ICO is a means to raise funds in unregulated media for different cryptocurrency companies. It’s something that startups use to bypass the rigorous and regulated process of raising capital required by banks and venture capitalists. In such a campaign, a certain percentage of the cryptocurrency is sold to the backers of the project very soon for other cryptocurrencies or legal tender.
how is it done
When a business wants to raise money using the initial coin offering, there should be a white paper plan outlining the details of the project. You should describe what the project is about, what the project needs, what you intend to achieve by completing it. You should also indicate the money that will be needed to start the entire enterprise and how much the pioneers will keep.
The plan also has to mention the type of currency accepted and how long you intend to run the campaign for. During the said campaign, supporters and enthusiasts of the initiative will buy the cryptocurrencies using virtual currency or fiat currency. The coins are called tokens and are very similar to company shares that are sold to investors during IPOs. If the required minimum funds are not reached, the money is refunded and the entire ICO is considered unsuccessful. When the requirements are met within a set time frame, the cash can be used to start the scheme or even complete it if it was still in progress.
Investors who participate in the project from the beginning are mainly motivated to buy cryptocurrencies in the hope that the scheme will succeed and, after launch, they will get more value from it. There have been very successful projects of this type in different economies and that is the main thing that motivates investors.
ICOs can be compared to crowdfunding and IPOs. Like IPOs, a start-up company must sell a stake to raise funds to help the company’s operations. The only difference is the fact that IPOs deal with investors while ICOs work closely with supporters who are very interested in new projects like crowdfunding event.
However, ICOs are different from crowdfunding in the sense that ICO backers are generally motivated by the fact that they can get a large return on investment. Funds raised through crowdfunding are basically donations. It is for this reason that ICOS are called collective sales.
There have been many successful transactions so far. ICOs are an innovative tool within our digital age. However, it is important that investors take precautions as there are some campaigns that can turn fraudulent. This is due to the fact that they are very lightly regulated. The financial authorities are not involved in this and if you lose funds through such initiatives it is difficult to follow up for compensation.
In this regard, there are some regions that do not allow the use of ICOs at all. It is important to buy such a coin only from trusted sources to be on the safe side.