With the advent of Initial Coin Offerings (ICOs), Crowdfunding has become even more powerful on campaigns conducted on blockchain platforms. Crowdfunding has emerged as a revolutionary concept in the world of finance. It allows entrepreneurs and startups to raise funds from many people instead of relying on traditional sources of financing like banks and venture capitalists.
First, let’s understand what an ICO is. An ICO is a fundraising mechanism that enables entrepreneurs to raise capital by selling a digital asset or token to investors. These tokens are usually based on a blockchain, which is a decentralized ledger that records transactions securely and transparently. ICOs have become popular in recent years because they allow entrepreneurs to bypass traditional intermediaries like investment banks and venture capitalists and reach out to a global pool of investors.
One of the most important benefits of ICOs is that they provide a level playing field for entrepreneurs. In traditional financing methods, the success of a fundraising campaign often depends on the entrepreneur’s connections and reputation. ICOs, on the other hand, is open to anyone with an internet connection and an interest in investing in a particular project. This democratization of finance has given rise to a new breed of entrepreneurs who can raise funds based on their ideas’ merit.
ICOs also provide a great opportunity for investors to participate in early-stage projects. Traditional venture capital firms typically invest in companies that have already proven their worth through a track record of revenue and growth. ICOs, on the other hand, enable investors to invest in projects at their earliest stages, providing them with a higher potential return on investment. This is because the tokens sold during an ICO are usually priced at a lower valuation than traditional equity investments, giving investors a chance to enter at a lower cost.
Another advantage of ICOs is their global reach. Traditional fundraising campaigns are often restricted to a particular geographic location, which can limit the potential investor pool. ICOs, on the other hand, can be accessed by anyone with an internet connection, making it possible for entrepreneurs to raise funds from investors worldwide. This global reach has the potential to unlock a massive pool of capital that was previously unavailable to entrepreneurs.
How Do ICOs Work?
In an ICO or token sale, startups receive funding in established digital currencies such as Bitcoin and Ether. In some cases, sovereign currencies are also accepted by startups as funding. Instead, the startup distributes digital tokens (the new digital currency) to investors at a predetermined price (or exchange rate). Digital tokens have various built-in features, such as rights to future earnings for startups.
Startups use funds to fund the development of a company or a specific project within a company, and digital tokens may also provide access to the project’s platform, software, or other benefits. ICO tokens are not typically structured as equity or traditional debt. In fact, with the advice of a professional law firm, it is designed to deliberately avoid the regulation and scrutiny of securities and banking laws.
ICOs are not issued through an intermediary and are not subject to crowdfunding laws like the US Jumpstart Our Business Startups Act. After the holding period, the tokens will be traded against other digital currencies on digital secondary markets.About 120 ICOs raised $1.6 billion in the first seven months of 2017 from $100 million in 2016. The largest ICO was in July 2017. Within two weeks, he had $230 million raised for the project.
ICOs currently exceed the amount VC firms donate to internet startups in angel and seed rounds. For investors, the ICO presents the business plan as a white paper. The whitepaper describes the project, introduces the team, and explains the token’s functionality. Whitepapers also typically do not include revenue projections. Potential investors exchange their views on specific ICO websites and discussion forums before launching the token.
Investment by the general public has become an integral part of enabling companies to expand their operations. Additionally, it is a way for people to earn passive income by supporting businesses and other assets so that they can grow in the future. The field of investment and how companies fund projects have mostly stayed the same since its founding in 1611. Many barriers still prevent small businesses from successfully using this system.
However, a new method is changing the investment and crowdfunding space initial coin offerings. This new system leverages the new technology of blockchain. This enables the creation of decentralized tokens on the blockchain that represent business value, which people can buy and own.
Initial Public Offering
To understand what an ICO is, we first must understand how crowdfunding is primarily done. An Initial Public Offering is a relatively common method used to raise capital for a company. You may be told to invest in company stock if you have heard of investing. At a basic level, this is what his IPO will allow businesses and the public to do. In a company, people divide their ownership of the company into shares. A stock is a portion of a company owned by an individual or an organization (usually a venture capital firm). To crowdfund funds, a company acquires a portion of its stock and makes it publicly available for sale.
