Technological advancements are leading to pathbreaking innovations across industries; firms are now raising capital for startups uniquely. Lately, the crypto industry has had a firm grip on the financial market. The crypto firms are switching to different ways of crowding their ventures, such as through ICO or initial coin offerings. Its application is not limited to crypto; other industries are equally reaping its benefits for raising funds. Its immense popularity owes to the fact that one needs a crypto token to increase the fund.
What is meant by ICO?
Initial coin offering refers to the process of offering cryptocurrency to raise funds needed for a crypto project. Investors receive new cryptocurrency on ICO trading platforms in exchange for capital investment in the business. You can call it a crowdfunding technique by creating and selling digital tokens to fund a new project.
Initial coin offering is similar to IPOs; however, there’s a differentiating component. Upon investing in a business, in IPO, investors receive a share, whereas, in ICO, one gets a new cryptocurrency. Their objective to raise funds for a startup is a common link that ties them together.
How does ICO work?
The ICO fundraising projects allow crypto exchange firms to raise capital for their project by distributing new tokens in exchange for investment in another cryptocurrency or fiat. The tokens transferred into people’s wallets perform various functions like entitling a company’s dividends or offering access to any specific service.
Sold tokens in a coin offering process belong to two categories in terms of supply and price: fixed and variable. Let’s delve deeper into these two types.
- A variable number of tokens having fixed cost: Though a firm offering token sets no limit to the number of tokens it sells, it specifies a standard price.
- Fixed price and total token supply: In this, a company sets a bar at a token’s supply and price. For example, firms offer 1 million tokens at a $1 cost.
- Fixed number of tokens with a variable price: The company sells a certain number of tokens and sets the price per the funds it receives. Suppose the firm sold 1 million tokens worth a 42million, then each token’s price will be $2.
Are ICOs profitable or risky?
Well, while offering people a fair number of advantages, every financial asset also imposes threats; if you are confused about choosing ICOs, check the list of merits and demerits of initial coin offering.
Merits:
- Guarantees high return
Initial coin offerings, unlike any other fundraising options, offer something unique and exciting to investors. If we try exploring the most successful ICO, NEO or Antshares comes to the fore. It is regarded as Ethereum of China. Its success is due to features like DeFi commerce, digitized assets, secured identification and peer-to-peer networking.
- Convenient and accessible option
One can efficiently conduct transactions and other processes associated with its launch online. Operating your own initial coin offering project is simple as you only need a whitepaper, a legal document containing your team’s background. You must also include their profiles on Linkedin, Github and other popular community pages.
- No hectic paperwork
With ICOs, a startup remains saved from hefty Paperwork prevalent in traditional crowdfunding systems. Besides cutting down on serious documentation processes, it saves an applicant’s time. In a conventional financial scenario, fundraising projects require companies to fill up forms which undergo several confirmation stages before approval. In ICOs that rely on a digital ledger, one can save themselves from completing hectic processes.
Demerits:
- Accountability in question
ICO is a strategy adopted by startups or private institutions that might not have enough funds. Investors taking a good amount with an expectation of reaping high returns often bear losses. There’s limited or no guarantee if the project will be executed successfully. Hence investment poses a fair number of risks.
- Dominated by volatility
A hell lot of factors serve as a driving factor behind the sudden rise of asset values. Digital assets or projects come under the scanner of market volatility. Besides market situations, blockchain often undergoes protocol amendments that might directly impact ICOs.
- High chances of fraud
Unlike traditional fundraising projects, which are regulated by authoritative bodies, initial coin offerings run without regulatory norms. Any illicit company can apply for ICOs and carry out malicious activities; hence there are higher chances of fraud in ICOs.
Essential considerations when investing in ICO
Investing in ICOs comes with many challenges, so specific considerations seem necessary before you stake hard-earned capital on these blockchain projects.
- While accessing ICO funds, make sure it’s an escrow wallet because these types of wallets are accessible with multiple keys hence chances of scams limits.
- Many startups operate ICOs; you should adequately review the company’s credentials online and go through their websites.
- As ICOs are devoid of regulations, investors must properly oversee legal terms and conditions.
ICOs undoubtedly are an excellent way for institutions to raise funds without tackling long and hefty documentation processes. However, it is also considered a risky platform which requires investors to research the project and stake money they could afford to lose.
