Should you invest in one?
An ICO or Initial Coin Offering, otherwise called a “token sale” or “token launch,” is a version of IPO for cryptocurrencies.
Blockchain entrepreneurs are constantly developing products with varied utilities. Any entrepreneur who intends to raise funds to initiate a crypto project or to expand an existing project can come up with ICO.
To initiate an ICO, the entrepreneur/developer needs to submit a whitepaper, outlining the problem he/she intends to solve, the crux of the technology in place, and how it works to solve the problem.
The ICO panders to stakeholders who believe in the vision of the entrepreneur/developers and who intend to be an early part of this network.
Investors who intend to fund the project can buy the offered token using their existing crypto holdings such as Bitcoin, Ethereum, Binance Coin, etc.
ICO vs IPO
It may seem like ICO are similar to IPO, but there is a significant difference between the two.
→ IPOs are regulated by Govt Institutions. In most countries, a company fresh out of incorporation cannot go for IPO. A prior business history is mandatory for company’s to launch IPO.
→ ICOs are unregulated. Any entrepreneur can put forward his idea and execution abilities can raise money by issuing tokens. He/She is not required to have a prior business history to raise money.
Due to lack of regulation and lack of prior history, ICOs can be a perfect tool to scam investors.
ICO investors vs IPO investors
The IPO investors, get ownership of the company in the form of equity, however, crypto tokens are not stakes in the company. In fact, entrepreneurs / developers opts for ICO route because they don’t want to give away equity to venture capitalist.
The IPO investors are eligible for a portion of the company’s profit, which is restricted to his shareholding in the company. Whereas an ICO, investors can only command the price of the coin in the open market.
If ICOs are so risky, then why would someone invest in it?
Just like shares, investors expect that eventually the value of the token will rise, and they will be able to sell them at higher prices.
Also, not all ICOs are risky. The credibility of any ICOs is dependent in entrepreneurs’ credibility, i.e., the identity of the people putting up the ICO is a crucial determinant of the ICO’s authenticity. The ICO will have better chances to gain traction if it is supported by an entrepreneur who has a track record of past performance.
Marketing & Community
Marketing an ICO is a major play. There are over 17,000 cryptocurrencies, therefore, the entrepreneur should undertake massive marketing to spread the news among investors.
Also, crypto is largely communities driven. Having an engaging community over Discord, Reddit & Twitter can be a big plus for driving investors’ interest.