Initial Coin Offerings are means used by start-ups to raise capital. The start-up issues tokens that are integral to their venture. Cryptocurrencies are required to purchase these tokens. Bitcoin and Ethereum being the most popular among them. ICOs are quite new and they involve cryptocurrencies. Consequently, in most nations, they are unregulated and are categorized as very risky.
Initial Coin Offerings
ICOs are a kind of crowdfunding tools. They use the blockchain to raise the investments. The start-ups bring out a white paper. It contains detailed information about the business model. It also has information on the milestones, technical specifications, development team etc. The project timeline and budgetary allocations mentioned along with the distribution of coins. ICOs are parallels to IPOs when the tokens purchased represent a stake in the project.
ICOs give a return on investment. It happens when the tokens for a higher price on a later date. Some ICOs offer token holders a stake in the project in the form of voting rights. Tokes offer a wide variety of value propositions. They can differ in properties and in their legal status. Hence, it is always good practice to check the particular project for clarification.
In ICOs the start-ups seek to raise a minimum amount of money. Investors send Bitcoins or Ethereum to the provided addresses and get the new tokens in return. Not meeting the minimum amount criteria makes it a failed ICOs. As a result, investors get back their funds in this scenario.
History of ICOs
- Mastercoin – July 2013 – Raised $500,000 using Bitcoin.
- Maidsafe – April 2014 – Raised $7 Million using Bitcoin.
- Ethereum project – July 2014 – Raised $18 Million using Bitcoin.
Successful launching of the Ethereum project made issuing tokens easier. Consequently, a series of ICOs have taken place.
Types of ICOs
Initial Coin Offerings follow not set rules. As they are unregulated, the startup solely decides its ICO rules. ICOs can be of many types. But, token pricing mechanism can break ICOs into four types.
- Increasing: Initially, the price of the token is set high. As more investors show interest, the token price increases. Hence, here the early investors get to make more gains.
- Decreasing: A dutch auction method is used to raise funds. The price of the token is initially set high. Price is incrementally reduced. Consequently, all tokes are sold off.
- Fixed: The price of the token is fixed all through the auction period. Until all the tokes are sold out, the tokens are frozen. The tokens are only later allowed to be listed on the exchanges.
- Non determined: In this scenario investors first contribute the money. Later the start-up proportionately divides the tokes corresponding to the investor’s investment.
Participating in an ICO
- Buy Bitcoin or Etherum at a cryptocurrency exchange.
- Transfer your cryptocurrencies to your wallet.
- Ensure that you use a wallet compatible with the ICO you are participating in.
- Take care to follow all the steps required for the ICO
- Keep your tokens secure after you have received them.
Initial Coin Offerings are great alternatives for start-ups to raise funds. But, it is not uncommon to come across fraudulent ICOs. Moreover, the business model itself can be faulty. Always carry out due diligence before investing in a startup.
Some aspects to evaluate are:
- The value proposition of the start-up.
- Demand for the product or service.
- Developer team behind the project.
- Availability of the prototype.
- Project timelines and marketing plans.
- Regulatory requirements.
- Type of the token.
- Funding structure.
- Competitors to the start-up