Initial Coin Offerings: Financing Growth with Cryptocurrency Token Sales
ICOs are similar to IPOs (initial public offerings) in offering investors a stake in the company. However, the ICO’s size largely depends on how much capital the business requires and how many tokens they want to sell. You can visit at this link to get a massive variety of trading strategies and activities that can assist you in polishing your trading skills. Presale crowdfunding is a form of investment where businesses raise funds from people by selling them digital currency at a discounted rate.
A venture capitalist invests in entrepreneurs or their ideas rather than equity. Investors purchase these digital assets with cryptocurrency (bitcoin) and use them to pay for a product or service provided by the issuer of the tokens.
Several of the largest ICOs in history have been for blockchain-based tokens. It is estimated that startups in the space raised more than $1.5 billion in 2017, with ICOs alone representing more than $750 million brought in by investors.
The ICO market has grown exponentially over the past year, with USD$2.3 billion raised via ICOs in 2016 and over USD$750 million by July 2017. Experts say that blockchain startups are slowly shifting away from traditional VC funding to Initial Coin Offerings (ICO), a crowdfunding model made possible by distributed ledger technology (DLT) and smart contracts. Let’s have a detailed look at the initial coin offering.
How do Initial coin offerings operate?
The most common method is creating a new token using blockchain technology, which allows them to link the ICO with their project. The second step is creating a white paper that describes the project and its vision. The white paper includes information on who is behind the ICO, how much money they need to complete their idea, and their plan for developing the project in the future. Once the white paper has been created, the project organizers can begin accepting pre-sale contributions.
They can choose to start by selling off pre-sale tokens that have no value on the market and are only intended to help build interest in their idea. The main ICO begins once the project has raised a minimum amount through pre-sales, usually between 10 to 25 per cent of the total funds needed.
Once complete, the project begins developing its plan and using blockchain technology to create a digital token representing it. This token is called an ICO coin or “ICO token.
Three different structures of an initial coin offering:
The first type of ICO coin is an analogue of traditional stock, in which the investors receive digital tokens representing ownership of the company. The second type is described as a “utility token”, which gives rights to specific services and products but does not have value or equity. Finally, the third type of ICO coin does not appear to provide services to users and therefore has no value for investors.
A special kind of ICO coin is an ERC20 token, which stands for the Ethereum Request. Smart contracts on the Ethereum blockchain create ERC20 tokens, and they act as transferable financial assets on both Ethereum public ledger and its internal distributed ledger called the “blockchain”.
How to identify a legit ICO before investing in it?
The first way is to analyze the project’s white paper and how they defined the core principles behind their idea and what problem they seek to solve. The second way is by anticipating whether you can use the token issued by that particular ICO for its original purpose or not. When an ICO issues a coin, the startup will usually produce its blockchain that extends beyond its network but doesn’t support any transactions until it gets listed on cryptocurrency exchanges, where people can buy and sell them for fiat money.
An important fact to keep in mind before selecting the ICO is to study their past performance and the track record of their team members. The best and safest way is to invest in an ICO, have a team member involved with a known organization, and have a decent track record of success.
The major advantage of an ICO is that it raises significant amounts of money (in some cases millions) for companies that may not be accepted by VCs or other startup funding sources. In addition, an ICO provides immediate liquidity for investors and access to tokens that help build out products, projects and services.
A prominent example of an Initial coin offering is Bancor – a blockchain protocol for decentralized exchange running on Ethereum that allows an account to hold any amount of token within a smart contract, then convert those tokens to another token with immediate market liquidity; it raised $153 million from more than 150 investors in under two weeks.
Read also: Types of Altcoins and Advantages of Investing In Them
