Initial Coin Offerings are a type of crowdfunding or crowd investing tool conducted entirely on the blockchain. An ICO for cryptocurrency is like an Initial Price Offering (IPO) on the stock market. Nevertheless, here instead of buying stock in a company you buy digital coins.
The main difference is that with an IPO you own part of the company as stock, while with an ICO, you own digital coins issued by the company. You don’t have equity or voting rights; you just get the new token/cryptocurrency/coin. In some cases the value of the company can affect the value of the coin.
Originally, the main idea of an ICO was to fund new projects by pre-selling coins/tokens to investors interested in the project. During the crowdfunding campaign, investors purchase tokens with already established cryptocurrencies like Bitcoin and Ethereum.
In typical ICOs, Token Issuers provide information through their own websites, including summaries of more detailed information, such as technical descriptions in the form of white papers. The general information disclosed in the implementation of ICOs includes the following items.
- Commencement date and closing date of the ICO
- A brief description of a specific project using Blockchain technology,
- Technical explanations of the project with the Tokens
- Characteristics and features of the Token and the advantages of buying tokens
- Total amount and allocation of Tokens to be issued
- Roadmap for the project development
What is a token?
ICOs offer “tokens“, so it’s useful to understand this terminology. “Token” stands for “cryptocurrency token.” In other words, token=cryptocurrency=coin. For instance, Bitcoin tokens are the cryptocurrency built on the Bitcoin blockchain, and Ether tokens are the cryptocurrency built on the Ethereum blockchain. Interestingly, unique coins can use the Ethereum blockchain and build their own token network off it. This is what about 1/2 of ICOs here in 2017 – 2018 do.
Because of the lack of regulation, developers still had complete freedom in how to manage the ICO. There have been different approaches on how these campaigns are set up. You can hardly find ICO that has been conducted in the same way as another.
However, the price of the token during the ICO period often goes through different stages.Commonly, it has four different pricing mechanisms
Price increases: ICO works in stages, where the team sets a fixed exchange rate for tokens. Speed can gradually increase with time. Thus early investors, who takes the highest risk, eventually get the best price per coin ratio.
Price decreases: Another option would be a dutch auction, presented by the Gnosis team for the first time, where the sale starts at a maximum price per token proportionally reduced at the end of the auction.
Fixed price: If the exchange rate of the issued token is fixed, it gives investors the opportunity to receive as many tokens as they need at this fixed price. This mechanism is attractive for large investors, because they do not need to worry about the impact of the price, by purchasing a big number of tokens. After a token sale ends, the cool-off period takes place, when tokens can be frozen or kept away from exchanges. After the end of the cool-off period, the exchange can start listing the token. It allows other people to trade at a market price.
Not determined price: The developer may decide not to sell his tokens at a fixed exchange rate, but rather allow people to invest in their start-up, and then distribute the new tokens proportionally, giving each person a percentage of the tokens corresponding to a portion of his investment that is part of the total investment.