What is Initial Coin Offering?

Initial coin offerings (ICO), also known as first token sales, are a way for a company that is looking to release a new app, coin, or service, to raise funds that will help it get started. The way it works? The users that will crowdfund the company will be rewarded with tokens that will give them access to the future service the company is looking to launch. The funding of the prospect service can be done in crypto or fiat currencies.

The very first initial coin offering was held by Mastercoin in July 2013, and Ethereum later held its own first token sale in 2014. This is where the history of ICOs started. Namely, the latter one was an immense success that resulted in an amazing 2.3 million dollars raised in around 12 hours. After the precedent set by Ethereum’s accomplishment, initial coin offerings have become a relatively common practice on the blockchain.

Summary of Important Points

• Initial coin offering is the process of raising funds for the release of a prospect service, coin, or application on the blockchain.
• Investors that will contribute to the ICO project will be rewarded with tokens or coins that will be useful to them when the service is launched.
• For a successful ICO project, you have to make sure you structure your campaign in an ideal way that will allow you to achieve your fundraising goal.
• The biggest difference between an IPO (initial public offering) and an ICO is the enormous return of investment you can get with the latter option.

How Can You Structure an ICO?

If you are looking to raise funds through an upcoming initial coin offering, you need to structure your project perfectly to have the best chance at being successful. Generally, there are three ways to go about it:

• You can set fixed token prices and a fixed fundraising goal you are looking to achieve and those numbers will determine your supply.
• You can set a fixed supply and a variable fundraising goal that you are looking to achieve which will have influence over the token price.
• You can set a fixed token price but have a variable supply that will be determined by the fundraising goal you are looking to achieve.

In addition to the structure, you also need to create a white paper that will contain all of the important information about the service you are looking to launch. This is where the potential investors will be able to find out more about your project so make sure you include info like:

• The general information that explains what your project is all about.
• What needs will your project satisfy once it is completed?
• What is the fundraising goal you are looking to achieve?
• Provide more information about the tokens you are giving away and their value.
• List the payment methods and currencies accepted in your ICO.
• Lastly, inform potential investors when you plan to end your campaign.

ICOs vs. IPOs

There is not a big difference between initial public offerings and initial coin offerings in regards to the reward that investors get for their investment. In IPOs, institutional investors are granted shares and partial ownership of the company they are funding, while in ICOs they get coins. The value of the coins can increase over time if the project they supported turns out to be a successful one, similarly to how the success of a company you funded will increase the value of your assets.

The biggest difference between them is in the way that they are regulated. IPOs are controlled by different kinds of commissions while ICOs, for the most part, are not regulated at all. The lack of regulation coupled with the decentralized nature of ICOs can make the risk vs reward factor highly volatile. You can either end up with a fortune for a small investment or be left with a worthless coin at the end of it.

Advantages and Disadvantages of Initial Coin Offerings

Initial coin offerings are quite easy and straightforward to be launched, which can be seen as a significant advantage. They are attractive to investors as they offer a chance to make an incredible return on the investment.

The biggest downside to them is that they are not yet completely accepted worldwide. Some governments consider them counterproductive and destabilizing to the economy. Namely, the government of China has taken legal actions to ban mining & crypto transactions, trying to make them illegal. Some investors are also having difficulties, primarily because they don't know how to buy and get started.