ICO is short for initial coin offering. When launching a new cryptocurrency or crypto-token, developers offer a limited number of units to investors in exchange for Bitcoin or other major crypto currencies such as Ethereum.
ICOs are amazing tools for raining rapid development funds to support new cryptocurrencies. Tokens issued during the ICO can be sold and traded on cryptocurrency exchanges, assuming there is sufficient demand for them.
The Ethereum ICO is one of the most notable successes and the popularity of Initial Coin Offerings is growing as we speak
A Brief History of ICOs
Ripple is probably the first cryptocurrency distributed through an ICO. In early 2013, Ripple Labs began developing the Ripple payment system and created around 100 billion XRP tokens. These were sold through an ICO to fund the development of Ripple’s platform.
Mastercoin is another cryptocurrency that sold several million tokens for Bitcoin during an ICO, also in 2013. Mastercoin aims to tokenize Bitcoin transactions and execute smart contracts by creating a new layer on top of the existing Bitcoin code.
Of course, there are other cryptocurrencies that have been successfully funded through ICOs. In 2016, Lisk raised nearly $5 million during their initial coin offering.
Still, Ethereum’s ICO that took place in 2014 is perhaps the most prominent to date. During their ICO, the Ethereum Foundation sold ETH for 0.0005 Bitcoin each, raising around $20 million. Using the power of Ethereum smart contracts, it paves the way for the next generation of Initial Coin Offerings.
Ethereum’s ICO, a recipe for success
Ethereum’s smart contract system implemented the ERC20 protocol standard that sets the ground rules for creating other compliant tokens that can be traded on Ethereum’s blockchain. This allows others to create their own tokens, compliant with the ERC20 standard that can be traded directly on Ethereum’s network for ETH.
The DAO is a notable example of successfully using Ethereum’s smart contracts. The investment company raised $100 million worth of ETH and investors received DAO tokens in exchange to participate in the management of the platform. Sadly, The DAO failed after being hacked.
Ethereum’s ICO and their ERC20 protocol outlined the latest generation of crowdfunding blockchain-based projects through initial coin offerings.
This makes it very easy to invest in other ERC20 tokens. You simply transfer ETH, paste the contract into your wallet, and the new tokens will appear in your account for you to use however you like.
Obviously, not all cryptocurrency ERC20 tokens live on Ethereum’s network but pretty much any new blockchain-based project can launch an Initial Coin Offering.
Legal status of ICOs
When it comes to the legitimacy of ICOs, it’s a bit of a jungle. In theory, tokens are sold as digital goods, not financial assets. Most jurisdictions have yet to regulate ICOs so assuming founders have an experienced lawyer on their team, the entire process should be paperless.
Nevertheless, some jurisdictions have become aware of ICOs and are already working to regulate them similarly to the sale of shares and securities.
In December 2017, the US Securities and Exchange Commission (SEC) classified ICO tokens as securities. In other words, the SEC was preparing to crack down on ICOs that they considered misleading investors.
In some cases the token is just a utility token. This means the owner can only use it to access a specific network or protocol in cases where they may not be defined as financial security. Still, equity tokens whose purpose is to appreciate in value are pretty close to the idea of a security. To be honest, most token purchases are made specifically for investment purposes.
Despite the efforts of regulators, ICOs are still stuck in a gray legal area and until a clear regulation is imposed entrepreneurs will try to benefit from initial coin offerings.
It’s also worth noting that once regulations are finalized, the cost and effort required to comply may make ICOs less attractive than traditional funding options.
For now, ICOs remain an amazing way to fund new crypto-related projects, and many more have been successful.
However, keep in mind that everyone is launching ICOs these days and many of these projects are scams or lack the solid foundation they need to thrive and make it worth investing. For this reason, you must thoroughly research and investigate the team and background of any crypto project you wish to invest in. There are several websites that list ICOs, just search on Google and you will find some options. .