Initial Coin Offering (ICO) Explained [2023]

Cryptocurrencies and blockchain technology are relatively new entities in the grand scheme of things, but they already have a long and quite colorful history. From the genesis of Bitcoin to crypto faucets and DeFi to NFT mania, few things get investors quite as excited as an initial coin offering (ICO).

Bitcoin has made many millionaires, and so have the innumerable cryptocurrencies that have followed in its wake. Even the controversial “memecoin” Shiba Inu is famous for a speculator reaching billionaire status on an initial investment of just $8,000.

Such rags-to-riches stories are in the minority, though, and it’s arguable that for every millionaire crypto has created, it’s seen plenty of others buy at the top and get wiped out. Nevertheless, getting early into a project is invariably the best way to make big gains, and ICOs have historically been some of the best opportunities for investors worldwide.

What is Initial Coin Offering?

An initial coin offering is cryptocurrency’s early answer to the Initial Public Offering model traditional firms use to open their doors and raise funds from the public.

In an ICO, a blockchain-based project generally creates or mints a specific amount of its own digital token and sells a portion to investors. Most ICOs use cryptocurrencies such as Bitcoin and Ether to raise funds, although projects based on other chains often use the native cryptocurrencies of those blockchains.

Digital crowdfunding isn’t difficult, but many existing platforms have significant downsides. ICOs are much easier to conduct, although they may have restrictions for various reasons.

For instance, investors based in the U.S. have been locked out of many major ICOs for regulatory reasons. Not that this prevents U.S.-based institutional investors, many of whom utilize offshore shell companies, from participating.

ICO participants are speculating on the price and performance of the tokens they buy. If the project does well, gains can be very appreciable. Exchange listings also tend to give the token a significant bump, and participants in the ICO of a successful project can often realize huge profits.

However, investing in an ICO also carries risks. If the project fails, or worse yet, is a scam or a rug-pull, investors can lose some or all of their funds. Unfortunately, there isn’t any protection for investors since the industry remains under-regulated.

Types of ICO

There are several types of blockchain-based digital fundraising methods, but even these can work differently. All ICOs aren’t the same. Generally, ICOs tend to have two variables—token supply and token price. They are categorized by:

• Static supply, static price. In this case, the project looking to raise funds sets a fixed funding goal and issues a set number of tokens for sale at a set price. All investors can get in at the same price.
• Static supply, dynamic price. It’s also possible to let the price float, or have tranches of tokens sold at price ranges to reward early birds. The funding goal for this sort of ICO tends to be variable and depends on how much funding is received.
• Dynamic supply, static price. In these ICOs, the amount of funding received determines the token supply.

The Importance of Initial Coin Offering

In a world fraught with inflation, a cost of living crisis, and wealth being funneled to the super-rich at an alarming rate, bootstrapping a project is harder than ever. Any sort of endeavor requires funding to get off the ground, and the availability of early-stage funding can be make-or-break for even the best projects.

The usual recourse for a firm seeking to get off the ground is seed capital from venture capitalists and/or angel investors. This isn’t easy to manage, and not every developer has the requisite sales, marketing, or networking skills to persuade investors.

Even if they do, the VC route has major pitfalls. For one thing, venture capitalists require an outsized amount of control in the company, and tend to make decisions purely based on enriching themselves. In some cases, they’re outright predatory and can be horrible to deal with.

As such, an ICO gives a project team to bypass these traditional early investors and go directly to the public. Some, perhaps questionably, choose to combine the models, letting VCs in early at lower prices and then carrying out an ICO at a higher rate.

