What is an ICO?

And with the growth in ICO activity comes excitement about potential investment opportunities, but also concerns about bubbles and legitimacy.

Which leads to our question: What is an ICO?

ICO is short for initial coin offering, which is a derivative of IPO, or initial public offering.

An IPO is a familiar tool used by companies when they move from privately held to publically traded on the stock market. An IPO is a chance for an average investor to get in early and own shares in a company. And it’s a chance for a company to raise capital to grow.

An ICO is similar in that investors have a chance to get early exposure to a fresh idea.

Other than the similar sounding acronym and the early bird opportunity, the similarities between ICOs and IPOs ends.

Unlike an IPO that calls for investment in an existing company, so far ICOs have been used more like a crowdfunding tools to raise money to support the development of a new crypto token or a new application for an existing protocol, and/or a foundation or organization that will become responsible for governing the new network.

According to Smith + Crown, a cryptofinance research firm: “Several ICOs use existing cryptocurrency protocols to create their tokens on top of them. This helps simplify the token-creation process. The most notable such protocols today include NXT, Counterparty, Bitshares, and Mastercoin. Waves, which itself was developed through an ICO (raising over $16 million) is also developing a token platform. Some well-known cryptocurrencies that were developed through an ICO include: NXT, Mastercoin, Bitshares, Ethereum, Maidsafecoin, NEM, Synereo, Factom, DigixDAO, Lisk, and Waves.”

It’s important to do some research on the project and team behind the ICO and to understand how the process and technology will work. Unlike an IPO, where a company has to be vetted by regulators and go through a pretty lengthy process to become publicly listed (somewhat related, you might be familiar or interested in the ongoing debate about the worthiness of bitcoin exchange-traded funds), starting a cryptocurrency project and soliciting funds is a pretty easy process without any sort of formal oversight.

ICO: The birth of cryptocurrencies

When cryptocurrencies first came into existence (the bitcoin network launched in 2009, followed by other altcoins, such as Litecoin, which became public in 2011), users could only obtain new coins by mining them or buying or trading for them.

ICOs debuted in 2013 as a way for hybrid fundraising/early investor model. Again, according to Smith + Crown, projects such as Mastercoin and NXT, were early successes proving the model could work.

Even though today it feels well-established, it’s important to remember that Ethereum launched an ICO in the summer of 2014, drawing wide attention and investment in the Ethereum Foundation, which governs the continued development of the network.

So far a pretty standard operating procedure is emerging. Deviations from this path might be cause for concern or at least warrant a little bit more due diligence.

The crowdsale or ICO is announced via social media or cryptocurrency chatrooms. Then the project makes a white paper (or other foundational explanation) available to the public.

The project should be well outlined and include information about how the technology will work, the terms of the ICO, the founding team, and the project timeline.

Most projects ask for donations or investments in bitcoin or ether and usually provide a single public address for incoming funds.

Just because a new coin provides these details and/or is hyped before the ICO, it’s best to remember that a lot of cryptocurrency projects have failed, or endured some kind of scandal. Some are just straight up scams.