To further understand this concept, imagine that there is a company called Apple, and it does an IPO. Also, you own 1 million shares and allow the public to purchase 50% of those shares. The company’s founders, investors, and employees own 50%. Each share is priced according to the estimated value of the company. People start buying shares because they believe the company will grow. This allows the company to fund investments for company growth.
As a company grows in size, so does its stock value. Most people often buy stocks to increase their value so they can be sold in the future. In addition, shareholders receive a portion of future business profits as dividends.
Initial Coin Offering
Initial coin offerings, or ICOs, are a new alternative crowdfunding method compared to initial public offerings. This method allows people to invest in a company by paying a certain amount. However, the shares will not be distributed to the public in this case and will remain in-house. Instead, it uses tokens to allow people to buy to invest in corporate projects. These tokens can be used to purchase products and services internally. In this method, the company receives money from people purchasing tokens, which people can use to purchase products and services.
In this system, there is a certain amount of tokens available. Companies may make all available tokens available for purchase by the public or keep some for their use. Similarly, in an initial public offering, as the size of the company grows, so does the value of its shares. We also often buy tokens to increase their value so that we can sell them in the future. A successful ICO benefits investors as the price of the token increases based on the company’s growth.
Supermarket Walkthrough
Let us use an example to understand the concept of ICO better. Suppose you have a supermarket named Bob’s Market. The supermarket wants to get funding to fund the creation of several other supermarket stores to add to the chain. They start creating ICOs to get funding to implement their projects. Let us say they created a total of 1 million ICO tokens. In this scenario, the public could purchase 50% of the total ICO tokens or 500,000 ICO tokens. Investors can use these tokens to buy products or hold them in hopes that the tokens will increase in value as the company grows.
ICOs Backend — Blockchain
Now that we understand what ICOs are and how they are used in the real world, let us see how they work on the backend. They typically run on a token system, just like cryptocurrencies. To understand how the ICO token system works, we first need to understand how the leading technology behind it, the blockchain, works.
Blockchain is a decentralized system that documents data in a manner that causes it challenging or unattainable to modify, hack, or trick the system. This is similar to Google Docs, where you can create and share documents with others. When a document is shared, it is distributed rather than copied, creating a distributed chain where everyone has real-time access.
All changes are available, so no one can change anything without their knowledge. A blockchain is made up of blocks that store information. For cryptocurrencies, blocks store transaction data. An individual block also has a nonce and a hash. A hash is a block signature that sticks to it for later reference. It is similar to a person’s fingerprint as it is the signature of the transaction data.
A nonce is the first number a blockchain miner must discover before resolving a block. To create blocks, a process called mining takes place. In this process, a person finds a nonce that matches the hash. Miners are people who complete the mining process. To learn more about blockchain, check out this article on blockchain technology.
Token
Whenever we hear the term token, we think of cryptocurrency tokens, including Bitcoin, Ethereum, etc. However, tokens have a much more comprehensive range of uses than just being used as an alternative option to money. Tokens are digital assets that people can transfer to other people. The system is built on the blockchain to maintain security and privacy while trading tokens.
People develop tokens in many different ways, but the most common approach is to leverage the Ethereum blockchain. The Ethereum blockchain, or “Ether,” currently includes several different tokens, including Gnosis (GNO) and Auger (REP).
ICOs use case
Many successful companies and services have used the initial coin offering process to raise capital early in their growth cycle. Some of the largest and most successful ICOs ever used were created by Ethereum and Stratis. Unlike Bitcoin, Ethereum is not just a cryptocurrency; it is also a protocol for running and developing decentralized apps via smart contracts. Once the Ethereum blockchain and protocol launched, the developer began funding the company by creating one of its first ICOs. Another successful ICO of his was created by the company Stratis.
The company has created a platform allowing companies to develop blockchain apps while using traditional programming languages. They also conducted his ICO campaign to fund the platform, during which he raised 1,000 BTC or $675,000 worth of funds. These two cases were the most successful cases where the ICO process worked, but many companies use this process to fund their projects. With the expansion and growth of blockchain technology, the number of companies using ICOs is increasing daily.
