Historically, new companies raise funds through venture capitalists who fund the project in the early stages and then issue a public offering to elevate their company to the next stage. This has been the standard model and hasn’t evolved much until now. What is crypto ICO and how has it affected how new projects raise capital?
You can find more information about Crypto and Blockchain in the Algory website’s blog section; this particular article will be focused on crypto ICO. So, without further ado, let’s jump right in.
What is Crypto ICO?
In the world of Blockchain, crypto ICO is a way to raise capital for new projects by selling Blockchain-based digital assets. It is becoming a popular method of crowdfunding either targeting the general public or a few select participants. Rather than being rewarded with an equity stake in the company, investors are rewarded with cryptocurrency tokens. As the network grows, the demand for the tokens grows as well and their value rises thus greatly rewarding the investors.
Crypto ICOs eliminate the need for intermediaries in the capital-raising process. It creates a direct connection between the company and the investors. Compared to the traditional methods of raising capital, ICOs are more effective in aligning the interests of upcoming companies and investors.
Types of Initial Coin Offering
There are two types of Initial Coin Offering namely private ICOs and public ICOs.
- Private Crypto ICOs
Only a limited number of investors are allowed to participate or invest. Generally, it targets accredited investors such as high-worth individuals and financial institutions. In some cases, the company may set a minimum investment amount.
- Public crypto ICOs
This type targets the general public; it is democratized in such a way that just about anyone can invest or participate. Due to regulatory concerns, public ICOs are getting less viable than private ICOs.
Why are Crypto ICOs so popular?
The cryptocurrency marketplace is extremely competitive and often new crypto projects will face serious scrutiny from both regulators and the crypto community itself. Interestingly, ICOs continue to increase in popularity. Why do you think this is the case?
Crypto ICOs offer several benefits to their users, they include the following:
- Tokens can be created and distributed within a very short period
- The tokens enjoy high liquidity since they are sold to a global market that operates 24/7.
- They eliminate the need for intermediaries within the capital-raising process
- ICOs are a fantastic way to create a community as they attract early adopters with similar priorities
- Minimum paperwork is involved which is not the case for traditional public offerings
Understanding how Crypto ICOs work from start to finish
The entire ICO process is very sophisticated as it requires conversance with technology, the law, and of course finance. The main idea is to utilize the decentralized systems offered by Blockchain in the process of raising capital.
Here are the steps involved in an ICO:
- Coming up with the project concept
The first step in the creation of any ICO is to come up with a project idea/concept. In this case, the project must be based on Blockchain. What product or service are you asking people to invest in? Remember, people only invest their money into things that align with their interests so it’s your job to ensure that your project is relevant.
- Identifying your target investors
Now that you are clear about the details of your project, the next step is to identify your potential investors. Bearing in mind that your end goal is to raise capital, you need to identify specific targets for your campaign. What group of people will give you the most amount of money? Is it the general public or accredited investors? Identifying your target helps you to come up with the relevant campaign materials.
- Plan the specifics of your ICO
The next step is to outline the specifics of your ICO campaign in a whitepaper or similar document. Here you will cover how much money you hope to raise, how many tokens you intend to issue, and of course your target audience among many other things.
- Creation of the token
This is a critical step because investors are given these tokens in exchange for their capital. The tokens are a representation of utility on the Blockchain. They should be both tradeable and fungible; however, instead of providing an equity stake in a company, they provide a stake in a product or service offered by that company. The tokens are created on particular Blockchain platforms and thankfully the process is quite easy as the creators don’t have to write the code from scratch.
- Promotion campaign
Your concept is clear, you know your target investors, and both your tokens and whitepaper are ready; what’s next? The ICO promotion campaign is your way to attract potential investors. Most marketing is done via the company website, other appropriate social media channels are also used to raise publicity and public interest. However, recently most large online platforms do not allow the advertising of ICOs because of scams.
- Initial offering
In this next step, investors send funds in exchange for tokens. This can only be done on the date of the ICO or afterward. The offering may be structured in several rounds to ensure that they reach their target capital.
- Launching the product/service
The company uses the proceeds from the ICO to launch and grow the business. These funds are useful in creating or building upon an already existing product or service. The investors can either use the acquired tokens to benefit from the created products and services or they can wait for the token’s value to appreciate.
ICO scams and how to avoid them
In the cryptocurrency sphere, things are rarely the way that they appear. That is why it is very important to do your research and determine whether any project can be trusted or not. Lately, ICOs have become vulnerable to multiple fraudulent activities in which scammers have taken advantage of investors and ripped them of millions worth of dollars. There have been hundreds if not thousands of ICO scams some of which include PinCoin, Bitconnect, Centra Tech, and Onecoin.
Common characteristics of ICO scams include:
- False promises and over-estimated returns
- Shoddy whitepaper
- Little to no technological backbone
- Aggressive marketing tactics such as flaunting high-profile investors and supporters
It is critical to stay informed and you can do this by utilizing various tools offered within the crypto sphere. For instance, you can find the latest information regarding ICO using the Algory Crypto news aggregator.
ICOs are some of the most successful capital-raising instruments for new projects. They have proven to be beneficial to the investor as well as the company as they can lead to huge returns for both parties. However, despite their many merits, ICOs are also plagued with scammers therefore you need to be very careful not to invest your hard-earned money in the wrong places.
Disclaimer: This information is for education purposes only; it should not be taken as investment advice or recommendations. The material was prepared with no regard to any particular investment or financial objectives. We recommend that you carry out your independent research before you reach any financial decisions Algory.io is one of the best platforms to learn more about different crypto topics.