Understanding ICOs (Initial Coin Offering) in just 3 minutes

It was in July 2013 that the first ICO took place, that of Mastercoin. In early 2014, the Ethereum ICO was launched which accelerated the development of smart contracts. Since 2017, ICOs have grown strongly in the cryptocurrency ecosystem. But what exactly is behind these 3 initials?

What is an ICO?

In the cryptocurrency ecosystem, an ICO, for “Initial Coin Offering”, can be defined as an initial coin Offering. In other words, a fundraiser needed to start a new crypto project. The ICO appears as a viable alternative to mining to launch a cryptocurrency.

These very common financial transactions are generally accessible to all people. They offer a distribution of tokens in exchange for a financial participation in the project. In this sense it can be assimilated to an IPO (Initial Public Offering). That is to say the introduction of a company on traditional financial markets.

The tokens collected during this ICO may have some utility related to the product or service the company offers, or simply represent a stake in the company or project.

How do ICOs work?

Previously, the promoters of a serious project will detail in a white book the important information for the functioning of the ICO. This will answer the following points: the duration of the ICO campaign, the type of payment accepted, the amount of funds needed, the amount of tokens that the founders will keep, the method of delivery of the tokens, etc.

Technically, to create an ICO, the contents of a project must structure it. This can take several forms:

  • Or from a “Static offer at static price”. There will be a default price for a total number of tokens set in advance.
  • Or from a “Static offer at dynamic price”. In this variant, the amount of funds received in the ICO will determine the overall price per token.
  • Or from a “Dynamic offer at static price”. In this case, the amount of the tokens will vary according to the amount of funding received.

Note that in the event that the money raised is less than the minimum amount required by the requirements of the operation, all the money can be returned to the project investors.

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How to participate in an ICO?

On background, the investor must first register on the website or platform that initiates this process. It will also take complete regulatory documents (KYC).

On the form, the investor will generally have to hold a portfolio (wallet) and cryptocurrencies (bitcoin, ethereum). Then it will have to communicate a public key for the initial transaction. This will be used a second time for receiving the tokens. Therefore, the delivery of the latter can be carried out automatically or in several installments following the end of the operation.

The advantages and disadvantages of these operations

These initial offerings have several benefits for both project developers and investors themselves:

  • They allow you to raise a significant amount of funds and quickly to ensure the development of the project.
  • Allows you to build a solid user base financially involved in a project.
  • Some ICOs ultimately, it can generate significant returns for participating investors.
  • They can provide additional benefits such as access to certain services or the distribution of dividends.

How often, these ICOs are not free from flaws or drawbacks:

  • Some ICOs have been found to be fraudulent.
  • Investing in an ICO doesn’t offer no guarantee of return on investment.
  • It takes some mastery of the crypto ecosystem to move to ICOs (hold cryptocurrencies, fully understand the project white paper, hold a wallet, etc.).

Conclusion: Operations that require preparation for the investor

A successful ICO can prove to be very effective in the long run for the investor. But being unregulated, investors should exercise caution and diligence when seeking to invest in such financial transactions. It is important to review the white paper written by the team to fully understand the project. Interested in forged partnerships, discover specialized forums or even join the project community.

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