What is an ICO? Meaning of ICO Explained
Meaning of Initial Coin Offer (ICO)
ICO or Initial Coin Offering is a process by which early age crypto currency startups raises funds in order for further development of the crypto currency. Those who wishes to support and contribute to the development of crypto currency provides funds and in return get’s a percentage of share in the total number of crypto currency. ICO is an unrregularised process of raising fund and is used in order to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. ICO is of cryptocurrencies what IPO is for shares/securities.
Decoding Initial Coin Offer (ICO)
A cryptocurrency startup firm can raise funds through Initial Coin Offering (ICO), in which the the firm creates a strategic plan on a whitepaper which discloses important details like:
- What is the project about?
- How is it different from other existing projects?
- What advantages does this project have over other exiting projects?
- How much funds is required?
- How much percentage of the tokens or share in crypto currencies will the promoter keep for self?
- For how long the ICO campaign will run?
- and some more important details about the project which helps any supporter/investor to make a decision for contributing /investing the funds in projects.
If any supporter/investor is willing to invest, he may buy the tokens from the promoter in exchange of fiat currencies or crypto currencies. The total amount of funds or the value of cryptocurrencies collected should be equal to or greater than the amount mentioned by the promoters while raising funds. If the amount raised is equal or exceeds, the ICO is said to be a successful ICO. In case, the opposite happens, the ICO is deemed to be unsuccessful and the amount so far collected is returned to the supporters/investors.
In case of successful ICO, the funds are then deployed in development of the project or for the reasons stated by promoters while raising funds through ICO. The value of coins after successful ICO is calculated by dividing the total amount of funds raised by the number of coins offered in the project.
Why do Supporters/Investors contributes to the project?
When An ICO is successfully completed and the project becomes successful, usually the value of cryptocoins in the market increases because,now it has some sort of advantages ( which were mentioned in whitepaper) and can add value to the economy. The investor can now cash out his token that he received by contributing to the project and make huge profits. An example of successful ICO project was of Ethreum.
Ethereum project was announced in 2014. It’s ICO raise $18 million in Bitcoins or $0.40 per Ether. The amount was then deployed for development of Ethereum and the project was live in 2015. In 2016, the value of one ether rosed upto $14. So here, those who had invested in Ethereum ICO received Ether for $0.14 and could cash it out at $14 making huge profits.
The concept of ICO can be related to the concept of Initial Public Offers (IPO) where an investor invests in any company’s IPO by looking at it’s future prospects. If IPO goes successful, shares are allotted and then investor can later sell it off as he/she may think fit. But one major distinction between and ICO and IPO is that IPO’s are regulated by financial authorities like SEBI who assures the protection of investors and minimizes the chances of fraud.
But in case of ICO, there is no regulatory authority and the promoters may run away with the funds so collected which happned in the case of Bitcoin PLUS.
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Rohit Kukreja is a Commerce graduate with Financial Markets expertise involving Stocks, Forex, Futures & Options Market and now Bitcoins & Cryptocurrency Markets. Blockchain Enthusiast but not a techie, Rohit is an active member of various Blockchain & Crypto communities all over India.