The chance to buy Bitcoin, Ethereum, and other popular cryptocurrencies for pennies is now long gone. However, there are still opportunities in the crypto space. ICOs are a chance for investors who missed crypto opportunities a decade ago to be the first through the door this time around.
The term “ICO” is becoming more frequent as the crypto universe expands. It stands for “initial coin offering” and is analogous to a conventional IPO or “initial public offering.”
An ICO is a method that companies offering blockchain-based services use to raise money to fund their operations. Like an IPO, ICO investors give money to entrepreneurs hoping that the value of the company’s assets will go up over time. However, unlike a regular company, these assets aren’t physical plant and equipment, but digital tokens.
Let’s say, for instance, that you own a cryptocurrency company and you want to start issuing your own coins. Because the network of people currently using your coins has zero members, the coins you issue are worthless. Thus, to get your cryptocurrency off the ground, you need people to give you money to pay for marketing, a website, and anything else you require to run your operation (such as salaried workers).
Like a regular company, you could go to a private investor and get them to fund your crypto project. However, given the advantages of an initial coin offering, many entrepreneurs choose not to. With an ICO, you’re essentially collecting money from members of the general public and then using that to fund your project.
Naturally, a crypto entrepreneur’s first task is to convince would-be investors that the new service will provide real value. But how do you do this? Usually, the first step is to create a beautiful website and then distribute documents explaining to investors how the scheme works. Investors then read these and decide whether they like their idea or not. If they do, they then use some other currency (usually Fiat, Ether, or Bitcoin) to purchase the new company’s coins (hence the term “initial coin offering”).
When investors buy these coins for real money, they are speculating that their value will go up over time. Even though there are zero people in a coin’s network now, they hope that thousands or millions will join and that the coins they purchased become more valuable. If they go up in price enough, investors can then sell them for a profit.
For this reason, investing in an ICO is taking a substantial risk. Like shares in a startup, coins from a new cryptocurrency platform are essentially worthless. Their value only increases if the network of people using them expands over time.
Because of this, companies offering ICOs need to make it clear to investors why they are different from every other coin out there. To this end, they might highlight how they resolve problems that other cryptocurrencies have, the features of their coins, or their values or goals.
Launching a regular IPO requires you to have an already functioning business. Auctioning shares allows you to trade equity in your business for cash to grow it further. Thus IPOs are relatively rare events. Only a tiny minority of entrepreneurs even get to the point where they can auction off ownership stakes in their companies and list them on public indexes.
However, ICOs are much more common. Virtually anyone can launch them because barriers to entry are so low. There are practically no laws or regulations saying who can host an ICO. So if you have a good enough idea, you could launch one right now.
Given the ease of entry, scams and ICOs often go hand-in-hand. Fake companies will often set up ICO auctions just to swindle unwitting participants out of their money.
Because of this, consumers are wary. Many now require extensive proof that the creators of the ICO have a legitimate, blockchain-based product in the works that can create real value. So you may find it harder to get investment capital than you think.
If you want to create an ICO, either you or your partners will need to have in-depth knowledge of blockchain technology. Even if practically anyone can launch an ICO, that doesn’t mean that they should. Only a small number of entrepreneurs actually have the skills to create something that offers users real value.
Before you launch an ICO, you should ask yourself whether your business model stands to benefit from doing so. Any blockchain-based company can start issuing its own coins, but it doesn’t always provide a benefit.
If you’re not sure whether you need an ICO for your company, speak with a consultant with experience in the area. They will tell you how offering coins to investors could benefit your business (or whether you would be better off choosing a different capital-raising strategy).
If you discover that holding an ICO is the best option for your business, the next step is to create a white paper. This document gives would-be investors all the information that they need to decide whether to invest in your enterprise or not. As discussed, you should write down what your currency offers and what makes it better than the others already out there.
Try, if possible, to keep the gist of your product’s advantages concise. Avoid spending many pages discussing the history of blockchain or the bitcoin market. Instead, tell investors within the space of a page what makes your product so compelling and why people will want to use it once adequately funded. Always make your literature understandable so that you don’t alienate less technically-minded investors.
ICOs are an innovative way for coin-issuing blockchain-based businesses to raise capital. Currently, many entrepreneurs are trying to use it. However, to make your ICO successful, you need to do your homework and find ways to overcome investor concerns.
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