An initial coin offering (ICO) in the cryptocurrency industry is similar to an initial public offering (IPO). A blockchain startup which wants to raise money to finance the creation of a new coin, app, or service launches an ICO as a way to raise funds.
Investors who are looking for a way to profit from new coins can buy into the offering and receive a new cryptocurrency token issued by the company. This token may be an utility token to be used in making use of the product or service the company is offering, or it may just represent a stake in the startup.
When a cryptocurrency startup wants to raise money through ICO, it usually creates a whitepaper that outlines what the project is about, the need the project will fulfill upon completion, how much money is needed, how many of the digital tokens the founders will keep, what type of money will be accepted, and how long the ICO campaign will run for.
If the total value of funds raised during an ICO does not meet the minimum funds required by the firm, the money may be returned to the buyers; at this point, the ICO would be deemed unsuccessful. If the funding requirements are met within the specified timeframe, the money raised is used to pursue the goals of the project.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
For traditional companies, they can begin to raise funds necessary for development and expansion in various ways. A common method for traditional companies is to reach out to external investors for early support, in order to get a quick influx of cash which comes in exchange for a portion of ownership stake in the company. Another method is to go public, earning funds from individual investors by selling shares through an IPO.
While IPOs deal purely with investors, ICOs often deal with crypto enthusiasts who are keen to invest in a new project, much like a crowdfunding event. But ICOs differ from crowdfunding in that the backers of ICOs are motivated by a prospective return on their investments while the funds raised in crowdfunding campaigns are basically donations. For these reasons, ICOs are referred to as “crowdsales.”