IPO vs ICO Explained
The business of Initial Coin Offerings (ICO) is hot right now in the blockchain community. They are a popular way to fund new cryptocurrency projects. Capital is raised by a blockchain company offering its cryptocurrency, or tokens, to investors and enthusiasts for money or bitcoin. It can be likened to crowdfunding and has the potential to revolutionise the way start-ups capitalise themselves.
ICO provides members of the public with a chance to invest in a new business before they’ve really taken off. The ICO takes place before the end of the project to help the founding team with expenses before the launch. This means that there is a high level of risk involved as there is a possibility that all invested capital could be lost by taking a chance on an idea that could flop.
On the flip side though, with no regulatory restrictions imposed on ICO activity, companies can be invested in right from the start of an idea, before a product has even been produced. Like Kickstarter, people can choose to help fund a project that they have an interest in before it explodes.
However, unlike Kickstarter, there is a possibility to profit from taking part in an ICO. Generally, crypto-tokens that are issued through an ICO are sold at a fixed price in the form of bitcoins or US dollars. The value of the tokens isn’t supported by anything but the ICO participants trust that the project team will launch a product in the future. This usually makes the tokens very affordable and attractive to investors that believe in the project.
Once the project is completed, the tokens’ value is likely to increase as there is now a tangible product, rather than simply an idea. Original investors can then choose to sell their tokens to make a considerable profit. It should be remembered though that, as with any investment, profits are not a certainty, particularly with somewhat risky ICOs. An ICO campaign may fail and that would result in all contributions being returned, or if the project is successful, the value of the tokens may not increase.
Furthermore, lack of regulation means that the cryptocurrency community has been targeted by scam ICO campaigns. There are some warning signs to look out for which should alert potential investors to a fraudulent ICO:
• The people behind the project wish to remain anonymous – consider why the developers do not want to make themselves known.
• The whitepaper does not provide an understanding of how the end product will work or does not explain how the money raised by the token offering will be used.
• There is no escrow wallet for contributions (this is where a neutral third party holds and regulates payments so that the ICO project does not have complete freedom over funds).
• The promise of high returns, with little or no effort – profit cannot be guaranteed when investing in an ICO.
Why is it that ICOs are often compared to IPOs (Initial Public Offering) then? Well, there are undoubtedly comparisons to be made, but there are more differences between these methods of raising capital, than similarities.
So, what is an IPO? This is when a company offers shares of its stocks to the public. By "going public” the company is essentially giving up part of their ownership to stockholders. The IPO signifies an exciting time for a company as it means that it requires additional funds to expand due to its initial success. The fundamental difference is that the IPO industry is extremely regulated by the government. This requires a company wishing to sell shares to complete a mountain of paperwork before it can do so. The documentation needs to be prepared properly for the consequences of non-compliance can be devastating for a company.
In contrast, cryptocurrency crowdfunding is a comparatively new concept and so has yet to be regulated by the government. Little, or no, regulation means that any project can start an ICO and with a relatively small amount of effort can influence investors to contribute to their project. This more relaxed approach to raising funds holds both opportunities and risks when weighed up against the more conventional IPO route.
To summarise, while the terms ICO and IPO are very similar, they really are quite different. To launch an ICO, companies simply need to develop a whitepaper to convince investors that their project is worth contributing to. At the other end of the scale, an IPO needs a lot of time, resource, and effort to comply with regulation before a company can “go public”. As with any investment, research is critical to making sure that the right decisions are made, regardless of whether those investments are in ICOs or IPOs.
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