We hear or read that crypto exchanges seek to raise funds through initial coin offerings (ICOs) to finance their projects. In this capsule, we will discuss all what you want to know about ICOs.
Through the offering, a cryptocurrency or token is offered with the aim of raising funds for a new or outstanding project, especially the technical or ICT projects. The ICO is the cryptocurrency industry’s equivalent to an initial public offering (IPO).
The ICO is usually carried out by startups that may face difficulty in obtaining the proper finance from banks or financial institutions.
In addition, such companies may resort to ICOs to avoid the higher interest rates offered by banks and financial institutions.
What is token?
Token is a digital coupon offered to investors who seek to participate in the ICO. It is also the equivalent of shares offered in the initial public offering.
The token is sold through the blockchain, and its price is much lower than the real value of the project at the time of implementation or the cryptocurrency price at the time of launching it. The token can also be traded on crypto platforms.
Why the ICO?
Those working in the crypto industry resort to ICO to finance their projects. This is due to the fact that raising funds in cash to finance a crypto project simply contradicts the digitization idea, especially if the project is related to the launch of a cryptocurrency.
What about the ICO period?
The ICO period ranges between one week to one year, compared to the IPO whose period ranges between one to two weeks maximum.
The ICO, however, is like other projects which may fail if they do not achieve their objectives. The same thing applies to ICOs if they could not raise the target amounts. In this case, the offering is stopped and investors receive their funds.
What is the white paper?
The white paper is one of the most important aspects of the ICO, especially as the success of the offering depends on the information included in this paper. The white paper is the equivalent of the IPO prospectus.
Information to be included in the white paper?
If a startup or a major company plans to raise funds through an ICO, it should conduct a study about the project, including the offering purpose, expected trend, target proceeds, the number of tokens to be held by founders and date of the offering.
Since those planning to buy shares seek to know the fate of such shares and their relevant risks, those participating in the ICOs also try to know that the offering is useful.
The ICO is different from IPO in two things. Firstly, the ICOs are almost unregulated, which means that they are not supervised by government organizations such as market authorities. Secondly, the ICO is decentralized and unregulated, which means that it is not controlled.
In addition, the more funds received through the ICO, the higher the price of a token or currency. There are no also limits to the total number of tokens.
It is worth mentioning that several coin offerings have achieved remarkable success. In 2017, a total of 435 offerings were carried out at an average of $12.7 million. Moreover, the total proceeds raised during that year amounted to $5.6 billion; an increase of 25 percent in the largest projects ever launched.
The tokens purchased in ICOs yielded an average return of 12.8x.
Examples of ICOs
In mid-March, Alternet Systems Company (ALYI) has announced its plans to raise $100 million through an ICO. ALYI added that it is the only company that has partnered with the digital currency initiative.