Initial Coin Offering or ICO – Concept, Types, IPO and ICO & moreLast Updated Date: Nov 17, 2022
We get to hear popular thing from digital currency – the ICO, which stands for Initial coin offering. But what it is?
How it is a popular thing in the financial sector? In this article, we will discuss everything about it.
The financial world is going through a dramatic transition. It is made possible with the advent of technology integration; block-chain technology sets the perfect example here.
We can’t stop ourselves watching the rising demand for digital currency since the time the world first introduced block-chain technology.
The world is discovering lots of opportunities in this goldmine.
What is ICO (Initial Coin Offering)?
ICOs or Initial Coin Offering is a type of crypto-currency (digital currency) that global firms, enterprises and industries use to fund their business capital needs.
To simply put, ICO is a form of a trading platform where crypto-currency in terms of “Tokens” is issued to potential investors in exchange for their investments in a particular company.
It is similar to Initial Public Offering (IPO), where companies approach to raise capital for their businesses. Still, there are lots of factors that state ICO is quite unlike of IPO.
In simple words, ICO is an investment. It gives investors a digital currency, “crypto coin” (also called as “coin” or “token”), in exchange for their investment.
In this digital age, ICOs are also recording notable growth with the rise in the value of block-chain technology.
In 2017 alone, up to 7 billion dollars was raised via ICOs and when the year 2018 kicked in, the amount almost doubled.
Let’s go deep into the debate to find more about ICO so you could know ICO better.
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Types of Initial Coin Offering
ICO is split into two different types. Let’s have a look-
Only private institutions or individuals with high net worth can participate in private IPO and continue with the further ICO process.
Also, the company is free to select the ideal investment amount as per their business plans.
Public ICO is fairly similar to crowd-funding as it targets the general public. To simply put, it is a democratized form of investment.
Public Initial Coin Offering allows any investor from the general public to come ahead and invest. Still, in contrast to the private ICOs, Public offerings are less viable due to regulatory concerns.
After taking a quick glimpse at the types of ICOs, next, we will discuss how actually an ICO works.
How does an ICO Work?
An initial coin offering can be a slightly complex thing to grasp as it entails a thorough understanding of technology, law and finance.
The key concept behind ICOs is to use block-chain technology’s decentralized networks in capital-raising operations to balance the priorities of different stakeholders.
The following are the actions upon which ICO works:
Identification of Investment targets
Any ICO begins with a company’s urge to collect funds.
It is the only company that determines the fundraising campaign, investment targets and produces the information needed for prospective investors.
So they could learn more about the company and its operations.
Creations of Tokens
Tokens creation is the next step included in the ICO (initial coin offering). In simple words, the tokens stand for asset or utility that plays an integral role in block-chain technology.
These tokens are valuable since they are fully trade-able and transferable. Since the tokens are just variations of crypto-currencies, one cannot conclude them as the actual crypto-currencies.
Also, unlike stocks, tokens don’t typically have an equity interest in a business. Rather, most tokens provide their holders with a stake in the product or service that the company offers.
Now you might wonder how actually these tokens are created. Well, it is the magic of block-chain technology.
The entire process for token creation has turned instant, easy and more reliable with block-chain technology.
The company itself does not need to create the code from scratch. Every crypto-currency in the digital world works with block-chain technology; thus, they are valuable.
A company will typically run a marketing campaign with the aim to draw new investors. Most campaigns are run online.
They are more helpful in attracting as many investors as possible. Still, it’s vital to note that there is a ban on ICO advertising on several online platforms, including Facebook and Google.
The tokens are then issued to investors once they’ve been formed. It’s possible that the offering may split into diverse rounds.
The company will then utilize the ICO profits to release a new product/service.
Here, investors have two options: choosing the tokens they received to profit from this product/service or waiting patiently for the tokens’ value.
This is how the whole structure of ICO works. Next, we will talk about the differences between ICOs and IPOs to wrap up how one is unlike and similar to another.
Differences between ICO & IPO
Here are the list of differences between ICO & IPO –
- From an investor perspective, IPO offers you ownership of the company you invest in. Still, it depends upon the number of shares you purchase from the company. At the same time, ICO offers the investors right on a specific project only and not to a company.
- In IPO, the decision making works on a centralized choice. In contrast, ICO follows a decentralized network which concludes investors also have the right to show their suggestion on a particular project.
- Investors may receive information about the Financial Data as soon as the exchange for IPO makes any decision. At the same time, the information is open. Since it works on block-chain technology, hence not anyone can access the information.
- IPOs can be subjected to taxes that we don’t see in ICOs. Tax is paid in ICOs on gains only.
- There is a multiple intermediaries’ involvement in IPO in comparison to ICO with limited intermediaries.
ICO or Initial Coin Offering – Conclusion
Ultimately, now you have got the answer to what is ICO and how actually does it work. Through this article, we come to the point that ICOs are helpful for the start-up.
This may help them in raising the capital. ICO can be of two types, private offering and public offering with varying operations and regulation.
In a nutshell, it is similar to IPO with modest variation as here the monetary investment turns digital.
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