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How does an ICO work?

To many of you, ‘ICO’ may be nothing more than an acronym.  However, a chance occurrence may have led you to discover that acronym stands for initial coin offering. A chance occurrence like this article, perhaps?

Nonetheless, regardless of whether or not you can decipher the acronym and match it to its meaning, there is still a lot of mystery surrounding an ICO and how it functions.

The ICO  (initial coin offering) is a totally transformative way of fundraising, unlike anything we’ve ever seen before, and the revolutionary blockchain technology fuelling this new way of connecting with investors will continue to make strides into the future.

With an estimated total of 871 ICOs in 2017, nearly $6 billion was raised by new blockchain projects. This figure was up from a total of $295 million between 2014 and the end of 2016. In other words, ICOs rose about 20 times more funding in 2017 than they did in 2014, 2015 and 2016 put together.

Pair this with the notion that there were over 13 times more ICOs held in 2017 than 2016 (64 ICOs in 2016), and you’ll begin to truly realise this space’s massive growth potential and devoted following.

In the first three months of 2018, ICOs had already raised more money than they did throughout all of 2017. Clearly, new investors and business people alike are looking for ways to capitalise on the growth potential of blockchain technology. In fact, despite early 2018’s cryptocurrency price stagnation, this ICO momentum doesn’t seem to be slowing down any time soon. It seems like anyone and everyone in the technological space is rushing in to get their piece of the pie.

However, on both sides of the fence (both produce and investor), it is important to have a deeper understanding that extends beyond the simplicity of what an ICO is. To take full advantage of this revolutionary technology and the surrounding change, it is better to understand how an ICO functions and operates. To help develop that knowledge and prepare you for what’s around the corner, here is some basic information about how an ICO works.

Three words: Initial Coin Offering

A quick dissection of the ICO acronym sheds light on the basic operating procedures of an initial coin offering. Since it might make more sense to address ‘coin,’ the most pivotal word of these three first, we’ll do exactly that.

So, to start out, what’s a coin? In crypto speak, a coin is probably completely different than any other ‘coin’ we’ve ever dealt with. The root of this difference comes from the digital nature of cryptocurrency.

Thus, our experience with the physical, fiat coins we’re used to transacting with will likely do us more harm than good in wrapping our minds around cryptocurrency and the coins sold by blockchain projects.  Rather than tangible coins you can hold as a store of value and means of exchange, cryptocoins are digital assets programmed into the blockchain.

You can probably consider these coins a, rather volatile, store of value.  Depending on the project, you might even be able to exchange them for goods or services someday. However, in an ICO, that some day may not come for a very long time. That’s because of the acronym’s other two words: initial and offering.

In an ICO, digitalised coins, as mentioned above, are offered to investors for purchasing. While aggressive marketing pitches may make it seem otherwise, nothing is forced down investors throats; they are offered the opportunity to invest in a new blockchain project through the purchase of coins.

However, investors have the opportunity to buy and sell cryptocurrencies through online marketplaces and exchanges all the time, so what makes an ICO unique? The answer lies within the final word: initial. ICOs are the very first time that investors have the opportunity to purchase a specific coin.

Oftentimes, significant discounts will be offered as part of this introductory level promotion. The aim of an ICO is to get coins out and into the hands of investors, raising money in the process. And yes, at its core, an ICO really is that simple.

After the sale

OK, but how does everything work once the coins are out and about (and into the hands of investors)? Once coins have been purchased and released, there is traditionally a pre-defined lock-up period that prevents early investors from selling off their coins before a project gets its footing.

Once this deadline passes, however, coin holders are free to do whatever they please with their tokens. In this way, projects that were once considered ICOs transform into your everyday, mainstream cryptocurrencies.

Speaking of which, did you know that Ethereum was funded by an ICO in 2014? It’s been a pretty nice run for them. Obviously, not all ICOs will reach these heights, but one can always dream. As they say, “everyone has to start from somewhere.”

 

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