What is an ICO?

2 August 2019

When investors purchase shares of a company, they are participating in an IPO (Initial Public Offering). An ICO (Initial Coin Offering) is something very similar: it is a mechanism in which investors buy tokens of a new cryptocurrency in exchange for bitcoin, ethereum, or fiat.

The only fundamental difference is that in an ICO you are not buying any shares, you are just investing your money hoping it will generate a return.

Let’s imagine this situation as an example: let’s say you created an online platform on which people can hire a chef for a party or a business conference and you want the payment to be virtual and encrypted. In order to launch this system, you need to create a cryptocurrency. Let’s call it Chefcoin.

The moment you start, a chefcoin is worth nothing, because nobody wants to buy them. At this point, you can start a fundraising campaign, i.e.: ICO, to make investors buy some chefcoins in exchange of more mature currencies like Bitcoin. The more people buy Chefcoin, the higher its value gets.

Let’s explain this in detail.

How ICOs work

ICOs are an alternative to bank fundings and venture capital investments for start-up founders who do not want to give up part of the ownership of their companies (this is also a reason why ICOs are no longer on the rise, but we will talk about that in a future post).

To start an ICO, you have to draft a white paper, which is a document explaining in detail how the system you are going to create will work. In a certain way, the white paper is an exercise of persuasive writing, because it is the document you will present to potential subscribers in order to convince them your project will scale up and they will get a return on their investment.

You might need some marketing experience on your side and a budget to invest in advertising, because attracting the right people is not that easy.

In fact, investing in an ICO is very risky, because they only generate a return if the new cryptocurrency gets used a lot and circulates among a high number of people, because its value will increase only if this scenario happens. It is more of a calculated risk than a gamble, but the level of uncertainty is still notable. Furthermore, there are a lot of ICO scammers around, so investors are becoming more and more cautious and they will do some background research, so be ready for it.

Who can start an ICO

The short answer is: everyone! However, legally speaking, although there is a fair amount of jurisdictions in which ICOs are fully regulated, they are still in some sort of limbo, as they are not fully regulated by the law, mainly because they are relatively new: making laws takes time, but new technologies are very fast to spread.

In the example we made above, tokens are purchased to access to a service, but we can realistically expect that a certain percentage of users would trade for speculative purposes.

There are three kinds of tokens:

  • Utility tokens: they help in funding ICOs and creating an internal economy in their blockchain. There is no relationship between the value of the token and the value of the company;
  • Payment tokens: they are great for payment processing, as customer’s payment details are memorised as a Token ID which can be used for purchases, especially online;
  • Security tokens: they are very close to an investment contract in which is stated that tokens are exchanged with legal ownership of physical or digital assets. There is a direct link between the value of the company and the value of its tokens.

According to the jurisdiction of your company, the production of some documents and policies might be mandatory, and you have to take them into account, if you want to start an ICO. In some countries, ICOs are totally illegal, while in other more flexible countries they are legal only if they fall under the utility category (or security, or payment).

So, how do I start my own ICO?

We think the best and most cautious way of starting an ICO is getting the help of an expert in ICO and Blockchain.

The range of services we offer, for example, goes from the preparation of the white paper to the research of investors with marketing campaigns and the help of our expert in investor relationships, but if you did not start yet, our intervention goes even deeper, with an analysis of the best jurisdiction for your project and the fulfilment of all legal and compliance requirements.

By the way, if you are interested in setting an ICO up, you can contact us for assistance.

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