Initial Coin Offering (ICO) is a means of crowdfunding to release a new cryptocurrency. Traditionally, the sale of tokens is organized before the cryptocurrency is released in order to raise money for technical development. ICO is notable for little or no government regulation.
It also differs from IPO (initial public offering) as acquisition of the tokens does not grant ownership in the company developing the new cryptocurrency. While IPOs are well-defined and understood by governments, ICOs are obscurer. The U.S. Securities and Exchange Commission and other regulatory agencies are currently examining the practice. Proponents state that tokens are something between a security and a currency.
The first ICO was conducted for Mastercoin in 2013. Next year, Ethereum followed and raised money with an ICO.
ICOs are rather popular with blockchain-based startups. The issue of their own cryptocurrencies to be bought in a crowdsale seems to be more profitable than accepting some fund’s money in exchange for equity stakes. Revenue from the auction of these virtual shares allows funding the businesses.
The fundraising tactic offers some tangible benefits. The liquidity is to be mentioned above all. Backers’ funds are traditionally tied up in their bets until the companies “exit,” going public or selling out. Thus, investors can cash in and out whenever they like, converting tokens into Bitcoin, Ether, and fiat currency at their leisure. There is no need to wait.
Secondly, ICOs enable new business models for open source projects. Now, developers frequently participate in various collaborations, tinkering in vital code repositories free of charge. ICOs enable coders to generate value. The more successful a project is, the higher market participants may appraise it and the more rewards contributors may get.
The success of the approach is already obvious. The market capitalization of Ether has risen by more than 500% in value since the beginning of the year.
Not to make an impression that everything is so ideal and in order to provide objectivity, let’s discuss the downsides.
As far as there is no strict regulation in the sector, investors take a risk of getting scammed. Pump and dumps, Ponzi schemes, and buggy foundational software can endanger normal operation. Ether’s debut was marred by the spectacular bust of a much-hyped project, a decentralized venture capital firm called The DAO, built atop its network. The problem wasn’t caused by malicious intent of the founders but mostly by a hack.
The main rule for those who are going to enter a game is to remember never to wager anything they feel not ready to lose.