Creating and developing a cryptocurrency often requires a not inconsiderable amount of resources. Teams in charge of new currency projects need to find investors who will support the initiative in the beginning. This is how the idea for Initial Coin Offering (ICO) was born.
Initial Coin Offering by its operation largely resembles the Initial Public Offering known from the traditional stock exchange. Like the IPO, the ICO is a way to attract the first investors, but in the world of cryptocurrencies.
ICO – what is it?
Initial Coin Offering refers to the initial offering of cryptocurrency coins. In simplest terms: the originators of new crypto, application, or service present their projects and try to convince potential investors. Among other things, for this purpose, they create a white paper that describes how the cryptocurrency will work, what its supply will be, how it will be mined, how it will be used, its availability, and what advantages this particular project has will have over the competition.
Interested investors can buy tokens of the yet unissued cryptocurrency. The price for those who decide to invest in the project before its debut is usually several times lower than the price of the digital currency at the time of its launch. Thus, the investor can potentially make a pretty good profit from the ICO, and the team creating the project has the necessary operational resources to fine-tune the product.
Often there is also a safeguard in the case of Initial Coin Offering that if the creators do not manage to raise the anticipated minimum amount within a certain period of time, investors get a return on their invested funds. Then the ICO is deemed a failure. It all seems quite reasonable for each party.
A controversial history
However, ICOs have several flaws that have been exposed over the years. Let’s start at the beginning, though. The first sale of tokens in this system took place back in 2013, when J.R. Willett, the creator of MasterCoin (the project was later renamed Omni Layer and still serves even today as a protocol for Tether), offered this solution to his clients. Willett accepted investors’ funds in BTC. He managed to raise the equivalent of $600,000. Later, other initiatives were created that raised much larger sums.
So why the controversy? The problem with ICOs is that the Initial Coin Offering mechanism has been used by fraudsters quite often. The biggest scandal was Pincoin. The creators of the cryptocurrency raised funds worth $660 million from more than 32,000 investors and then conducted a so-called “exit scam” (escape with stolen funds).
There have been many more such scams in the history of ICOs. Onecoin, Bitconnect (creators of a Ponzi scheme and popular meme), Plexcoin, and Bitcard are well-documented cases of fraud on cryptocurrency investors. In 2018, there was a report published that found as many as 81% of all ICOs were fraudulent.
This is largely why Initial Coin Offering is banned in many countries. Also, numerous social media platforms have introduced bans on ICOs.
Biggest ICO in history
Nevertheless, many ICOs have been spectacular successes. Already the second such offering met with a considerable response from the community. NextCoin (NXT), as it is referred to, passed its ICO in the second half of 2013. The creators managed to raise 21 BTC within a few months. This amount was awe-inspiring, as NXT was the first-ever cryptocurrency that was entirely based on the Proof-of-Stake algorithm.
The real breakthrough turned out to be the sixth ICO in history – Ethereum. Yes, the second-largest cryptocurrency and the most widely used blockchain in the world has its origins precisely in raising funds through token sales. Vitalik Buterin 2014 presented his vision of a new platform to the world, which quickly gained popularity. Within just 12 hours of the ICO launch, the creators managed to raise 3700 BTC! In total, 18.3 million dollars worth of funds were raised.
However, these numbers pale in comparison to what the creators of EOS have accomplished. During the 11 months (beginning 07.2018) of the ICO, they raised funds worth $4.1 billion. However, the platform that was supposed to bring Ethereum to its knees turned out to fail.
ICO – a relic of the past?
Initial Coin Offering reached its peak in 2018 when more than 800 such projects were created in total. History has shown that most of them turned out to be a failure, but many creators managed to raise substantial amounts of money this way.
Today, however, ICOs are not so popular. The confusion with fraud, poor legal regulations and limitations of this system caused new creators to prefer to try to raise funds using other methods, such as STO (Security Token Offering). The way to raise investors, once so popular, is now going down the drain as a tool not suited to the current times.