a method that a cryptocurrency startup can use to raise money
An initial coin offering (ICO) is a campaign used by cryptocurrency startups to raise money. Although this crowdfunding technique is still relied on by some companies, the amount of capital generated through ICOs has dwindled substantially from the peak of $3 billion achieved in January 2018 – after Bitcoin achieved its all-time high of almost $20,000, and just before the cryptocurrency’s precipitous decline.
What does ICO mean?
Unlike conventional crowdfunding campaigns, where a consumer may make a donation because they like a product, initial coin offerings are motivated by the prospect of receiving a return on an investment. Usually, a startup will provide a detailed white paper that outlines their business proposition and why there is a market for it. This document will also provide a thorough explanation of the economics behind the coin that’s the subject of the offering, and what it’s for. Oftentimes, a breakdown is provided that itemizes how funds raised through the ICO will be spent.
Initial coin offerings are not to be confused with initial public offerings, the route that traditional companies use to distribute shares and make their debut on the stock market. ICOs are not held through a centralized entity, nor are they regulated. Instead of shares, investors will receive a number of cryptocurrency tokens that’s proportionate to their contribution. The risk here is that these tokens could end up being worthless – or worse, could be exposed as a scam.
A major factor in the downfall of ICOs has been the fact that many of them struggle to survive. In June 2018, research by a US university revealed that most tokens fail within four months of a sale concluding – and just 44.2% make it to their fifth month.