ICOs (Initial Coin Offerings) are a new form of fundraising that is gaining a lot of attention. In form, it is similar to an IPO of stocks.
Users who are thinking about starting a Cryptocurrency business should have a good understanding of ICOs. In this article, we will explain in detail what an ICO is, as well as the differences between ICOs and stocks.
What is an ICO (Initial Coin Offering)?
ICO stands for Initial Coin Offering, which means the public offering of new Cryptocurrencies. It is also sometimes referred to as a crowdsale or token sale.
An ICO is when a company or organization issues its own Cryptocurrency tokens to raise funds. The idea of users investing in Cryptocurrency tokens is “expectation of the company or organization” or “expectation of a price increase”.
In ICOs, which require funds for proprietary technology research and development, some users invest with the expectation that such new technology will develop. It is similar to an IPO (Initial Public Offering), where funds are raised by issuing shares, but there are some differences.
Depending on state regulations, raising capital with Cryptocurrency tokens is relatively easier to get into than an IPO, as the hurdles are relatively lower. On the investor side, even beginners can participate in ICOs relatively easily, as long as they have enough money to invest.
On the other hand, there have been cases of fraudulent ICOs, so caution should be exercised when using ICOs.
What is a Token?
Cryptocurrencies issued mainly in ICOs are called “tokens”.
There is no clear definition of a token, but it is similar to a stock certificate that serves as a proof of investment in a Cryptocurrency. Characteristics of tokens include, for example
Digital currency created using blockchain technology
The first is that it is a digital currency created using blockchain technology.
Cryptocurrencies may be strongly associated with Bitcoin (BTC), but another currency that is also developed on the blockchain is called a token.
Tokens and Cryptocurrencies are often seen as almost the same thing, but those used in ICOs are generally referred to as tokens to distinguish them.
There are different types of tokens
The second point is that there are different types of tokens.
Tokens act like electronic vouchers that can be used for a specific means or purpose. Some tokens can be used as a means of payment, just like Bitcoin (BTC) and other Cryptocurrency assets, while others can only be used for specific services or events.
Tokens, like Cryptocurrencies, fluctuate in price. Many users who participate in ICOs aim to make a profit from this difference.
Purpose of ICO
There are several purposes for an issuer to issue its own tokens and conduct an ICO
To raise funds
The first is to raise funds.
The issuing company or organization can raise funds by appealing its business or project to investors and getting them to buy a large number of the tokens to be issued.
As with stock issuance and crowdfunding, the more projects and tokens that investors want to invest in, the easier it will be to raise funds from all over the world. 2.
Popularize the currency and make it valuable.
The second objective is to “popularize the currency and make it valuable.
In addition to raising funds, the second objective is to make the issued tokens have value. If the issued tokens become famous and popular, they will be traded on many exchanges and may attract the attention of many users.
As the value of the currency increases in this way, the effect of fundraising can be further magnified.
Building a New Economic System
The third objective is to build a new economic system.
Tokens may be needed to use a company’s services. Although such a service has not yet been created in your country, there is a possibility that a service in which value is exchanged via tokens will be created in the future.
Tokens could then be used by a large number of people within that service and could play the role of a new type of money. This is sometimes called the token economy.
ICO vs IPO
Slightly similar to an ICO is an IPO, which stands for Initial Public Offering, meaning an initial public offering of stock.
An IPO is a way for a newly listed company to raise funds from the market by issuing shares. The shares are listed on a stock exchange and are then sold to general investors selected by lottery so that they can trade in the stock.
Both ICOs, which use tokens, and IPOs, which use shares, have similar mechanisms as a way to raise funds, but there are some points to keep in mind as differences.
Speed
The first is the difference in speed.
For example, if a U.S. company issues shares, it can only issue shares domestically, and it is difficult to raise funds from investors around the world.
On the other hand, Cryptocurrencies are traded worldwide from the beginning and can be easily transferred across borders, making it possible to raise funds from all over the world in a short period of time.
Difficulty of Issuance
The second difference is the difficulty of issuance.
In order to raise funds by issuing shares in an IPO, the company must be listed on a stock exchange, and the hurdles for examination are high.
On the other hand, Cryptocurrencies can be newly issued by anyone, and depending on state regulations, smooth fundraising is possible without involving a third party.
Rights of investors
The third difference is the rights of investors.
In the case of stocks, investors can obtain rights such as shareholder benefits and voting rights. Shareholder benefits are a kind of perk that you can receive if you own a certain amount of shares, although the details vary from company to company. Many individual investors invest in stocks for shareholder benefits, which is one of the attractions of stocks.
In addition, voting rights are rights to participate in the general shareholders’ meeting of the company in which you have invested in proportion to the number of shares you own. In the case of stocks, holding a significant number of shares allows you to be involved in the management of the business. On the other hand, if you participate in an ICO, there is no such thing as shareholder benefits or voting rights.
Advantages for companies conducting ICOs
In addition to being able to raise funds, the benefits of an ICO for a company include
Obligation to repay funds
The first is that there is basically no need to repay the funds raised.
As is the case with shares, funds raised through an ICO are different from debt. Therefore, there is basically no obligation to repay the funds. 2.
Funds can be raised from all over the world.
Second, funds can be raised across countries through the Internet.
