What is Initial Coin Offerings for Cryptocurrencies? Since Bitcoin launched in 2009, more than two thousand cryptocurrencies have followed. In just ten years, an entire industry has emerged around cryptocurrencies, thanks to the relatively little barriers to entry.
One of the biggest barriers to entry into traditional industries is the amount of capital required to commence operations. Although the funding requirements required to bring a crypto project to fruition isn’t anywhere less than what is required for other industries, it is still easier to launch a project in the crypto space, thanks to a phenomenon known as an Initial Coin Offering.
Initial Coin Offerings are a way of raising funding for a project in the crypto space in return for tokens when the project reaches fruition. In essence, ICOs are basically a way of crowdfunding a project in the crypto space. So instead of reaching out to venture capitalists or angel investors, startups in the crypto space reach out to the general public with a value proposition while soliciting investments for the project. The process is as simple as “we’ve identified a problem worth solving and we believe we have the capability to build an innovative solution to the problem in a cost-effective manner but we need your financial commitment to bring the project to fruition”. This message is usually encapsulated in a concise whitepaper (usually between 20 to 30 pages long). The whitepaper is an integral part of the ICO process. In fact, the success of a crypto startup in attaining its funding goals with an ICO depends on how compelling its value proposition is and its ability to convey its ideas coherently in a whitepaper. Without a compelling value proposition, it is highly unlikely that it will appeal to anyone, let alone secure their financial commitment. So the whitepaper is the centre of the project.
But this approach is in perfect alignment with the premise on which cryptocurrencies are built on decentralization. It only makes sense that a project that propagates the gospel of decentralization should use the same approach to first solve the problems of funding. If a crypto project can’t secure funding from a large pool of investors, it’s already DOA. The logic is simple: without the financial commitment of a large number of people, not only will a crypto startup fail to meet its funding goals, but it will also lack the level of transactions needed to make the project attract mainstream attention.
Because ICOs can pull funds from a large pool of investors, the funds raised can be huge. But ICOs are a high risk, high return strategy. Because you are investing in a project without a product, there’s a possibility that it never reaches fruition, which means that your investment goes underwater. But on the converse side, if the project becomes a hit, you are likely to reap huge gains.
Individuals interested in an ICO can buy into the offer by sending funds (usually a crypto coin like bitcoin and ether) to a smart contract. In exchange for their investment, they receive units of the new crypto token. Funds raised from the project are used to facilitate the development of the project. If the token performs well in future, individuals can bag significant gains on their investment.
Abraham Jimoh is a tech enthusiast with an almost maniacal interest in emerging technologies with disruptive potential.