Initial Coin Offering

An Initial Coin Offering (ICO) is a popular way of raising funds for cryptocurrency-related startups. An ICO is the first time a new cryptocurrency is offered for sale. It is the equivalent of a stock’s IPO (initial public offering).

ICOs are a concept similar to crowdfunding. Someone presents an idea for a project and advertises it in an attempt to attract investors. If you like their idea, you can buy the coins or tokens in advance, paying with already-established cryptocurrencies or (less commonly) with traditional currencies. This funds the project and enables the team to develop their design. If it is successful, the coins rise in value and the original investors make a profit.

ICO Essentials

• An alternative method of raising funds for a start-up.
• The team presents their project in a whitepaper.
• The ICO is launched and coins are sold to the public.
• Gathered funds allow the project to enter its main development stage.
• Development is completed and the coins become useful and potentially valuable.

Crowdfunding

The concept of initial coin offerings is similar to crowdfunding. A team comes up with an idea for a cryptocurrency-related project. Then they need to get enough money to develop their idea. Instead of (or alongside) trying to court investment from a venture capital fund (as most traditional start-ups do), these teams publicly announce their idea and allow almost anyone to invest.

During an ICO, it is possible to buy coins of the new cryptocurrency at a predetermined price. This is the first time anyone can buy the new currency. The idea is that the price of the coins will increase as time passes and the investors, or backers, will profit from that.

The stages of an ICO

ICOs have several stages, not all of which are fully open to the public.

An ICO begins with a private sale. This usually takes place behind closed doors, and before the public sale. During this stage, the team tries to collect money to be spent for marketing and funding the next stages of the ICO. Since the project is not yet on its feet and many things have to be handled manually, they try to avoid a multitude of small investors and usually create an investment threshold (eg, 5000 USD).

The next stage is the presale. By this stage, the funding process has been somewhat automated and manual work reduced. The ICO is now open to the public, but investing is still not available to everyone. The team makes a selection, usually based on know-your-customer filters, or even a random selection, in order to prevent overcrowding. The presale itself can be split into multiple phases. The price of the coins increases with every phase.

After that, it is finally time for the crowdsale. During the crowdsale, investors may need to be whitelisted and can be required to submit a KYC form. This is necessary to comply with regulations (such as anti-money-laundering policies and anti-terrorist prevention measures). Certain exchanges provide launchpads and crowdfunding solutions to support startups. The whitelisting process in these instances can also be taken care of by respective exchanges.