Benefits of Initial Coin Offering

Initial Coin Offerings wouldn’t be carried out if they didn’t have any benefits, such as:

• Funding. The primary reason for a project team to carry out an ICO is to raise money. These funds can pay the bills and provide the capital needed to get the project off the ground. In many cases, the best-performing ICOs have set projects up for years of operation and expansion.
• Appreciation. For investors, on the other hand, the hope is that the tokens in question will appreciate following the ICO. Early investing tends to be the best, and it’s hard to be earlier than the project’s ICO.
• Ease of access. An ICO is much easier to carry out than most other fundraiser forms. Anyone with the relevant tech experience can set up and carry out an ICO, and participating in one tends to be just as easy with a little preparation.
• Control and fees. Plenty of crowdfunding platforms exist to fulfill a similar purpose, but investors have much less access to liquidity with these platforms. Neither the project team nor investors need to worry about fees, either.

Risks Associated With Initial Coin Offering

As mentioned, Initial Coin Offerings can be risky if an investor goes in unprepared or unwary. Here are some of the main risks connected to ICOs:

• Soundness of investment. Most ICOs are carried out by project teams that may lack experience and tend to focus on experimental business models with a very high chance of failure. Through no wrongdoing on anyone’s part, the business and token could be a bust.
• Scams. It’s very easy to set up an ICO, and blockchain transactions are unregulated and immutable. That’s a great environment for a scammer to get you to send them your funds.
• Transparency. It’s sometimes hard to grasp all of the information about the project’s model, inner workings, and even the team’s identities in some cases.
• Volatility. Crypto doesn’t always go up. It’s entirely possible that a token’s price may crater following the ICO thanks to wider market events.
• Custody of funds. ICOs tend to use a custodial model, whereby you send your funds into an escrow and later receive the ICO tokens. This is the same as with IPOs, but blockchain tech always offers non-custodial solutions if you look hard enough.
• Regulation. Various regulatory agencies have their own opinions on ICOs, and the legal framework is still in formation in some places. Many tokens which were issued via ICO are now being evaluated to see if they qualify as securities. ICOs are also illegal in some countries, such as China.
• Shills and hype. In earlier ICOs, many celebrities or other influencers were involved in encouraging investors to buy tokens—a practice often referred to as shilling. This is now illegal if the celebrity in question doesn't disclose their compensation, but every single case doesn’t get policed. The world of shilling is particularly murky, and fresh crypto enthusiasts who often don’t know better are targeted.

Examples of Initial Coin Offering

There have been many ICOs over the history of cryptocurrency, both successful and unsuccessful. Here are some of the most notable examples of Initial Coin Offerings.

#1. Ethereum

One of the best-performing early ICOs, Ethereum raised $18 million over a month and a half in 2014. It used BTC to raise funds dynamically, with early participants able to acquire 2000 ETH for 1 BTC.

The Ether price gradually increased until it reached, amusingly, 1337 per Bitcoin. Prophetic, perhaps, since ETH has since been the very definition of an elite blockchain and crypto coin. The average token price in dollars? $0.31.

#2. Neo

Then called Antshares, Neo was also an early project to use the ICO model, raising $4.5 million in 2015 and 2016 in a two-phase ICO.

#3. EOS

A long ICO is a good opportunity to build a significant war chest, and EOS took that to the extreme by conducting a year-long ICO. This endeavor proved a resounding success, as the project was able to raise an astounding $4.2 billion.

This beat out the combined venture funding rounds of Epic Games and Uber, held in the same year.

#4. Dragon Coin

In 2018, this project raised $320 million in a one-month ICO. You may not have heard of it, and for a good reason—Dragon Coin is down to less than 1% of its price in 2018 and was embroiled in significant, multi-pronged controversy following a New York Times exposeé.

#5. Telegram

Another ICO that essentially failed, messaging service Telegram’s founders, Pavel and Nikolai Durov, held two ICOs for their Telegram Open Network in 2018. They raised $1.7 billion, but the U.S. Securities and Exchange Commission stepped in, eventually ordering the team to refund investors.

The project was abandoned by the Durov brothers and Telegram, but was taken over by its community and launched as “The Open Network.”

