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What Is an Initial Coin Offering (ICO) and How It Works?

Updated on :  

08 min read.

With a total market capitalisation of more than $900 billion, the cryptocurrency space has attracted the attention of several investors, including those seeking quick cash with few regulations. ICOs are a highly popular method of raising money in this space.

Investors are drawn to ICOs for their dream of grabbing an early to successful crypto. As of April 2018, ICOs raised a whopping USD 5,014,952,132. 

Here’s more about ICO.

What is an ICO?

An ICO or initial coin offering is an event where an organisation sells new crypto to raise money. In exchange for their financial contributions, investors receive cryptocurrency. In several ways, an ICO is the crypto version of an IPO (initial public offering) in the stock market.

Working of an ICO

When an organisation decides to launch an ICO, it declares the rules, date, and purchase procedure in advance. On the ICO launch date, potential investors can purchase the new crypto.

In most ICOs, investors have to pay using another crypto, with Ethereum (ETH) and Bitcoin (BTC) two common choices. Also, there are ICOs which accept fiat currency.

Typically, the buying process involves sending money to a particular crypto wallet address. Investors offer the recipient address to receive the cryptocurrency they purchase.

The token price and number of tokens sold during an ICO can be either variable or fixed. 

These are some examples of the way the process can work:

  • Variable price and fixed number of tokens

The organisation sells a fixed number of tokens and fixes its price depending on the funds it receives. More funding leads to a greater token price. If it sells two million tokens and raises $6 million, every token will have a price of $3.

  • Fixed price and a variable number of tokens

In this case, the organisation sets a fixed price but does not put any limitation on the number of tokens it will sell. For example, an organisation might sell tokens at $0.75 apiece until the end of the ICO.

  • Fixed price and fixed number of tokens

The organisation sets both these ahead of time, for example, offering two million tokens for $2 per token.

Final word

Anyone can launch an ICO. Owing to the low barrier to entry, the launching of several new kinds of crypto takes place via this procedure. While sizable profits can be made via ICOs, the lack of regulation makes them immensely risky.