Businesses need money to expand their operations and increase profits. There are many effective methods of achieving this goal, like bank deposits, exchange stocks, and selling shares or equity. ICOs are a new and popular way of raising money for a business that sidesteps many of the limitations of the more traditional methods. Let’s find out how they work.
How Initial Coin Offerings Work
ICO stands for Initial Coin Offering. It’s the first time that a crypto token (coin) is offered for sale. ICOs can be public or private, depending on who the initial coins are offered to.
To run an ICO, a business or organisation builds a blockchain-based product that uses some form of crypto token to operate. It then offers these tokens to the public in exchange for funds (usually ethereum, bitcoin or some other major cryptocurrency). These tokens have value to the user because they provide access to a prospective platform or a service. The organisation that ran the ICO raises money while only giving away digital tokens that may have future value if their project turns out well.
The most famous example of a successful ICO was for Ethereum, when $5.2 million dollars was raised to build the Ethereum platform. In return, investors that held on to those initial cheap tokens gained thousands of times their money back in 5 years. It was a win-win.
Ways to Raise Capital Using ICO
There are two ways. The first is to run your own ICO for your business or startup. This method can bring you lots of funds in a very short period of time. The second is to raise money as an investor by buying ICO tokens in other businesses’ ICOs. This effort can also be highly effective. Both methods have their advantages and disadvantages.
Create Own ICO
Creating your own ICO is a big undertaking, but the reward could be massive. For example, the former Mozilla CEO earned $35 million in 30 seconds for his new web browser idea. That was before the project was even built. If you can get enough people excited about your brainchild, the sky’s the limit when raising funds this way.
To start your own ICO, you’ll need to create a token that will likely have some value related to your product in the future. For example, the Ethereum ICO offered ETH tokens that would later be used to run smart contracts on Ethereum. You should also be able to trade the token on the open market. It should be clear how it will grow in value as your project gains traction and evolves.
For an ICO to work, it must be highly credible. You’ll also need to launch using crypto exchanges that are high-quality, secure and legally compliant in order to access enough qualified buyers.
Advantages
The main advantage of running an ICO is the control you have. You can choose how your project works, and how and to whom the tokens will be issued. ICOs remove intermediaries from capital-raising, so you won’t have any banks taking a large cut of your funds.
ICOs also massively reduce barriers. You can raise capital directly from anyone using only your crypto wallet. You can choose the community to launch your crypto token to maximise engagement.
Disadvantages
The main disadvantages to running an ICO relate to the associated risks. You’ll spend a lot of time planning and promoting your ICO, and there’s no guarantee of reward. You may not raise much money at all in the end. There’s also the legal risk. If you don’t plan your ICO carefully, you could easily end up in breach of investment and securities laws and regulations in various countries. These could cost you further down the line. You’ll need to have the right technical knowledge, legal advice and human resources to run a successful ICO.
Invest in ICO
Investing in ICOs to raise capital is a different ball game. Here, you have almost no control over the project. You are picking other people’s businesses to purchase a stake in. This makes ICO investing similar to regular investing.
You’ll need to have a great understanding of how cryptocurrencies and blockchain projects work. This is important to realise what ICO tokens are likely to grow in value. For example, in the Ethereum ICO, it was necessary to know how a smart contract platform would work, even before the first one was invented.
Advantages
If you can follow the above, the opportunity for investment returns in ICOs is perhaps better than any other type of investment. Many of the most successful ICOs have given investors over 10,000% returns. These millionaire-making gains simply aren’t possible with other investments, like the stock market.
Buying ICO tokens is also significantly easier than investing in IPOs and startups. You can learn about an ICO and be investing in it within minutes. Big projects also have high liquidity, meaning the real-time pricing is based on the project’s current value.
Disadvantages
The ICO market is full of scams and projects designed to simply raise money for their operators, not for investors. To sidestep these risks, you’ll need a robust process for weeding out bad ICOs, including choosing the right crypto exchange to buy into ICOs.
ICO tokens are very unstable. There is always a high risk you’ll lose your initial investment.
Why Is ICO Popular?
ICOs are popular because they offer a new capital raising vehicle for businesses and a new investment vehicle for regular people. One that doesn’t have the bureaucracy of more traditional methods, making them attractive to young investors and business owners.
ICOs also have an unmatched ability to create communities of early adopters around a new and exciting project that can often pull it through difficult times to completion. If you want to raise money for your business, ICOs should certainly be on your list of capital-raising options.
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