How to Participate in Initial Coin Offering

The first step when taking part in an initial coin offering is to register for it, but the problem most people have is that they don’t hear about ICOs in the first place.

The extremely influential Bitcointalk forum used to be a great place for this, but platforms like Reddit and Discord seem to have taken over. Just don’t let yourself get duped by influencers and shills who’ve been paid to promote dodgy ICOs.

Once you’ve heard about an ICO and done your due diligence by reading the whitepaper and checking the team credentials before registering, you need to set some funds aside. Most ICOs will either use a major currency like BTC or ETH, or the native token of the chain they’re launching on.

Armed with a wallet and the needed currency (remember to set some aside for gas fees on chains like Ethereum), you’re good to go. Simply follow the instructions you received when registering, which generally entails sending funds to an escrow wallet. Once the ICO is over, you’ll be sent your brand-new tokens!

Initial Coin Offering vs. Initial Public Offering

Initial Coin Offering sounds an awful lot like Initial Public Offering, and that’s not an accident. When originally coined, the term attempted to draw parallels between the two, although the differences are also very apparent.

For one thing, investing in an ICO doesn’t secure any sort of ownership stake in the project. An IPO is generally used for company shares, which confer the owner—if directly registered since some brokers withhold or skew votes—with a vote on company matters. An ICO may do this if the token being sold is a governance token but it doesn’t have to.

ICO investors generally hope that a token appreciates in value, but the reason for that can vary. ICOs have been held for all kinds of tokens, from currencies to gas tokens to utility tokens and the aforementioned governance tokens.

Investing in cryptocurrency does have advantages compared to instruments like stocks, however. While risky, the main plus point in crypto’s corner is decentralization and blockchain immutability. However, stocks can be manipulated even to the extent that the law of supply and demand ceases to function.

Future of Initial Coin Offering

ICOs are, for better or worse, currently on the wane. Increasing regulatory scrutiny over the role of an ICO in a coin or token’s make-up as a security has led its future to come into question.

However, this assertion could just be a matter of semantics. While the ICO disappears from consciousness, the token generation event (TGE) is now being used increasingly by projects needing that vital early funding boost. The differences between an ICO and TGE aren’t all that many, with the TGE mainly being a token sale focusing more on token utility.

There are other, more innovative approaches to funding out there too. For example, the initial stake pool offering (ISPO) is an extremely compelling new alternative model that neither requires investors to risk any of their funds, nor even requires them to send coins out of their wallets.

With the availability of models that are both safer and more compliant with regulation, it’s unlikely that ICOs in their traditional guise will stick around for too much longer, despite their historical success.

Key Takeaways

Initial Coin Offerings are on the wane as new alternatives, such as Initial Stake Pool Offerings and token generation events, emerge, but their place in blockchain history is undeniable. They’ve been used to kick off some of the most valuable projects in cryptocurrency and have made many a millionaire—imagine buying Ether for $0.31 a pop during its ICO!

There are several risks inherent to ICOs, which may explain their decreasing popularity as time and technology march on. The element of trust in escrows and development teams can be removed by ISPOs, and TGEs are all about dealing with regulatory risk. Ultimately, ICOs may decline into obscurity, but their spirit, and that of the decentralized fundraiser, definitely lives on.

Initial Coin Offering FAQ

• Is initial coin offering legal?

  Initial coin offerings are legal in most places, although the views of regulators can and may change. China declared ICO illegal in 2017, and the US SEC is currently investigating whether previously ICOd tokens and coins should be classified as securities.

• What is the difference between IPO vs. ICO?

  An IPO is used to take a company public via a share offering, while an ICO is a way to raise funds without necessarily needing to give up controlling shares of the company.

• What is ICO used for?

  ICO is used by blockchain firms and project teams to raise funds in a decentralized, public manner without giving up control or jumping through the hoops of a public listing. It’s a fast, relatively easy way for a project to raise capital, and household investors have a rare opportunity to “get in at the ground floor.”