What is a Cryptocurrency Initial Coin Offering (ICO)?

The term “ICO” stands for “Initial Coin Offering.” When a new cryptocurrency or crypto-token is released, its creators offer a limited number of units to investors in exchange for other big crypto coins like Bitcoin or Ethereum.

ICOs are fantastic methods for raising development capital for new coins quickly. If there is enough demand for the tokens given during an ICO, they can be sold and traded on cryptocurrency exchanges.

The Ethereum ICO was one of the most well-known successes, and the popularity of Initial Coin Offerings is on the rise right now.

A brief history of Initial Coin Offerings (ICOs)

Ripple is most likely the first cryptocurrency to be given through an initial coin offering (ICO). Ripple Labs began developing the Ripple payment system in early 2013 and generated around 100 billion XRP coins. These were sold as part of an initial coin offering (ICO) to help fund the development of Ripple’s platform.

Mastercoin is a cryptocurrency that, like Bitcoin, sold a few million tokens via an initial coin offering (ICO) in 2013. By establishing a new layer on top of the existing Bitcoin code, Mastercoin aims to tokenize Bitcoin transactions and execute smart contracts.

There are, of course, other cryptocurrencies that have been funded successfully through ICOs. During their Initial Coin Offering in 2016, Lisk raised around $5 million.

Nonetheless, Ethereum’s initial coin offering (ICO), which took place in 2014, is undoubtedly the most well-known. The Ethereum Foundation raised about $20 million during its initial coin offering, selling ETH for 0.0005 Bitcoin each. Ethereum cleared the way for the next generation of Initial Coin Offerings by utilizing the power of smart contracts.

Ethereum’s Initial Coin Offering (ICO), a prescription for success

The ERC20 protocol standard, which defines the main principles for building other compliant tokens that can be traded on Ethereum’s blockchain, has been incorporated in Ethereum’s smart contracts system. Others were able to design their ERC20-compliant coins that could be traded for ETH directly on Ethereum’s network.

The DAO is a good illustration of how Ethereum’s smart contracts may be used successfully. The investment firm raised $100 million in ETH, and in exchange, the investors received DAO tokens, allowing them to participate in the platform’s governance. Sadly, the DAO was hacked and failed.

The Ethereum ICO and ERC20 protocol have defined the next generation of blockchain-based project crowdfunding via Initial Coin Offerings.

It also made investing in other ERC20 tokens relatively simple. Simply send ETH to your wallet, paste the contract into your wallet, and the new tokens will appear in your account for you to use as you like.

Not all cryptocurrencies have ERC20 tokens that live on the Ethereum network, but almost any new blockchain-based startup can launch an ICO.

The legal status of initial coin offerings (ICOs)

It’s a bit of a jungle out there when it comes to ICO legalities. Tokens are marketed as digital goods, not financial assets, in theory. Because most governments have yet to regulate ICOs, the entire process should be paperless if the creators have a seasoned lawyer on their team.

Nonetheless, several countries have become aware of ICOs and are seeking to regulate them in the same way that shares and securities are regulated.

The Securities and Exchange Commission (SEC) of the United States classed ICO tokens as securities in December 2017. In other words, the SEC was planning to put a stop to ICOs that they believe are deceiving investors.

In some circumstances, the token serves only as a utility token. This means that the owner can merely use it to connect to a specific network or protocol, in which case it is unlikely to be classified as a financial asset. However, equity tokens to increase in value are quite close to the concept of security. To be honest, the majority of token purchases are undertaken solely for investment objectives.

Despite authorities’ efforts, ICOs remain a hazy legal area, and unless a clearer set of restrictions is implemented, businesses will try to profit from Initial Coin Offerings.

It’s also worth noting that, if rules are finalized, the cost and effort required to comply may make ICOs less appealing than traditional financing sources.

Last but not least,

For the time being, ICOs are a fantastic method to fund new crypto-related projects, and there have already been many successful ones with more on the way.

Keep in mind that everyone is creating ICOs these days, and many of them are scams or lack the solid basis they require to develop and make the investment worthwhile. As a result, you should conduct extensive research and analyze the team and past of any crypto project you are considering investing in. There are a lot of websites that list ICOs; just conduct a Google search and you’ll find a lot of them.

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