Initial Coin Offering (ICO)
What Is an Initial Coin Offering (ICO)?
An Initial Coin Offering, or ICO, is a fundraising mechanism unique to the cryptocurrency space. It is often compared to an Initial Public Offering (IPO) in traditional finance, where a private company sells shares to the public to raise capital. However, ICOs are fundamentally different. Instead of selling equity or ownership in a company, an ICO sells digital tokens that are often intended to be used within the project’s future ecosystem.
This method allows a project to bypass traditional venture capitalists and banks, raising funds directly from a global pool of supporters. Investors, in turn, purchase these new tokens hoping that the project will be successful and the token’s value will increase over time. The tokens purchased are typically paid for using established cryptocurrencies like Bitcoin or Ethereum, or stablecoins like USDT.
How Does an ICO Work?
The ICO process generally begins with the project team publishing a whitepaper: a detailed document that outlines the project’s goals, the technology it’s building, the problem it aims to solve, and the “tokenomics” of its new token. The tokenomics section is where the project explains the total supply of the token, how many will be sold to the public, how many the team will keep, and the token’s specific function (utility) within the project.
Following the whitepaper, the project launches its token sale. Investors send funds to a specific smart contract address, and in return, the smart contract automatically sends the new tokens to the investor’s wallet. The project team then uses the raised capital to fund development, marketing, and operations.
The peak of this fundraising model, often called the “ICO mania,” occurred in 2017 and 2018, when thousands of projects, mostly based on Ethereum, raised billions of dollars.
The Risks and Legacy of ICOs
While ICOs opened up a new, decentralized avenue for funding, they are famous for being high-risk. The 2017-2018 boom was plagued by exit scams, rug pulls, and projects that otherwise failed to deliver on their promises. Many investors lost their entire investments.
Due to these risks, the ICO model has largely fallen out of favor. It has been replaced by fundraising methods that aim to provide more investor protection, such as Initial Exchange Offerings (IEOs), which are vetted and managed by a centralized cryptocurrency exchange, and Initial DEX Offerings (IDOs) on decentralized exchanges.
