What is an Initial Coin Offering (ICO)?

3 Apr 2021  Read 1056 Views

We often hear that we live in a digital age. Almost every aspect of our lives has been digitized in recent times. From digital watches to digital photos to digital marketing. We have also seen the rise of digital currencies – cryptocurrencies like bitcoin. It was only a matter of time that digital stocks jumped on the digital wagon. Oh, it’s digitalization all over the world.

In today’s article, we will discuss an interesting new concept – Initial Coin Offering (ICO), which is a risky process of bringing new cryptocurrencies into the market.

Let’s get started.

Understand Initial Coin Offering (ICO)

Let’s try to understand this with the help of an example. Suppose you are a startup with a great new idea for a new blockchain/cryptocurrency system. Perhaps you want to encrypt and digitize the house-maids payments system. Sounds good? Let’s call it MaidCoin. Now you want the people to give you money to make MaidCoin. You could reach out to banks or venture capitalists for the required funds. But what if there was a way of raising money without giving up the ownership of the company? Cue ICO.

Here’s how it goes from here. You create a document (white paper) that essentially details how exactly the system will work. You create a stunning website emphasizing the usefulness of your great idea. Once these steps are done, you ask people to transfer money (usually bitcoins or Ethereum, but you can accept fiat too), and you send them MaidCoin in return. The people investing money will do so out of the expectation that the MaidCoins will be heavily used and be in high circulation, which would raise the value of the underlying currency.

Wait, it sounds similar to an IPO!

You are not entirely wrong because both initial public offering (IPO) and initial coin offering (ICO) are fundraising vehicles. However, both majorly differ in the following two points:

1. ICOs must somehow be connected to the blockchain.

2. Investing in ICO does not mean you own a share in a future company.

Why invest in ICO at all?

ICOs are a relatively new concept. The safety provided by the IPOs is undeniable. However, ICO delivers some of the most unbeatable benefits. A few are listed below:

  • Retention of control: People investing in ICOs do not share your company. You sell them a future service in exchange for their money. This is a crucial difference because you’re getting the money while still retaining control of your business.
  • Globalization: Usually (but not always) IPOs attract investors from the country where the company is located. However, in the case of ICOs, you can raise funds from investors worldwide.
  • No regulation: No regulation essentially means no bureaucracy, which slows the working for months. A critical factor of tech startups is being first in the market because you run the risk of being yesterday’s news if your competitors beat you at it.

Who can initiate an ICO?

The simple answer to the questions is literally anyone! Because of their novelty, ICO is not under any regulation. Being unregulated means that you are free to raise funds through an ICO as long as you have the technological setup. There’s one big downside too. ICOs can easily be used to set up scams. As there are no regulations, anyone can make people believe in a great idea and then abscond with the collected money.

Tips to see if an ICO is real or fake:

If your friend tells you about a new ICO, do your homework and thoroughly check and ensure that the people behind the ICO are real and accountable. We live in a digital age where stock images can be used to make a convincing website. Therefore, it is imperative to go the extra mile and check, among other things:

  • History of product leads with crypto or blockchain technology.
  • If there appears no clear history with either crypto or blockchain, it’s a red flag.

How to start an ICO?

Just because we said literally anyone could start an ICO doesn’t mean everyone should. The important thing is to make sure that you or the people involved with you have experience working with cryptocurrency and blockchain technology. It is essential to know if the ICO will actively benefit your business.

Suppose you find yourself determined to move ahead. In that case, you will need a white paper – a document identifying what your currency offers that no other currency does or how you plan to improve an already established idea. The document must be extremely detailed, informative, and highly engaging because the reader/user has to be hooked on to your idea by the end of the first page. The white paper needs to be written in a manner understandable by someone without any prior knowledge of how these systems work.

Marketing an ICO

Once your white paper is ready, you need to advertise it to people. In this regard, you will be targeting two broad groups of people:

  • People with knowledge of how cryptocurrencies and ICOs work and
  • People with NO understanding of how cryptocurrencies work.

The key is to identify the group of people who will be the most excited by your novel business venture because people tend to throw in money behind ideas that, in their eyes, are a deal for them.

Engagements of your programmers and leads on social media platforms like Twitter and Reddit are good marketing strategies. You can also submit your ICO to listings that maintain databases of what they perceive as quality ICOs. By doing this, you can get the people in the crypto-community excited about your product, giving you a further push into the internet.

Closing remarks

If this article has made anything clear – it’s that it is easy to come up with an ICO, but at the same time, it is essential to have clarity about the blockchain tech working and marketing strategies. Because ICOs are relatively new fundraising vehicles, it is necessary to carefully look into all the information made public and not fall prey to scams. 

Stay Positive, Test Negative

Happy Investing!

About the Author: Shrey Salwan | 42 Post(s)

Shrey Salwan is an MBA student at FLAME University, Pune, majoring in Marketing. He is also pursuing CA and CS. He is a creative thinker, a grammar nazi, and social media enthusiast seeking to work in the dynamic world of social media and content marketing to transform technical and digital information and processes into influential stories. He has a knack for telling stories and does so through his quirky way of writing.

 

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