What Are ICOs?

Last Updated on January 9, 2023 by

A Quick Guide to Initial Coin Offerings and How They Work

virtual visualisation of ICOs

Contrary to popular belief, you don’t have to invest in digital coins for you to be part of the cryptocurrency industry.

While coins such as bitcoin and Ethereum are highly profitable, they are also expensive, which is why some traders prefer to buy altcoins that are cheaper.

If you’re looking for other ways to make money with digital currency, you’ve definitely come across ICOs. They may be fairly new in the market, but they’re quickly catching on.

What are ICOs?

Are they safe investment?

How many types of ICOs are there?

We’ve compiled a simple guide below to get you started with initial coin offerings.

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Initial Coin Offerings (ICOs) are on the rise and if you are interested in Cryptocurrencies, you’ve probably come across them by now. As exciting they might seem, you’ve also have to be careful before investing in ICOs.

Make sure to read the following carefully!

What Is an ICO?

Think of a scenario where you’re a tech guru with an amazing idea for a new cryptocurrency.

The premise behind this coin is great, and it’s aimed at providing solutions to problems that other digital coins have failed to solve. It could also be an original idea that you expect will revolutionize how people transact.

There’s just one problem; you don’t have enough money to launch your invention. You could go to the bank or ask for help from investors, but that also means that you have to give up part of your company. Here’s where ICOs come into play.

An ICO is a method through which startup crypto companies finance their launch. Unlike IPOs, an initial coin offering doesn’t give you any stake in the crypto company. You’re simply one of the first investors of a potentially profitable digital coin.

The startup creates a white paper detailing how the coin works and builds a website for their cryptocurrency, highlighting why you should invest in it.

If you’re interested in the ICO, you send them money, usually in the form of Bitcoin or Ether, and they send you baby coins. Once these coins achieve high circulation, their value increases, earning you a tidy profit.


The History of ICOs

ICOs were originally designed as a source of crowdfunding for crypto-startups to help them reach a large pool of investors without having to give away part of their company.

They capitalized on the decentralization of crypto markets to pull in money and use virtual tokens and blockchain as part of their payment system.

Some traders speculate the ICOs are the future of capital markets, but they are highly inconsistent.


Types of Initial Coin Offerings

1. Public ICOs

These initial coin offerings target the general public, and anyone can invest in them. There have, however, been some regulatory concerns around them which is why most crypto startups prefer private ICOs.

2. Private ICO

For these types of ICOs, every few investors can purchase the baby coin. Most of the time, these are usually accredited investors, including high net worth investors and reputable financial institutions.


Cryptocurrency ICO vs. Stock IPO: What Are the Main Differences?

Both ICOs and IPOs help startup raise capital for their launch but there 2 main differences;

1. Transfer of ownership:

When you invest in an IPO, you gain some stake in the company.

ICOs, on the other hand, only give you access to cryptocurrency before it starts circulating.

2. Regulatory oversight:

Before a company can issue IPOs to the public, they need to register with a regulatory body. They also have to create a prospectus which is the form of a legal declaration containing key details of the company aimed at helping investors make an informed decision.

ICOs, on the other hand, take advantage of the decentralization of capital markets to raise money. They allow startups to pull in funds without being bound by any regulatory body, which is why they are risky.


Why’s There so Much Controversy Around ICOs?

Virtual visualisation of ICOs

The success of an ICO is mainly determined by the buzz it creates as opposed to its investment viability. This has resulted in an increase of fraudulent ICOs, and beginner investors often get ripped off.

There are also instances where an ICO is legitimate, but once the coin starts circulating, its value drops and investors end up making huge losses.

The main problem is that there is already a lot of cryptocurrency in circulation, and most of the new coins aren’t offering any viable solution. This is why Charles Hoskin, a co-founder of Ethereum, referred to them as time bombs waiting to go off.

Most of the people that end up getting scammed are investors who are looking to make a quick buck. This is because ICOs look attractive and easy, but they rarely are. They are simply a way for companies to raise money by getting around government regulations.


