Initial Coin Offerings, also known as ICOs, are the cryptosphere’s variant of crowdfunding, where investors have the opportunity to pick up an exposure to a new or developing company ahead of the crowd. They permit companies and individuals with novel ideas to raise substantial amounts of money within a decentralized structure; this structure allowing ICOs to circumvent traditional fund-raising methods which operate within traditional financial systems.
As we know, these banks have a lot of money and a lot of power – but with ICOs, a share of that power can go to everyone involved. So not only are ICOs one of the easiest and most efficient funding methods for companies and individuals, they also permit us “regular” investors to place a stake in projects they we see value in.
In terms of how they actually play out, an ICO is a sort of event that usually extends over a period of one week or more. During this predefined timespan, users and investors are permitted to purchase the newly issued tokens in exchange for established cryptocurrencies like Bitcoin (BTC) or Ethereum (ETH) – I’ll explain how to do this, step by step, below! This money raised from the ICO provides developers with the funds to bring their new coin to fruition.
A little bit down the line, if that cryptocurrency succeeds and appreciates in value – similarly to stocks in the public market – the investors make a profit. Unlike the stock market, though, the token does not confer any ownership rights in the associated venture, or entitle the token owner to any sort of cash flows like dividends.
There are three ways in which ICOs play out. There can be a specific goal or limit for project funding, meaning that every token will have a pre-determined price that will not change during the ICO offering period – meaning the token supply is static. Second, ICOs can have a static supply with a dynamic funding goal, in which the distribution of tokens will be made according to the funds received – so the more funds the project receives, the higher the token price will be. And, lastly, ICOs can have a dynamic token supply that will be determined by a number of funds that are received. This means that the price for each token is static (for example 1 ETH = 1 token), but every time 1 Ethereum is sent, a new token is created (a limit is still set in terms of goals or time frame for the ICO).