You see an incredible startup.
You want to invest.
But they say you need to buy their "coin".
What does that even mean? 🤔
What is an ICO (Initial Coin Offering)?
An Initial Coin Offering is a fundraising strategy used by blockchain startups.
Startups create a new cryptocurrency and sells it to early backers of the project.
It is similar to an Initial Public Offering (IPO) which is used by traditional companies to raise money.
The ICO process
- The startup creates a "white paper" that describes the problem they are solving, their business model, technical details, and sometimes a demo of their product.
- The startup then creates a new cryptocurrency and sells a portion of it to early backers of the project.
- The startup uses the raised funds to build their product.
- Startup's token value increases with the demand for their product.
- Depending on the token setup, buyers can also get functional benefits (ie. early access, voting rights, join community, etc.)
The Benefits of ICOs
- Low transaction costs.
- It is a liquid investment. Investors can easily buy and sell their tokens.
- Tokens are easily trackable and impossible to counterfeit.
- ICOs allow for fractional ownership.
- Incentive alignment of investors and users. Since they are the same now.
The Risks of ICOs
- There can be scams. Some ICOs are frauds and you can lose a lot of money.
- Regulation changes. There aren't many regulations for ICOs right now and changes may significantly impact it.
Ethereum: Ledger technology with one of the most successful ICOs
Telegram: Messaging app that tried to ICO but was fined by the SEC
Mirror: Decentralized writing using crypto
Braintrust: Freelancing network using crypto
Collab.Land: Manages your crypto community
We Predict That...
- More startups will use ICOs to raise capital. It will democratize the access to capital.
- There will be new regulations for ICOs.
- Some will experiment with a hybrid model of both traditional and token fundraising.
- Startups will be less reliant on VCs and Angel Investors so they will have to adapt.
4 ICO Opportunities:
- Create a new ICO for your startup. Experiment with different token setups to raise money.
- Help companies do an ICO. Many people don't know the intricacies of ICOs yet and need guidance. There is also a big engineering effort to set this up.
- Buy a startup's coin. This will force to to learn about the process and understand the gaps. It may also make you some money!
- Join a crypto community to learn more about ICOs. Many communities are on Telegram and Discord.