What is an ICO
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ICO stands for Initial Coin Offering. Despite the name it doesn’t actually have much in common with an Initial Public Offering (IPO). It’s a new way for cryptocurrency companies to raise money.
Here’s a quick summary of other popular ways to raise money to illustrate the difference between traditional fundraising methods vs an ICO.
Crowdfunding
Fundraising potential: 0 — $20MM
Crowdfunding is somewhat like a donation. Platforms such as Kickstarter, Indigogo, and Gofundme are the most popular sites to conduct and participate in a crowdfunding campaign. Participants in the crowdfund send money to the project via credit card, and in some cases receive company swag such as a Tshirt or special access to the product that’s being crowdfunded in return. The crowdfunding participants’ only expectation is that the product gets completed and is available to purchase. The downside is that once you participate, there is no way to receive a higher return on your original investment.
VC funding
Fundraising potential: $100k — $1B
Most tech startups these days are seeking funding from a VC. Depending on what stage the company is at (concept, prototype, launched, post-revenue, etc.) a VC may decide to invest in your company in exchange for equity (company stock) and a seat on your board which gives them the power to influence business decisions that you make, in turn giving them a say in the direction of your company. They expect your company to grow quickly, and for you to take the company public or for you to sell the company at a profit, giving them a good return on their investment in you and your company.
IPO
Fundraising potential: $10MM — $70B
When a company wants to sell shares of it’s stock to the general public, it conducts an IPO. There are seemingly endless regulations and responsibilities that a company has when it sells shares to the general public as opposed to being a private company. This funding gives the founders, employees with stock options, and investors in the company a way to sell their stock and effectively “cash out”. Stockholders expect steady continued growth and quarterly profit. These are the metrics (along with hype of course) that stockholders use to attribute value to the stock. Another way to put it is, companies with steady and continued growth, increases stockholder sentiment which in turn increases demand for the shares which drives their price up.
ICO
Fundraising potential: $1 — $250MM
With an ICO, a company conducts a crowdfunding campaign but instead of merely accepting cash, the company creates a cryptocurrency, and gives it to participants in exchange for money. (The company conducting an ICO does not typically give away company stock.)
The ICO participant can then exchange that cryptocurrency back into cash on a cryptocurrency exchange online. If in the future the project becomes popular, the price of the cryptocurrency may increase*, allowing participants to make money, which is the main difference between an ICO and a standard crowdfunding campaign.
*Unlike stockholders, steady continued growth and quarterly profit are not the metrics that cryptocurrency holders use to attribute value to the cryptocurrency. Instead, it’s the overall value that a technology brings to the greater cryptocurrency community, the scarcity of the cryptocurrency, and a dash of hype are what typically drives their value..
In the past few months this method of raising money has gone viral, and to date the largest amount raised through an ICO was $257MM! ICO investors have also done exceptionally well. For example, if you would have invested $10,000 in the Omise GO ICO in July, you would have $160,000 in just 3 months. Incredible.
The catch..
In short, it’s not easy to invest in an ICO.
First you have to get approved and buy cryptocurrency on a currency exchange. Then you have to transfer that cryptocurrency to a wallet where you own the address. Then you have to evaluate, and navigate the ICO project. Next you have to send the money to the proper address. Etc etc.
This difficulty is providing an environment for scams to flourish. There are sites that spoof and look identical to real ICO sites and when you go to invest, they steal your money. There are scammers in the ICOs own public chat rooms preying on investors, and there are completely fake ICOs who have no intention on actually creating their product, and just want to collect cash and run. Etc etc.
With all of that being said, the benefits far outweigh the pitfalls. Learn next about how to evaluate ICOs.