How to Start an ICO as a Business Owner

Since ICOs are relatively new, they’re not regulated by any authority, so anyone can issue them. To get started;

  1. You identify your target investors and create a white paper highlighting how your cryptocurrency works. This document is meant to convince people to invest in your coin and should therefore be detailed.
  2. Jumpstart your marketing strategy by creating a website and opening social media accounts.
  3. You request funding from the general public or select investors either in cryptocurrency or fiat money.
  4. You provide buyers with some of your coins in exchange for funding your startup.

If your digital coin gains massive publicity, its circulation will increase, ultimately raising its value.


Top Benefits of ICOs for Investors

  1. High profits potential: ICOs are a great investment for traders who prefer investing in coins before they are popular and later selling them when their prices increase.
  2. There are no middlemen: The buy is instant as no intermediaries exist between the seller and buyer. This also eliminates transaction fees.
  3. Ease of buying: Public ICOs are open to the general public, so anyone can invest in them. Most of the time, IPOs are restricted to a select few.
  4. Affordability: Since you’ll be buying a coin that isn’t in the market yet, its price will be relatively low.

Top Drawbacks of ICOs for Investors

  1. They are very risky: Just because a coin makes it into the circulation stage doesn’t mean it’s going to be successful. Some coins end up failing, and you may lose your investment.
  2. High number of scams: Since ICOs are unregulated, anyone can sell them. This draws in a lot of fraudsters which is why you need to conduct due diligence before investing in a startup.

Will ICOs Be Regulated in the Future?

ICOs are completely new in the world of technology & finance and are changing the way companies raise capital. Despite their significant impact on startups, governments were not prepared for this new fundraising model, which is why they are currently unregulated.

There have, however, been varying reactions from different governments, including full prohibition by South Korea and China governments. Most European governments, Canada and the US, are working towards developing suitable regulations to govern the way they are issued.

Some countries were quick to react and have already created guidelines on their issuance, including UAE, New Zealand, Hong Kong and Australia.


What Are the ICO Regulations in Australia?

The Australian Securities and Investment Commission (ASIC) published guidance on 30th May 2019 regarding how ICOs should operate. According to the Australian regulations, initial coin offerings have 3 main elements;

  • The contribution of money or assets towards a particular scheme.
  • Some or all of the contributions are used for the financial benefit of a company/ property and are aimed at producing financial benefits for the contributors.
  • Contributors have no stake or voting rights in the company.

The ICO regulations in Australia stipulate that if the initial coin offering is meant for a financial product, the company must abide by the regulatory requirements of capital raising, including the necessary licenses.

To protect users, companies are also prohibited from publishing misleading statements under the regulatory guide of advertising financial products and services.


Examples of Successful ICOs

Despite the controversy around initial coin offerings, some companies have managed to raise billions of dollars. The most successful cryo currency launches include;

  1. Ethereum: In 2014, this digital coin was able to raise over 18 million dollars for its launch in BTC, which translates to about 40 dollars for each coin.
  2. Tezos: This company managed to raise 232 million dollars in 2017 within a 2 weeks time frame.
  3. Stratis: Their concept was about integrating blockchain into IoT, and their initial coin offering raised around $675,000 worth of bitcoin, which is now valued at $8 million.
  4. NXT: They had 2 rounds of ICOs, which increased the value of their coin to about $180.
  5. EOS: This is one of the largest ICOs, and within 5 days, they had raised more than $185 million.
  6. Bancor: This was one of the most controversial ICOs at the time but managed to raise $150 million.

Which ICOs Should You Invest In?

Due to the lax regulations around ICOs, you make sure you conduct extensive research before investing in one.

Go beyond reading the whitepaper and look into the company’s founders to make sure they have a history in the cryptocurrency industry.

Keep in mind that sometimes coins fail as soon as they hit the market, so don’t invest in ICOs as part of a long term strategy.


Alternatives To ICOs

Now that you know what ICOs are, you know that they might not be the safest way to start when you are new to Cryptocurrencies. Especially,  if you can’t get them at an established cryptocurrency exchange in Australia. Please remember, that cryptocurrencies are always speculative, but in our opinion, you reduce the risks by using an exchange like Swyftx if you are in Australia.

Disclaimer: This article is intended to be used and must be used for informational purposes only. It's important to understand that digital assets are risky, you should always do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.