What Does ICO Mean?

Posted by Frank Gogol
Updated on April 26, 2022

If you have spent enough time in the crypto space, you might have come across the term “initial coin offering”, also known as ICO. But what does ICO mean? Is it the same as buying Bitcoin?

When crypto startups need to get money to create a new coin, app, or service, they sometimes offer an ICO as a way to collect investment. ICOs can offer great rewards to early investors. It’s important to be careful, though. An ICO is largely unregulated. Because of its decentralized nature, it is easy for fraudsters to con investors. 

If you are interested in taking part in an ICO or you just want more information, read on. We unpack exactly what does ICO means and give a few tips on how to navigate the process. 

What Is an Initial Coin Offering (ICO)?

What does ICO mean? An initial coin offering (ICO) is a way for a cryptocurrency to raise capital. A company looking to raise money will launch an ICO as a way to raise funds. These funds can then be used by the company in the blockchain environment to create a new coin, app, or service.

It is the equivalent of an initial public offering (IPO) that many traditional businesses do to raise capital.

Interested investors can buy into the offer and receive coins issued by the company. Just like in an IPO, ICO can be seen as a type of stock. It is not a precise comparison, because sometimes the ICO itself has utility for a software service or product offered.

Some ICOs have produced huge returns for their investors. On the flip side, other ICOs have turned out to be fraud or just a failed investment. 

Similar to an IPO, you could be getting in early on a massive company, or you could be deceived by a dishonest entrepreneur, or the start-up might just fail. It is one of the risks of early access investment.

However, ICOs are, for the most part, completely unregulated. Investors must exercise a high degree of caution and diligence when researching and investing in ICOs.

How ICOs Work

When a crypto startup wants to raise money through ICO, it usually creates a whitepaper for the offer. This will outline what the project is about, what the project will achieve, how much money is needed, what the investor gets out of it, etc.

If you want to take up the ICO offer, you will need to buy some of the project’s tokens. You can do this with other digital currency, or with fiat currency like U.S. Dollars. This requires you to have a basic understanding of how to use cryptocurrency wallets and exchanges.

The coins you have bought are referred to as tokens. They are similar to shares of a company sold to investors during an IPO.

If the ICO is unsuccessful and not enough money is raised, the money may be returned to the investors. If the ICO is successful, the money raised will be used to pursue the goals of the project.

Although ICOs aren’t regulated, the Securities and Exchange Commission (SEC) has intervened in the past to protect the interests of investors. 

Special Considerations for ICO

If you are interested to take part in an ICO, keep the following in mind:

  • Set up a wallet and exchange account – in the case of most ICOs, you must purchase tokens with pre-existing cryptocurrencies. This means you will need to already have a cryptocurrency wallet set up for a currency like Bitcoin or Ethereum, as well as having a wallet capable of holding whichever token or currency you want to purchase.
  • Stay abreast of the latest ICOs – the only way of finding a good ICO to invest in is by reading up on new projects online. There are dedicated sites that collect information about ICOs. This will allow you to discover new ICOs and compare different offerings against one another.
  • Consider your investment plan – make sure you know how investing in an ICO fits into your investment plan. Do you believe in the value of the project and want to stay in the business long term? Do you think that you can sell your shares for a profit after the ICO? Whatever your plan, make sure you have researched the ICO well.

Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)

What does ICO mean? In trying to answer this question, we have made comparisons between ICOs and IPOs.

When traditional companies are looking for a quick influx of cash, they can go public with an IPO. This way of raising capital allows companies to get money from individual investors by selling them shares through an IPO.

An ICO does serve a similar purpose, with the token representing a stake in the company or project.

However, an ICO differs from an IPO in two other ways. Firstly, ICOs are largely unregulated, meaning government organizations like the Securities and Exchange Commission (SEC) do not oversee ICOs. Secondly, due to their decentralization and lack of regulation, ICOs are much freer in terms of structure than IPOs.

There are many different ICO structures, based on the goals of the company and the needs of the project. The funding goals, token supply, and token price may all be either static or dynamic, leading to a wide array of different ICO structures.

An ICO may also deal with supporters that are keen to invest in a new project, much like a crowdfunding event. 

However, crowdfunding campaigns are donations that get a product off the ground. In an ICO, investors are also motivated by a prospective return on their investments. ICOs are therefore referred to as “crowdsales”.

ICO Advantages and Disadvantages

There are a few advantages and disadvantages of an ICO to keep in mind before investing in one. 

In an IPO, an investor receives shares of stock in a company in exchange for her investment. In the case of an ICO, there are no shares per se. Instead, companies raising funds via ICO provide a blockchain equivalent to a share—a cryptocurrency token. It is very easy for a company to launch an ICO to create tokens. There are online services that allow for the generation of cryptocurrency tokens in a matter of seconds. Keep this in mind when considering the differences between shares and tokens. A token does not have any intrinsic value or legal guarantees.

If the project happens and succeeds, the value of the tokens purchased during the ICO will gain value. The ideal situation for an investor is to buy the tokens when the crypto company is small and worthless, and sell the tokens for a lot of money once the company succeeds.

However, the potential for high returns also translates into a market that is full of fraudsters. Because they are largely unregulated, ICOs are easier for scam artists to set up and prey on overenthusiastic and poorly informed investors. As an investor, you need to get to know the project developers, check whether the project developers can clearly define what their goals are, carefully research the legal terms and conditions, and make sure you are using a secure wallet. 

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Conclusion

What does ICO mean? An initial coin offering is a way for crypto startups to get the money they need to create a new coin, app, or service. By buying the token associated with the ICO, you are making it possible for the startup to complete its project.

A token is a bit like a share of a company sold to investors during an IPO. A token can also function as a piece of the blockchain itself. Because a token is not just a straightforward share, an ICO functions a bit like a crowdfunding effort.

ICOs offer great rewards to early investors. If the project succeeds, you will have a piece of cryptocurrency that is suddenly very desirable and worth a lot of money.

It is important to be careful, though. An ICO is not regulated in the same way an IPO is. Because of its decentralized nature, it is easy to con investors. Make sure to do your research carefully before investing in an ICO.


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