ICO is short for Initial Coin Offerings and is the process by which companies, especially startups raise capital through the sale of their tokens. ICOs are comparable to Initial Public Offering (IPO) although the latter gives the investors a share in the company, which is not necessarily true with the former.
An ICO involves project leaders creating a given number of tokens and selling them to the public in exchange for Ethereum, Bitcoin, or any other major Cryptocurrency. People engage in ICO for either or both of the following benefits:
1. To sell the tokens later after they appreciate.
2. To access the service offered by the product or even a share in the project’s earnings.
Just like with the other Cryptocurrencies, tokens have to be listed on exchanges. Project leaders must have enough funds to pay a listing fee to the exchanges to make it possible for the people to buy the tokens.
Startups have been the major beneficiaries of ICOs as they have been able to raise capital. Furthermore, ICO enables the token buyers to adopt a given product. If the buyers are happy with a project, they may purchase more tokens before other people discover the product.
Impact Of ICOs On Startups
ICOs have been around for less than five years with the first seven projects raising around $30 million in 2014. In the same year, Ethereum ICO raised about $18 million. The high demand for the token has led to an increase in its price from around 40 cents per ether four years ago to around $200 today. Ethereum’s market cap has grown to about $20 billion according to the latest figures from coinmarketcap.com.
It is not until 2016 when ICO activities began to pick up. Some of the most successful projects that year included Lisk, Golem, and Waves among others. The 43 sales recorded that year raised around $256 million.
Last year was even more successful as 342 tokens were issued. Due to the growing popularity of ICOs, around $5.4 billion was raised through these projects. Even today, ICOs are still the most popular financing for most Crypto startups. ICOs have become the easiest way for blockchain and Crypto startups to raise the much-needed capital as they are accessible to more investors. Sadly, although many projects are genuine, the rise in frauds has seen some investors lose their funds.
Factors That Led To The Growth Of ICOs
Blockchain technology and Cryptocurrencies have not been around for long. Consequently, startups in the sector have been finding it difficult to raise funds through the traditional financial system, as most financial institutions don’t understand the technology. Startups in the Crypto sector have been left with no option but to turn to ICOs.
Project leaders are supposed to prepare a white paper explaining the project and list their coins on exchanges. Cryptocurrency exchanges are accessible to many people making it easy for startups to raise funds. As long as a project is appealing to the public, most likely it will sell.
The Legality And The Need To Scrutinize ICO
Although ICOs have become the easiest way for startups to raise capital, they have also given room for fraud. The US SEC has been quick to warn the public to do thorough research before investing in ICOs. Moreover, there have been issues on how to treat ICOs with the agency characterizing most tokens as security.