28 February 2020
Many times business enthusiasts have ample ideas for starting a business and earn independently. But the only point that holds them back is the lack of Capital required initially to start with the business. In traditional way it is considered as best solution to rent capital from an investor or take a business loan. Similarly, in the crypto world, to support a new start-up or to establish newer blockchain and cryptocurrency companies there is a new fundraising mechanism termed as “Initial Coin Offering (ICO)” also be referred to as “Token Generating Events (TGE)” and “Initial Token Offerings (ITO)” with very minor differences. It is basically an alternative to crowdfunding.
ICO v/s IPO
Between ICO (Initial Coin Offering) and IPO (Initial Public Offering) individuals generally get confused and used them inversely. However, both carry a vast difference, let’s understand them
IPO (Initial Public Offering)
ICO (Initial Coin Offering)
IPO is applied in well-established businesses
ICO is applied in the early stages of business/start-ups.
In IPO, the stock of the company is released onto the stock market and the shares are made publicly available.
In ICO, new tokens are generated and they act merely as a means to raise funds for the project.
The purchased shares give a stage of partial ownership of the company
The purchased tokens do not give any long-term authority or ownership of the project
How does an ICO work?
With the help of the ICO, new companies can bypass many intermediaries such as venture capitalists, banks, stock exchanges, and other legal paperwork. As cryptocurrency has touched the moon in a very short period of time so ICO can be a very fruitful journey for investors because in ICO campaigns new cryptocurrencies/tokens are created which gives huge returns even with a very small investment. These campaigns usually last for weeks or until investors can purchase the newly generated token in-exchange for cryptocurrencies like Bitcoin (BTC) or Ether (ETH).
The tokens cannot be applied directly to the blockchain, as they process only the transactions of their own cryptocurrency — like Ether on the Ethereum blockchain and Bitcoin on the Bitcoin blockchain. The applications that use tokens are called smart contracts. For eg. consider the following example; On Ethereum blockchain, ICO tokens are raised using the ERC-20 token protocol that defines rules the company should follow during issuing of the token. Other platforms that support the creation of digital tokens are Stellar, NEM, NEO, and Waves. Once the tokens are generated by the new business enthusiasts, they need to convince investors by promoting their project through the marketing campaign. This campaign includes issuing of the whitepaper that describes company goals and the work protocol the new start-up will follow. If the people get impressed and think the project will be good then they will invest by buying the token at a certain rate. During purchasing cryptocurrencies like ETH, BTC, LTC are paid to the ICO smart contract and this contract sends the token that has been paid for. With the purchased tokens, investors will be able to buy future company services or just sell tokens at a higher rate if the project succeeds.
Why does the Start-up should prefer ICO?
In ICO, only the future services are shared with the investor and not the partial ownership of the company.
An ICO raises money within a short period of time from worldwide and there is no need of door to door search for an investor
In an ICO, there is no government system for taking important decisions which could take several months
An ICO can be held by anyone, but it requires proper evidence of its working, its value, how it will be developed and a strong convincing power to convince investors for investing. ICO may relieve many problems that start-up faces during the initial stages and be a viable alternative to traditional fundraising routes.