Advantages Of ICOs
ICOs are growing in popularity for a reason. It is a win-win for everyone involved. The initial coin offering process benefits token customers and business owners looking to expand their businesses. Above all, there is a lower entry barrier when using an ICO. The corresponding initial public offering process is usually limited to top companies. This is due to the massive legal system at work throughout this process. This means that his IPO process cannot be used effectively by small businesses that need funding.
ICOs create an alternative way for companies of all sizes to participate and raise money from enthusiasts to fund their projects. Since ICOs are on the blockchain, they are decentralized by central authorities. Another advantage of the Initial Coin Offering is that it creates a global network that allows the system to be used anywhere. This allows companies and people worldwide to benefit from this crowdfunding system. This global network also reduces barriers to using this process as the company is not limited to one location and can help grow globally.
Numerous of the advantages for contributors are also benefits for founders. At the very least, these advantages will encourage more contributors to choose her ICO over other options to invest their money.
Liquidity
A standard deterrent for those looking for renewed investment options is the need for more liquidity. On many occasions, capital is not accessible for several years. For an ICO, investors have high liquidity, and the secondary market indicates real-time pricing is based on the project’s existing worth.
Decentralization
ICOs are available to everyone, especially if they acknowledge cryptocurrencies. The only condition for numerous ICOs is that contributors can transfer funds in time for the investment.
Openness
ICOs permit anyone to invest; contributors can also fund at any time. This varies from the standard model of funding startups, where it is nearly impossible to become an early investor if you are in close contact with one of the founders. Contributors care to pay less by bypassing the premium, so supporting earlier is worth it. To become an early investor, contributors should be on the lookout for their upcoming ICO and ready to buy tokens soon after launch.
Cost variability
Employing an ICO to finance a project indicates that the token’s value can deviate significantly from startup to startup. This can improve your chances of making a profit while reducing risk. Additionally, many investors can contribute, making his multi-million dollar ICO project possible.
Less competitive
Many projects need help finding funding through traditional methods, especially if, for some reason, they need to be more attractive. In some circumstances, this may be because of location (for example, if the project is outside a significant wealth center) or type of offering (particularly for nonprofits). An ICO’s simple fundraising procedure allows any project to receive funding.
Invest your cryptocurrency profits.
Cryptocurrency holders often hesitate to use their wealth because they prefer to bypass turning it into fiat currency and paying taxes. Cryptocurrencies will resume accumulating value, but people will demand assistance to tap into that wealth, and ICOs are the perfect outlet. Everyone is looking for more investment projects as more investors learn about ICO’s benefits. If you are looking for a form to finance your idea, regard it as a win-win for both the startup and the investor.
Disadvantages Of ICOs
Volatile
Different blockchain technologies are prone to changes, primarily because different ICOs compete in the market. Investors can expect sharp changes in an asset’s price as many factors can affect its current value.
Possible Fraud
A significant disadvantage of ICOs is that, as an investor, you have to look closely at the profiles of your team members to see if they have experience, technology, or blockchain knowledge. However, not all investors have enough information to distinguish between good and bad ICOs.
Numerous ICOs need to participate in the exact regulatory function of IPOs and other conventional assets. While this makes procurement more accessible and readily available, it is also subject to fraud and other malicious practices, making it more or less possible for illicit companies to extract money from vulnerable investors.
Possible lack of accountability
Many ICOs have arisen from startups and other private institutions that need more existing capital to launch potential projects. There is no guarantee that the companies mentioned above can deliver what they promise. In other words, investors sometimes get what they expect. When deciding which ICOs to invest in, investors are encouraged to research all aspects of the company, including reputation, key employees, and several successful projects launched.
The Future Of Investment And Crowdfunding
Initial Coin Offerings (ICOs) are becoming more popular daily as new companies and people try out this crowdfunding/investment system. It has become a prevalent investment method and may even overtake IPOs in the future. In conclusion, Initial Coin Offering is a new alternative to crowdfunding, where people can buy tokens to invest in a company. These tokens can be used to purchase products and services at the company in exchange for funding the company’s projects.
This investment process leverages blockchain technology to create decentralized tokens to trade between people. Initial coin offerings are becoming an essential method of investment/crowdfunding for businesses and people to support projects, and this growth is increasing daily.
