Today in this article we are going to talk about What is Initial Coin Offerings, how it works and some important things related to it.
For the past few years Cryptocurrency has been a topic of discussion and the biggest reason for this is bitcoin. The rising price of bitcoin is attracting everyone to know the cryptocurrency and take advantage of it by investing in it.
There are also other things related to the cryptocurrency’s industry and one of them is Initial Coin Earnings. Initial coin offerings are used in raising funds to issue new cryptocurrencies. But people don’t have complete information about it.
So, today in this article we will discuss in depth about what are Initial Coin Offerings, how it works, what is its future and many information related to it. So without wasting time let’s dig into what are Initial Coin Offerings
What are Initial Coin Offerings?
Initial Coin Offerings is an alternative to crowdfunding in order to issue new Cryptocurrency, coin, or service. In exchange for their monetary investment investors receive a new Cryptocurrency token issued by the Company. By using these tokens Investors can use the company’s products and services or they will receive a stake in the company.
The token can be used by an investor in anything. They can sell these Crypto tokens issued by the Company to anybody or they can hold until the price of the tokens goes up. Mostly people use these tokens to buy Cryptocurrencies, like bitcoin, ethereum, shiba inu, etc.
Key Points:
- Initial Coin Offerings is an alternative to crowdfunding
- Investors receive tokens in exchange for their investments.
- Investors can do anything of these. Ex – they can sell these tokens, or they can buy Cryptocurrencies.
Types of Initial Coin Offerings
There are two types of Initial Coin Offerings :-
1. Private ICO
In private Initial Coin Offerings (ICO) only limited accredited investors are allowed to invest. In this, the company has control over the investors that how much they can invest and a company also can set a minimum investment amount.
1. Public ICO
Contrary to Private ICO, In public Initial Coin Offerings every one can invest. It’s a crowdfunding which targets the general public. Also, any investor can by the coin through crypto currency exchange.
How Initial Coin Offerings Work?
Let’s discuss how Initial Coin Offerings works. So whenever a company(Cryptocurrency Start-up) wants to raise funds through ICO they create a white paper which they share with the public which Consists all the details related to the Project.
The details White Paper includes:-
- Project Briefing
- How much money to be raised
- Which type of currency is acceptable. Ex- Bitcoin, Ethereum or fiat money
- How much will the founders’ virtual tokens cost?
- Will funds raised would be meet purpose for project completion
- The Time period of Campaign
Types of structure to raise funds
There are 3 types of structure to raise funds.
1. Static Price and Static Token: in this case the price of tokens fixed and also the number of tokens the company is issuing will be fixed
2. Dynamic price and Static Token: In this, the number of the tokens are fixed but the price of the token can be dynamic.
3). Static Price and Dynamic Token. In this case, the number of tokens to be issued are not fixed but the price of the tokens will be fixed.
In case 1
When the startup does not get the money as per the requirement, then the firm has to return the invested money to the investors. And in this case ICO will fail.
In Case 2
If in case the required amount got fulfilled within a given period of time then the funds will be used in accomplishment of the mentioned in the white paper
Advantages and Disadvantages of Initial Coin Offerings
Everything has its pros and cons. Just like that, ICO also has advantages and Disadvantages. Let’s know about some of its benefits and disadvantages.
Advantages of Initial Coin Offerings
ICO has many advantages like through ico companies can raise funds to issue new coins. By investing their money investors receive coins which they use in many things like can sell it to anyone or they can buy other Cryptocurrencies using these coins.
Key points:-
- Company can raise funds
- Anyone can launch ICO
- Anyone can invest
- Investors can use these coins to sell or investing(bitcoin, etc)
- It has liquidity
Disadvantages of Initial Coin Offerings
With many advantages ICO has some disadvantages also. Many companies are doing fraud in this as they run away with the money. So, before investing you should have full knowledge about the project. Also, there is uncertainty in the price of tokens. As if a coin is performing best in the present is no clue that it will continue this in future too.
Key points:-
- Uncertainty in the price of the tokens
- Many companies do fraud
- Legality is not not guaranteed
Difference between Initial Coin Offerings (ICO) and Initial Public offerings(IPO)
| IPO | ICO | |
| Who can raise funds | Only Established companies can raise funds | New Entities or startups |
| Compliance | It requires a stable bank account and business records of company | If we talk about ICo, New entities or startups don’t require any business records. They just need an idea and on the basis of that idea they can raise funds. |
| Procedure | In case Of IPO, there is a very lengthy procedure to launch an IPO as they need to follow SEBI rules. | No such lengthy procedure followed as they just need a white paper which consists of all details related to the project. |
| Legal format | There is a proper legal format for procedure and prospects. | In the case of ICO, no legal format is required to prepare white paper. |
| Process | IPO process involves lawyer, bank, and lot of participantes | ICO only involves programmers and the Internet. |
| Regulation | In India, IPOs are regulated by SEBI | No one regulates ICO |
ICO Regulation
In the present there is no regulation of any types. Anyone can launch an ICO if they have a proper knowledge of technology. In this you have to issue a coin.
Future of the Initial Coin Offerings
After seeing the interest of people over ICOs it seems that it can boom in future. As it gained much popularity in just a few years. If the companies keeps showing interest in this way of raising funds then definitely ICO will have a bright future.
Examples of Initial Coin Offerings (ICO)
- Ethereum
- Cardano
- Sirin Labs
- Dragon Coins
- Filecoin