An ICO (Initial Coin Offering) is a financing mechanism that allows a project or company to raise capital in cryptocurrencies with high liquidity, such as Bitcoin or Ethereum, and fiat currencies, such as USD or Euro, through the massive sale of a new digital asset. It is a case of crowdfunding, which is a method of financing a project or company by collecting many small amounts of money from a large number of people, typically over the Internet.
This mechanism has become very popular through the years in which we have known more in depth the capabilities of Blockchain, specifically because many investors have deposited their capital in the correct ICO and have managed to extract, after a while, very significant.
How does an ICO work?
Similar to a public sale process, companies carefully organize a pre-ICO system, its marketing and list the private exchangers of the token in advance. The ICO starts at a certain date, and is available for a certain period of time. Each ICO has a maximum number and a minimum number of tokens to sell, the minimum is the necessary contribution to make the project viable, and the maximum is reached when all the available tokens are sold.
When initiating an ICO, the project that seeks to gather funds issues a certain number of tokens on a previously existing blockchain platform, such as Bitcoin, Ethereum or Waves, and delivers them to investors in exchange for cryptocurrencies or, in very few cases, fiat money. The entire operation is carried out using smart contracts that are responsible for automating the process of distributing tokens according to the requirements established by the person behind the ICO. Thus, when the payment condition is fulfilled, the contract assigns and sends to the investor’s portfolio the corresponding amount of tokens automatically.
How important is blockchain to an ICO?
First, it is imperative to understand that an ICO does not only serve to finance the deployment of a cryptocurrency. Blockchain is a chain of information protected by cryptography and shared by the entire community that allows registering economic transactions within the cryptocurrency.
Although originally, Blockchain was mainly the technology that supported the new cryptocurrencies that were premiering the market, it can be used for multiple functions and objectives of storage and data optimization. For example, it is used to carry out cloud computing processes without loss of information, ideal for managing copyrights, having an unforgeable repository of information and so on. Blockchain allows you to store and modify data in a secure and verifiable way and therefore many businesses adapt well to this technology.
Each time a person or company decides to use the blockchain technology for a special use, there must be an associated currency (and often it is called a token to avoid confusing the project with a new currency) and therefore a new one can be created. ICO to finance the project, changing these pre-mined tokens for money. The tokens can be used within the project to make payments for specific services.
In short, it is safe to say that both cases of an ICO (financing a cryptocurrency or a blockchain) are very similar. The difference lies in the focus of the project (the currency itself or the information that contains the associated blockchain). Knowing that a project is directly based on blockchain makes it much more reliable and interesting, because although cryptocurrencies are not taken with the same seriousness by all investors, blockchain continues to develop as a revolutionary technology that has implemented multiple improvements in endless companies and industries.
Why do companies prefer an ICO over an IPO?
To understand this trend, we must have a knowledge base on what is an Initial Public Offering (IPO), which is defined as the process of selling for the first time a portion of the shares of a company to the public in the market of capitals, their buyers becoming shareholders of the company. The ICOs differ from the IPO in the sale of a cryptocurrency or utility token that does not represent equity capital in the company or project, but allows its holder to interact in the platform to be launched in the manner in which the creators have it (for example, by activating an instruction or generating a digital asset in a game) and exchanging it in the market with other cryptoactive or fiduciary money. In addition, the token may represent a property or royalty right over the benefits of a project or company, as agreed by the issuer.
Although for some, IPOs are considered somewhat “safer”, ICOs are often preferred by many initiatives for benefits such as:
Retention control is maintained, in which the owners of the companies do not establish a trade in their shares, they simply offer a future product. You get the money without losing control over the business.
ICOs have a global character, since it is possible to raise funds through them from any country or region of the world, unlike other protocols that involve the investment of time in going personally offering the service or product
ICOs are not regulated, which means that companies can skip all the necessary paperwork between lawyers and permits. The successful offer in this digital area is based on the speed with which the market moves, and in this case, it moves very fast.
Steps to participate in an ICO
Buy Bitcoin or Ethereum. You can not participate in an ICO with fiduciary currency
Put your bitcoin or ethereum in a compatible wallet with the ICO. These wallets are usually listed in the information offered by the ICO.
Be available to the exact date and time of the ICO and buy your tokens. ICO’s can last minutes or even seconds.
When the ICO closes, the acquired tokens will be sent to your wallet.
If you want to sell immediately you can do it in a public exchange. If you want to keep your tokens, simply store them on your wallet.
There are several websites that keep the community informed about future ICO’s, as it is in the case of Reddit. The ICOs must provide a significant amount of information regarding the offer and must be 100% transparent to users, since without the confidence of investors, these initiatives will not be successful.