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What is an ICO and How Do They Work?

Green image of cryptocurrency coins.
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In the cryptocurrency world, initial coin offerings (ICOs) are a popular way for startups to raise capital for their blockchain-based projects. Investing in a crypto project through its ICO can also be rewarding for early investors. So what is an ICO, and how does it work?

Let's explore this and how to identify a project worth investing in.

What is an ICO?

Blue image of ICO website screenshot

An ICO is a frequently used method of raising funds deployed by crypto startups to finance their blockchain-based projects. It is, in many ways, quite similar to an IPO (initial public offering).

ICOs involve startups creating and issuing new digital tokens or cryptocurrency to investors in exchange for funding. The company then uses the funds it raises to develop and launch the project's platform or product.

Essentially, an ICO allows startups to bypass traditional fundraising methods and access a wider pool of potential investors while also allowing investors to invest in promising new cryptocurrency projects in their early stages.

A good example of a successful ICO is Ethereum's ICO, which raised more than $17 million.

How does an ICO work?

Different stages lead to a successful ICO. Here is a summary of what a project team has to do to land a successful ICO.

  • Research and documentation: The process begins with the cryptocurrency startup creating a whitepaper that outlines their project and the goals they aim to achieve. The startup then sets a target amount of funding they hope to raise from the ICO.

  • Building the product: The startup can now start building the project. This will often involve creating the platform, features, and tokens to help users access the features.

  • Pitching, promotions, and campaigns: The company will begin approaching potential investors at this stage. Project teams can achieve this through cold pitches, social media campaigns, or word of mouth. The aim is to inform investors of the information contained in the documentation and ask for their financial contributions.

  • Initial coin offering launch: This is the D-day when investors buy the project's tokens using an existing crypto like Bitcoin or Ethereum. An ICO launch takes place in rounds. 

What is an ICO round?

Because an ICO is intended to generate funds over time, there's often more than one ICO launch for a given company. Instead, these launches come in a three-round sale model:

  • The seed round: This is often the first ICO for any project. The round offers investors a bonus for taking an early investment risk in the project. Alternatively, it may offer a token discount, ensuring investors buy the coins at their lowest-ever pre-launch value.

  • Pre-sale round: The pre-ICO sale round tokens still sell at a discount, but less than the project offered during the seed round. 

  • Token sale: This is the final ICO stage. The token or crowd sale offers the least discounts and rarely has bonuses. 

The difference between ICO and IPO

An ICO is used to raise funds by creating and selling a new digital asset or cryptocurrency, while an IPO raises capital through the public sale of shares of a company's stock for the first time.

Additionally, ICOs are often less regulated than IPOs, and investors in ICOs typically receive the newly created digital tokens or cryptocurrencies, while investors in IPOs receive company shares.

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The pros and cons of an ICO

Like most financial investments, ICOs have pros and cons. Here's a breakdown of an initial coin offering's main merits and demerits.

Pros

  • ICO enables startups to raise funds without giving up equity.

  • If the project succeeds, they allow investors early-bird access to platform features and impressive returns on investment.

  • ICOs establish a community of incentivized users, ensuring the project has demand even before its launch. 

Cons

  • Some ICOs can be financial pitfalls or scams.

  • They are not very well regulated.

How to spot a legitimate ICO

You can take several measures to avoid spending your money on ICO rug pulls and doomed projects. Let's explore a few tips on how to spot legit ICOs.

  • Read the project's white paper: This will help you understand what it's all about. Consequently, it helps in assessing the organization's growth potential.

  • Review the project's team: Do your due diligence on the company's team members and analyze the success of projects they were previously involved in.

  • Join the project's community: You can learn a lot from following a project on social media and joining its Discord server. The concerns raised on these platforms and the responses offered can help you gauge the company's legitimacy.

Frequently Asked Questions

Are ICOs safe?

ICOs can be safe if legitimate companies conduct them. It is crucial to #DYOR (do your own research) to verify a project's legitimacy before you put your money into it.

How to get information on an upcoming ICO?

Information on ICOs is often present on the social media pages of the given projects. Additionally, you can follow valid crypto investors, subreddits, or Discord channels that discuss upcoming projects to know what's trending.

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Evans Karanja Ivanco

Evans Karanja Ivanco

Evans Karanja is a content writer and scriptwriter with a focus on crypto, blockchain, and video gaming. He has worked with various startups in the past, helping them create engaging and high-quality content that captures the essence of their brand. Evans is also an avid crypto trader and investor, and he believes that blockchain will revolutionize many industries in the years to come. When he is not writing, find him playing video games or chasing waterfalls.

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