ICOs (Initial Coin Offerings) are funding rounds by crypto projects to secure necessary financial backing for the project’s growth. The most common reason for ICOs is usually to create awareness about a new cryptocurrency.
Investors can buy into the initial coin offering by purchasing the issued currency. Usually, the cryptocurrency has utility value, like access to products or services, or gives the investor a stake in the project.
ICOs provide an innovative way for new projects to raise capital, while investors gain access to the project’s value by holding the cryptocurrency. For the early investor and contributor, it is a leap of faith in the project’s ability to produce a high yield.
A Brief History of ICOs
While the earliest ICO most crypto users remember is Ethereum’s crowdfunding round in 2014, which raised around 31,000 BTC, it wasn’t the project that began it.
In 2013, MasterCoin (now Omni) protocol layer creator J.R. Willett went on a Bitcointalk forum and explained his idea, which needed funding. In summary, he asked for some BTC donations and raised $600k. His plan, the MasterCoin protocol, turned out to be an incredible success and now serves as the underlying protocol for the Tether token (USDT).
Since then, ICO and token sales have become widespread, shooting through the roof in 2017. Some of the most successful ICOs of all time include;
- NEO, the first Chinese open-source blockchain. It had support from some of the biggest names in the industry. Through an ICO in 2016, the blockchain raised US 4.65 million.
- Ethereum, the second largest cryptocurrency, raised approximately $18.3 million (at that time) when it launched a token sale in 2014.
- Stratis, a relatively unknown cryptocurrency, was able to raise 1,000 BTC in five weeks in 2021.
Advantages of ICOs to Investors
The coin’s popularity heavily influences the turnout of ICOs, so discounts and bonuses are usually delivered to investors willing to purchase at launch.
This gives early investors an advantage, as they can purchase the cryptocurrency at a relatively discounted price, in contrast to those buying them at the exchange at later dates.
Another advantage to buyers is that they change to get a more extensive stock at the launch. Project founders are usually inclined to sell these tokens and coins in more significant amounts at ICOs to promote the project and give opportunities for somewhat late investors.
If the turnout of the ICO is successful, they will be less willing to release substantial amounts of the cryptocurrency and add an aura of exclusivity brought on by scarcity. For the early investors, the increase in demand by other buyers interested in getting crypto means a higher yield on their investment.
Some might choose to hold for long-term purposes, while others sell the second the price is suitable enough to recover their capital.
The Grey Area of Initial Coin Offerings
Despite the silver lining ICOs provide, there are grey areas that make investing risky for investors.
For the investor, the capital invested into the initial coin offering doesn’t guarantee interest or the assurance of getting back the capital. ICOs are not securities and therefore are not backed by scrutinizing regulations.
While laws are beginning to crack down on ICOs, there is no real penalty if they fail to deliver as promised. They can go off the grid and leave investors gathering their losses.
There is also the possibility of the cryptocurrency plummeting in market value after the ICO. The initial coin offering might thrive but does not necessarily reflect the market’s reaction after the coin enters.
Is ICOs Worth It?
Statistics place the total funding raised by crypto ICOs as of 2019 to be around $14.8 billion. Undisputedly, initial coin offerings are essential to the crypto industry.
While some economies like China have chosen to ban ICOs, others like the United States have introduced regulations to tame the risks and irregularities.
With carefully implemented regulations, ICOs stand a chance to improve in the security department and provide better benefits to all involved, as long as these regulations do not restrict the potential of new projects.