As long as you can issue tokens, you can raise funds through the Internet. If you appeal in a foreign language, you can raise funds not only in your own country but also from other countries.
For the issuer, the hurdle to raise funds is low, and ICOs offer many advantages as an easy way to raise funds.
What is required for companies conducting ICOs
While ICOs are easier than existing methods of fundraising, there are a few things companies should be aware of.
Be aware of state regulations
The first is the need to be aware of national regulations. Some countries have banned ICOs altogether, so you need to check the law when conducting them. 2.
Create attractive tokens
The second point is that “you need to create a token that investors will buy.
Just as with stocks and other securities, you need to make it attractive enough that the users who invest in it will want to invest in it. If it is unattractive, it may not attract funds. 3.
Proof that it is not a scam
The third point is to prove that it is not a scam.
While anyone can participate in an ICO, it also has the aspect of being easily used as a scam. Therefore, many users have the perception that ICOs are fraudulent and dangerous.
Companies that are going to participate in an ICO need to prove that the project is legitimate so that people will not suspect it is a scam.
In any case, while ICOs are a low hurdle for fundraising, there are many points to be aware of. It is not so easy to raise funds nowadays, so companies considering ICOs need to be well prepared.
Advantages for Investors of ICO
ICOs not only have the advantage that companies can raise funds, but also the investors who use them have the following advantages
They can use tokens.
The first is the ability to use tokens.
Once the purchased tokens are handled by a cryptocurrency exchange, they can be bought and sold like any other cryptocurrency. Tokens can also be used as currency in games and services where tokens are used.
If they are ever listed on a Cryptocurrency exchange, they can be exchanged for dollar or other legal tender at any time.
Potential for profit
The second point is the “possibility of profit if the price increases from the time of purchase.
Many ICO participants are looking to make a profit by predicting the price of tokens that are likely to rise in the future.
You can invest from a small amount.
The third point is that you can purchase tokens with a small amount.
The minimum investment for stocks and other securities is set, and often costs several hundred thousand yen. On the other hand, tokens can be purchased for relatively small amounts, depending on the project.
Disadvantages for Investors of ICO
While investors have the potential to benefit from a rise in the price of tokens, there are also disadvantages to using ICOs.
Risk of losing funds
The first is the risk of losing funds.
While the price of the tokens may rise, there is also the risk that they may fall. In addition, the project may end without being handled by the Cryptocurrency exchange.
Thus, there is a natural risk of losing the amount invested, so care should be taken when using them.
Interruption due to regulations, etc.
The second point is that transactions and projects may be interrupted due to regulations.
Since ICOs are not yet fully regulated and regulated, there is a possibility that they will be suddenly banned. In an immature market, it is often impossible to predict what will happen at any time.
Therefore, it is important to always pay attention to the trends in the industry by gathering information on Cryptocurrency on a regular basis.
Possibility of Fraud
Third is the possibility of fraud.
ICOs often do not currently have the same strict rules as the stock market. While the lack of regulation or third-party binding is freeing, it also means that the environment for user protection is not conducive.
As a result, there are many cases of ICOs being used for fraud. There is a risk that all the money invested may end up as a loss. It is advisable to check the issuers and do your homework, and only participate in those that you can trust.
Process of ICO
The process for an ICO to take place is roughly as follows
- Announcement of the project by the company or organization
The company or organization issuing the tokens announces the project. This is a good place to get a rough idea of what the project is about and whether the company is trustworthy or not. - Offers to specific investors
Next, some specific investors may be offered the ICO in advance. - Publicity for the ICO
Next, a large PR campaign is conducted to attract the attention of a large number of investors; social networking sites and online advertisements are commonly used to promote the ICO to the general investing public. - Start selling tokens through ICO
Once the project has been announced and publicized, it is time to conduct the ICO and start selling tokens.
Here, you can raise funds from many investors in major Cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
How to Invest in ICO
If an ordinary individual investor wants to participate in an ICO, the basic steps are as follows
- Gather information about the ICO
Gather correct information about the ICO in which you want to invest. To avoid the risk of fraud, check carefully in advance. - Purchase Cryptocurrency to invest in the ICO
In most cases, you cannot purchase crypto assets to invest in ICOs with legal tender. Cryptocurrencies such as Bitcoin (BTC) should be purchased from a cryptocurrency exchange in advance. To use a Cryptocurrency exchange, you must first open an account. - Create a wallet
Next, you will create a wallet to receive your tokens. A wallet is a storage wallet for your Cryptocurrencies. In the wallet, you will deposit cryptocurrencies (Bitcoin, Ethereum, etc.) that you purchased on a cryptocurrency exchange. - Participate in the presale and transfer the Cryptocurrency
Then, transfer the amount of Cryptocurrencies (Bitcoin, Ethereum, etc.) from your wallet to the designated address for the amount of tokens you wish to purchase. - Receive the tokens
The tokens you purchased will then be credited to your wallet and you will receive them.
You can then store the tokens until they are handled and listed on a Cryptocurrency exchange, or you can use them for your project.
It is important to carefully identify ICOs
While ICOs are a convenient way to raise funds, they are also a high-risk means of fraud. Laws are not yet in place and they are not completely safe.
If you are interested in participating in an ICO, it is important to be well-informed and do proper checks in advance.