Definition of ICO

An Initial Coin Offering, or ICO, is a procedure for cryptocurrency teams to raise money for a project. In an ICO, teams create tokens based on the blockchain to sell to early backers. This is the crowdfunding phase. People get tokens that can be used at any stage, and the project gets money to pay for development.

In 2014, it became more common when it was used to pay for the development of Ethereum. Since then, ICO has been used by hundreds of new businesses, with varying levels of success, especially during the boom of 2017. Even though the name sounds like an Initial Public Offering (IPO), these two ways of getting money are very different.

IPOs are usually done by businesses that have been around for a while and want to raise money by selling shares of their company. ICO is used as a way for companies to raise money for their projects at very early stages. When investors in an ICO buy tokens, they do not buy any share in the company's ownership.

ICOs can be a good way for tech startups to raise money besides traditional methods. Often, it's hard for new businesses to get money if they don't already have a product that works. In the blockchain world, it's rare for big companies to invest in a project based on its white paper. Also, the deregulation of cryptocurrencies prevents people from thinking about blockchain startups.

Not only new businesses use this method. Established businesses sometimes choose to start a reverse ICO, which is identical to a regular ICO in terms of how it works. In this situation, businesses have a product/service and issue a token to make its ecosystem more decentralized. They could also hold an ICO to attract more investors and raise money for products related to blockchain. 

Comparison of ICOs and IEOs

There are many ways in which Initial Coin Offerings and Initial Exchange Offerings are the same. The major difference is that in the case of IEO, it's not merely hosted by the project team. It’s also hosted by a cryptocurrency exchange.  

The exchange works with the team so that its users can buy tokens by visiting the exchange's platform. This could be good for everyone involved. When a renowned exchange backs an IEO, users can be sure that the project is credible and there's no doubt about its authenticity. The team behind IEO benefits from more attention. Ultimately, the exchange gains from the success of the project.

Comparison of ICOs and STOs

People used to call Security Token Offerings the "new ICOs." From a technological point of view, they are both the same. Tokens are generated and distributed in the same way. Legally speaking, they are very different.

There is no agreement on how regulators should classify ICOs because the law is ambiguous. Because of this, the industry hasn't had any real rules put in place yet.

Some companies use an STO to sell tokens that represent shares of ownership. The issuer registers their offering with the right government body as a securities offering. Therefore, they are treated the same way as traditional securities.

Operations of ICO

There are many kinds of ICOs. Sometimes the team hosting it will already have a running blockchain that they will keep improving over the next few months and years. In that scenario, users can purchase tokens, which are then sent to their chain addresses.

In an alternative case, the blockchain might not have launched yet. If that's the case, the tokens will be issued on a blockchain that's already up and running (such as Ethereum). When the new chain is up and running, people who have tokens can trade them for new ones that are made on top of it.

But the most common way is to issue tokens on a chain that can handle smart contracts. Again, this is mostly done on Ethereum, and the ERC-20 token standard is used by a lot of applications. There may be as many as 200,000 different Ethereum tokens today, and not all of them came from ICOs.

Many other chains can be used besides Ethereum. Waves, NEO, NEM, and Stellar are some well-known ones. Because these protocols are so flexible, many organizations don't plan to move away from them and instead choose to build on what they already have. This lets them use the network effects of an existing ecosystem. It gives developers access to already tested tools.

An ICO is planned ahead of time, and the rules for how it will work are set. It could say how long it will run or set a hard limit on how many tokens can be sold. It could also do both. There could also be a whitelist that people have to sign up for ahead of time.

The users then send money to a specified address. Bitcoin and Ethereum are usually accepted because they are so popular. Either the buyer gives a new address where the tokens are sent, or the tokens are sent to the address where the payment was made.

Can I launch an ICO?

Most people have access to the technology needed to make and distribute tokens. But in reality, there are a lot of legal things to think about before you hold an ICO.

Overall, there aren't enough rules for cryptocurrencies, and some important questions still need to be answered. Some countries ban ICOs categorically, but even the ones that are most friendly to cryptocurrencies haven't made clear laws yet. Before you think about an ICO, you must know what the laws are in your own country.

ICOs Regulations

Different locations have different rules, and each project probably has its own details that may change how the government sees it.

It's important to note that the fact that there are no rules in some places is not a free pass to use an ICO to crowdfund a project. So, if you want to use this type of crowdfunding, you should talk to a lawyer first.

Several times, regulators have taken action against groups that raised money through what they later decided were securities offerings. If the government decides that a token is a security, the issuer must follow the strict rules that apply to other securities. 

Regulation in the blockchain space moves slowly. This is because technology moves faster than the legal system. Still, many government agencies have been talking about how to make blockchain technology and cryptocurrencies work more openly.

Even though many blockchain fanatics are worried about government overreach, which could slow down development, most of them understand the need to protect investors. 

Involvement of risk factor

The idea that a new token could give huge returns is exciting. But not every coin is the same. As with any cryptocurrency investment, there's no guarantee that you'll receive maximum (ROI).

It's hard to tell if a project will work because there are so many things to consider. Investors who want to buy tokens should do their homework and learn as much as they can about them. They should consider the following factors:

Is the idea workable? How does it make things better?

Does the project need a blockchain or token, or can it be done without them?

Is the project team capable? Do they know how to execute the project?

Refrain from investing more than you can afford to lose. The cryptocurrency markets are very volatile, and there is a big chance that the value of your holdings will drop.

Conclusion

ICOs are great at acquiring funding for your projects in the early stages. After the success of Ethereum's Initial Coin Offering in 2014, many enterprises acquired new capital and developed protocols along with ecosystems. 

Investors need to be careful in the cryptocurrency world because the market is volatile. If the project doesn't work out, you are at the risk of losing money.