Understanding ICOs (Initial Coin Offering) in just 3 minutes

It was in July 2013 that the first ICO took place, that of Mastercoin. In early 2014, the Ethereum ICO was launched and accelerated the development of smart contracts. Since 2017, ICOs have grown strongly in the crypto ecosystem. But what exactly are we talking about behind these 3 initials?

What is an ICO?

In the cryptocurrency ecosystem, an ICO, for “Initial Coin Offering”, can be defined as an initial coin offering. In other words, a fundraiser necessary to start a new crypto project. The ICO appears as a viable alternative to mining to launch a cryptocurrency.

These very common financial transactions are generally accessible to all people. They offer a distribution of tokens in return for a financial participation in the project. In this sense, it can be likened to an IPO (Initial Public Offering). That is to say the introduction of a company on the traditional financial markets.

The tokens collected during this ICO can have a certain utility related to the product or service that the company offers, or just represent a participation in the company or the project.

How do ICOs work?

Previously, the promoters of a serious project will detail in a white booklet the important information for the operation of ICO. This will make it possible to answer the following points: the duration of the ICO campaign, the type of payment accepted, the amount of funds needed, the quantity of tokens that the founders will keep, the method of delivery of the tokens, etc.

Technically to set up an ICO, the contents of a project must structure it. This can take different forms:

  • Either by a “static offer at static price”. There will be a predefined price for a total number of tokens fixed in advance.
  • Either by a “static offer at dynamic price”. In this variant, the amount of funds received in the ICO will determine the overall price per token.
  • Either by a “dynamic offer at static price”. In this case, the amount of tokens will vary depending on the amount of funding received.

Note that in the event that the money collected is less than the minimum amount required by the requirements of the operation, then all the money can be returned to the investors of the project.

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How to take part in an ICO?

On the background, the investor must first register on the website or platform initiating this process. It will also take complete regulatory documents (KYC).

On Form, the investor will generally need to hold a portfolio (wallet) and cryptocurrencies (bitcoin, ethereum). Then he will have to communicate a public key for the initial transaction. This will be used in a second time for the reception of tokens. As such, the delivery of the latter can be done automatically or in several installments following the end of the operation.

The advantages and disadvantages of these operations

These initial offers have several advantages both for the developers of a project and for the investors themselves:

  • They allow you to raise a substantial amount of funds and quickly to ensure the development of the project.
  • Allows to build a strong user base financially involved in a project.
  • Some ICOs can ultimately generate significant returns for the investors who participated.
  • They can provide additional benefits such as access to certain services or the distribution of dividends.

How often, these ICOs are not free from flaws or drawbacks:

  • Some ICOs have been found to be fraudulent.
  • Investing in an ICO does not offer no guarantee of return on investment.
  • It takes a certain mastery of the crypto ecosystem to move towards ICOs (hold cryptocurrencies, fully understand the project’s white paper, hold a wallet, etc.).

Conclusion: Transactions that require preparation for the investor

A successful ICO can turn out to be very successful in the long term for the investor. But being unregulated, investors should exercise caution and diligence when seeking to invest in such financial transactions. It is important to go through the white paper written by the team to fully understand the project. Take an interest in the partnerships forged, learn about specialized forums or even enter the project community.

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