What is an ICO: Initial Coin Offering FAQs

November 21, 2018

Even now that the dust surrounding it settled down a bit and Initial Coin Offering (ICO) funding has become a part of our everyday lexicon, digital crowdfunding is still something that scares most businesses away –especially those with particular niches that have nothing to do with the exciting world of cryptocurrencies and blockchain.

This sparks a fairly justified question: Why?

ICOs have proven their worth on a plethora of occasions, and there seems to be a general consensus that initial coin offerings carry about the same level of investment risk as venture capital.

So, why is there so much skepticism? Why are businesses so reluctant to dive into ICO waters, despite the long list of benefits they offer, like being able to build up an audience before launching a product or receiving precious user directions while creating it?

A big part of why businesses are still wary of ICOs is because this form of raising funds is banned in some countries, while countries that allow them do next to nothing when it comes to making sure they run smoothly and safely.

Obviously, this presents a hinderer for businesses that, while able to see advantages of such a fundraising concept, simply do not feel comfortable with risking assets in a legally-shady environment that has no guarantees past spoken promises.

We will discuss if the current reputation surrounding initial coin offerings is well warranted, and if businesses reluctant to invest or launch an ICO should reconsider their points of view. Furthermore, we'll try to answer a fairly convoluted question: Are we currently at the end of fundraising via ICOs, or is this just the beginning of a healthy market?

FAQs on ICOs

Before we can dive into whether ICOs have a sustainable future and whether businesses should rely on them, we first need to make sure we’re on the same page about what initial coin offerings are. With that goal in mind, let's cover the most frequently asked questions about ICOs and cryptocurrencies:

  • What is ICO funding? ICO funding is a method of raising funds via an initial coin offering, which is basically a digital crowd fund that, instead of FIAT, collects Bitcoin or Ethereum.
  • What is ICO and how does it work? According to the official ICO definition, ICO stands for an initial coin offering. This way of fundraising functions like an Initial Public Offering (IPO), where companies sell stock to raise funds. Only in the case of ICOs, the company sells digital tokens that gain real value once the project is launched.
  • What is ICO marketing? ICO marketing is a service provided primarily by digital marketing agencies that has the goal of developing a strategy for promoting an ICO-based project and fundraising.
  • What is a Bitcoin token? Cryptocurrency is the superset, while alt coins and crypto tokens are its two subset categories. In the case of Bitcoin, the world's first and most popular crypto, this is Bitcoin token.
  • What is an ICO token? An ICO token is what you receive when you invest in an ICO – a cryptocurrency that has no current value, but will be worth something within the project's system once it's launched – if the ICO turns out to be successful, that is.
  • What is ICO crypto? An ICO crypto is the currency that's projected to have value once the project exits its pre-launch phase. Until that moment comes, ICO crypto exists in the form of a token.
  • What is ICO investment? An ICO investment is what startups use to bypass the rigorous and strictly-regulated capital-raising process required by venture capitalists or banks.
  • What is the Ethereum network? Ethereum, which is actually the most successful ICO project to date, is arguably the world's most advanced ICO cryptocurrency. Its network is an open-source, public, blockchain-based, distributed computing platform featuring smart contract functionality that’s the framework of a lot of amazing apps.
  • What is the ICO market? The ICO market is simply the current state of things in the ICO field, which carries its own standards, prices, and rules.
  • Is Bitcoin a token? No, Bitcoin is a full-blown, totally functional cryptocurrency.
  • What is an alt coin? An alt coin is any digital cryptocurrency similar to Bitcoin. The term stands for alternative to Bitcoin and is used to describe any crypto that uses the same fundamental building blocks as Bitcoin.

Why businesses stay clear of ICOs

Since the moment ICO concept was first mooted, there have been concerns over its legality. After all, there's no sugarcoating the fact that ICOs and cryptocurrencies exist in a legal grey area and, thus, bear a number of risks for anyone who decides to participate in them.

Furthermore, literally anyone can invest in an ICO, even anonymously, which obviously opens up a lot of room for fraud of various kinds – which is why many countries have opted not to regulate ICOs or ban them altogether.

This leads us to the reason why regulators are increasingly warning investors to be wary of ICOs – there is no official guarantee or promise whatsoever on what the ICO-orchestrating teams will do with the invested funds they receive. In other words, if an ICO fails to deliver on its promise for whatever reason, there is no real penalty for doing so.

They can simply pack up all the ICO funds they received and disappear off the grid.

Regulating vs. banning ICOs

While the early phases of ICO crowd funding were a honeymoon in many ways, regulators worldwide have turned their attention to ICOs in recent years.

A growing number of them either took or are taking action, scrambling to come up with new rules on ICOs, mostly motivated by making digital fundraising more secure and taxable.

For example, the U.S. Securities and Exchange Commission (SEC) made strides toward strengthening its ICO rules this summer, while regulators in other countries, such as Singapore, Hong Kong, and Russia, warn that digital currencies are not safe investments and are working hard on finding the best possible way of protecting investors.

While some are trying to find a compromise of some kind, countries like China have chosen to ban ICOs, declaring them and cryptos a threat to financial stability.

There are valid cases to be made that ICOs can disrupt the economy. After all, there has never been a similar option of raising incredible sums of money like the one offered by ICOs, and there's no telling what effects they could have if they ever became legal in their current form.

So, how did China's market react to the ban of ICOs? Obviously, this brought about a huge collapse in ICO market value. On the other side, in the U.S., increased regulation had a lot tamer of an effect on the ICO market. The price, for instance, of the aforementioned Ethereum fell about 10 percent in one day after the SEC’s announcement.

Of course, the SEC’s stance also had a chilling effect on the creation of new ICOs in the U.S., putting a number of planned offerings on hold. This is usually the argument you'll hear from people who do not feel like regulating ICOs is the most productive course of action.

ICOs as a valid investment option

At the end of the day, it's hardly a surprise that regulation of ICOs came into play at some point. There was no way that the industry could keep on developing without starting to brush shoulders with regulatory bodies.

However, there's a growing concern that these regulatory interventions may very well change the landscape for ICOs in a fashion that completely takes the field's identity away. It remains to be seen if regulatory bodies are able to implement sufficient rules without compromising what made ICOs great in the first place

This will have a massive say in whether businesses start to see ICOs as a worthwhile funding method on which they can consistently rely upon.

If regulations are able to both protect investors and not tie hands of ICOs, there's no reason why we should not expect businesses of all kinds to start lining up to either invest in or launch an ICO.

Ban, regulate, or leave ICOs

While there's no going around the fact that ICOs have more than a few shortcomings in their security department, the truth is that a lot, if not all, of these problems can be solved with carefully implemented regulations.

And, as long as these regulations don't stand in the way of great projects, everything else should fall into place.

This will also be the determining factor as far as businesses are concerned, as safety is a primary concern whenever large amounts of money are involved.

In order to make a ruling on whether ICOs are worth the effort of implementing regulations or not, however, you need to perfectly understand how this kind of fundraising works and what the true ICO meaning really is.

This kind of knowledge is precisely what the following infographic aims to arm you with.

The infographic presents you with a perfect resource for understanding this unique method of fundraising. It does a great job of presenting both the good and bad sides of this revolutionary way to get funded and is an ideal place for anyone who wishes to learn more about the exciting world of ICO funding in 2018.

Ready to learn more about funding options? Learn about the state of FinTech in 2018

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