What is an ICO?
Initial Coin Offering is a kind of crowdfunding done within the blockchain. Someone can offer investors units of a new cryptocurrency in exchange for other cryptocurrencies such as Bitcoins or Ethereum or fiat money.
Individuals involved in the transaction use tokens to be offered during the ICO. They are considered equivalent to the purchase price and are more known as cryptocurrencies.
This method is often used by the cryptocurrency community to support the development of new cryptocurrencies since 2013. It shows a rising future since many companies benefited from this process in the year 2013. It is capable of revolutionizing the entire financial system we use nowadays.
Ripple was considered to be the first cryptocurrency introduced by an ICO.
In early 2013, the Ripple Labs created around 100 billion XRP token when they developed a payment system for financial institutions. The company then sold the tokens to fund the new Ripple platform.
Later on, ICOs continued to support more cryptocurrencies like Ethereum. The Ethereum Foundation sold the ETH for 0.0005 bitcoin each. In return, the company received nearly $20 million, the highest amount at the time.
Up to this day, the largest funding is the Telegram ICO which has amassed $850 Million for their TON Blockchain project.
ICO is also called a “crowd sale” because the tokens are not sold to be a financial asset, but to be a digital good.
The process of funding is not regulated, which is why we cannot define its legality. The method is paperless, but some organizations still regulate them to prevent the legal and financial risks for the investors.
Startups who start the ICO process establish the blockchain first and they have to set up protocols to regulate it. The creators, on the other hand, will have to begin the consensus mechanism for coins to be sold for the ICO. They will then have to make some adjustments if necessary to ensure the process will run smoothly.
Most companies prefer to raise their capital through ICOs because their project is not subject to taxation. They can also sell the tokens or coins directly with just a few intermediaries to take part in the process. Investors only have to base their decisions to invest on what the whitepaper of the fund-raising entity states.
The advantage of using ICOs is to raise capital for startups and also to launch the sale of a new service to the market. Investors mostly become the first consumer of the service offered by the company that raises funds through the ICO.
It gives the investors an opportunity to purchase coins at a discounted rate, though its value is based on the supply and demand in the market.