Crypto Academy Week 9 - Homework Post for @imagen
ICO is the short word for Initial Coin Offering.
Initial Coin Offering is another form of virtual currency that businesses use in order to raise capital for project development. ICO use trading platforms to transact to allow investors receive unique cryptocurrency known as tokens n exchange for their monetary investment into the business.
ICO is like shares and securities in the stock exchange market but in this context, the shares is only available in the crypto environment. People invest their money into ICO platfrom. The first cryptocurrency distributed by an ICO was ripple, in 2013, Ripple Labs started creating a called payment system known as the ripple and developed around 100 billion XRP token. The company sold these token to investors to fund the development of their platform. sometimes ICO may yield to massive profits for the investors and sometimes investors can lose all their money due to fraud so it is neccessary for an investors to make thorough research before investing into ICO.
There are two types of initial currency offering and they are: Public ICO and Private ICO
Public ICO
is type of fundraising strategy that aimed at the general public, anyone can participatec and invest their money into the ICO, this system doesn't consider status and economic level
Private ICO
is a type initial currency offerings Whereby only few people mostly the big financial institutions, tech companies or wealthy and influential people can participate in this capital raising activity and the company offering the ICO may set a minimum investment amount. In this system, the investors are limited and this is the best ICO due to regulatory concern because a coin will lose value if it is excessive in circulation, this leads to inflation and make it lose value easily but with the use of Private ICO this will help in increasing the value of cryptocurrency because it is limited in circulation.
An ICO is a very complex process that requires a good understanding of the blockchain technologies, the crypto market and law.
For an ICO to be successful, there are some processes that need to be performed and these process are:
Know your target:
main reason for developing ICO is the motive to raise capital, The company tries to find who is capable financially and in other resources to support their platform, is it the public or private individuals?. Also the startups set out their plans and also they make the whitepaper.
Developing the tokens:
after getting ther targets, it is neccessary to create something that will serve as a reward for their investment and this is why tokens are created.
The tokens are created using specified blockchain platforms. It is easy to create tokens because a company is not required to write the code from start.
Awareness campaign :
the company runs promotion to attract the investors through the use of media maybe on tv, social media platforms, etc. Creating awareness is very important cause the target needs to be aware of the ICO.
Rewarding the investors:
this last part of the process, the tokens created is been offered to the investors as their reward for investing in the business then the company can use the profits from the ICO to develop the project and the investors can use the token to benefit from this new products.
Difference between Initial coin offerings and Iinitial exchange offerings ( ICO and IEO) :
To understand the difference between ICO and IEO it is neccessary to understand the meaning of IEO.
IEO
IEO means initial exchange offerings, under this system the crypto exchange control the sales of tokens and blockchain projects go through a comprehensive authentication process whereby the startup white paper is seriously scrutinized, and their crowdfunding drive will also get promoted by the exchange. The IEO startup team does not develop a capital raising platform and does not manage it, but performs a financial and legal check on the exchange.
Some of the differences between ICO and IEO are :
Intermediary:
presence of intermediary is a major distinct between ICO and IEO. In ICO the startup sells tokens directly to the investors and there is no any broker who scrutinize the tokens or business but incase of IEO, anytime an investor buys tokens during ieo he or she transfers money to a business wallet on the exchange. These funds are under the complete control of the exchange. Funds are then distributed to a startup in the form of several tranches. Each tranche usually has a specific purpose and there is a refund if the purpose is not fulfilled.
Openness:
for a company to be registered on IEO platfrom, it must disclose some information and go through a due diligence procedure whereby the companies owners and employees background is thoroughly checked and also the white paper also investors go through a verification process to prevent case of money laundering unlike the ICO whereby there is no proper scrutiny of both the investor and business.
Formation :
the procedures creating ICO is different to that of IEO. In ICO you can just assemble any team and register a company then create a website, whitepaper and a platform for raising money and after that create awareness about your platform then when the softcap is reached you can use the proceed to develop the site or introduce new service. While that of IEO is more harder, you first assemble a team, register a company then create a site, whitepaper and a platform for IEO then you apply for listing and after appying for listing, you sign agreement with the exchange for IEO and you pay for inclusion in listing and passage of all other registration and after this obligations have been fulfilled, tranches are released from time to time for development of the site.
Advantages of ICO :
Investment opportunities :
ICO offers investors many options about where to spend their money, the rate at which the price of tokens goes up and yield massive returns for the investors is good for example when the ICO ethereum was created, it tokens which was the ether was sold around 40 cents but currently 1 ether is worth $600.
Easy access:
CO is very easy to join as anyone can invest easily with no restriction, companies that use crypto as an investment tokens provide more access to different investors from all economic levels and this is profitable for startup business who may not have the necessary capital to fund their projects.
Lastly with the use of ICO, transactions and enquiry like background checks can be done through the web. you can checkout the whitepaper of the business easily unlike the traditional IPOs, stocks, bonds, and other exchange forms that rely on various regulatory filings.
Disadvantages of initial coin offering:
Volatile:
the price of return on investment changes from time to time, different cryptocurrency are developed constant and this has lead to competition among existing ICO and it affects the values of an ICO as it may increase or decrease the value of the the token.
ICO platform are prone to fraud, since the governments or any agency can't regulate ico platforms, it is easy to get scammed so as an investor, it is neccessary you make a proper research and diligently look at the profiles of the business owners and employee also their whitepaper. However, not every investor is knowledgable enough to differentiate between a good ICO and a fraudulent one.
Example of initial coin offering:
ICO platform have really developed alot and has helped in raising alot of funds for crypto developers, in 2017, it is believed over $5 billion was raised through ICO, there are various types of ICO like ethereum, neo, storj,iota,nxt,lisk,etc but I will be talking more about ethereum.
Ethereum, many people who are associated with the business world would have heard of ethereum, it has been in existence 2014 by a Canadian programmer known as vitalik Buterin.
Ethereum is a public open source programs that uses decentralized blockchain technology to facilitate smart contracts and cryptocurrency trading safely without the involvement of a third party.
The development team of ethereum created this cryptocurrency to solve the issues associated with bitcoin, one of the main founder vitalik Buterin who was one of bitcoin developers imagined platform that could trade more than just cryptocurrency so he and others launched a crowdsourcing campaign where they sold investors tokens which was known as the ether or eth, they made over $18 million from the sales this eth and this money was user to develop the ethereum and over the years the ethereum has witnessed alot of growth. Currently the eth has the second largest market capitalization after bitcoin and each token is now sold ar $600.