An initial coin offering, or ICO, is an unregulated method of raising capital, allowing investors from all walks of life to contribute fiat or digital currency in return for a vested interest or stake in a blockchain technology-based project.
Investors could receive some sort of profit sharing or dividend. They can also receive shares in the company relative to the equity purchased in the form of the platform’s native cryptocurrency, as bearer shares. Finally, financial contributors may simply purchase coins as an access instrument for the company’s platform.
When a company decides to host an ICO, they are creating their own, new form of cryptocurrency, the value of which is predicated on the success — in other words, market demand — of the enterprise.
In the case of an access instrument, companies developing blockchain technology typically interact with their users in the form of transactions, as a result digital tokens are used to grant access and usage of the technology.
Coin offerings have a predetermined supply, or amount of coins or tokens to be sold, and the crowdsale will be open for only a set amount of time, often 30 to 60 days.
Company leadership typically publishes a white paper that will provide an overview of the project, outline the key value propositions and development milestones.
Interested investors will often receive a document, or memorandum, that carefully lays out the mechanics of the coin and governance of the sale.
Purchased coins are normally distributed at the end of the sale, or when the ICO sells out. Upon receipt of coins, investors can then trade their coins on cryptocurrency exchanges for bitcoin, other altcoins or fiat currency.
Typically, blockchain projects will keep a portion of the coins for different reasons but mainly to compensate everyone involved as well as carry out further development and marketing campaigns. The funds raised are normally used to further develop the project and there should be a roadmap provided to this respect prior to starting an ICO.
Just as with shares in a company, the value of the project’s digital coin will conform to the value of the project; the market’s sentiment around future development and rate of adoption play key roles toward the proliferation of any coin or token.
While similar to the more traditional initial public offering (IPO), ICOs have a different process and structure and terms and conditions can vary widely across a range of spectrums.
The nature of the crowdfunding model, where a community of investors or contributors deems a project worthy to support, it allows novel ideas to find backing that might not have been feasible under traditional models. There is a significant amount of risk involved however, like any investment or monetary contribution, make smart decisions, stay within your comfort zone, and conduct due diligence with every project, and the pitfalls will be avoided.
About Kevin Hobbs, Vanbex Group:
Kevin Hobbs is chief executive officer at Vanbex Group, a full stack blockchain company providing a range of services specialized in the blockchain industry.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed article. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.