Traditionally, there are a number of ways available for companies to raise funds necessary for development and expansion. A company can start small and expand as its profits grow, remaining indebted only to company owners but having to wait for funds to build up. Alternately, companies can look to outside investors for early support, providing them a quick inflow of cash but typically coming with the trade-off of giving away a portion of ownership stake. Another way is that companies go public, earning funds from individual investors by selling shares through Initial Public Offering (IPO), Security Token Offering (STO) or Initial Securities Offering (ISO).
In the last decade, the cryptocurrency market has slowly been cultivating into the mainstream. Initial Coin Offering (ICO) is making rounds among startups as a crowdfunding mechanism to fund the project development. But before we talk about the vast aspects of ICO, do we even understand the cryptocurrency basics as in what a token is and how it’s different from a coin?
In this article we intend to cover these crypto technical terms – token, coin, ICO so you can get a grip of the ins and outs before you take the plunge in this disruptive space.
Is Token and Coin the Same?
For those who are not completely sure how the world of cryptocurrencies work, it can be tough to differentiate between token and coin. Whilst they do have many similarities, both are essentially very different.
Simply put, a coin is a standalone currency that is completely independent of any platform. Examples include Bitcoin, Litecoin or Dash. Whereas, a token is a unit of value that can represent a service, or utility, as well as a value but it always needs another platform to operate on. Examples include Ethereum, Neo, Tether, and Gas.
So just to confirm once again, no they are not the same thing.
In terms of function, a coin is a means of payment whereas a token has a much wider functionality. In other words, you can buy or sell things with a coin, whereas with a token you are more than likely to just be able to exchange it for a service, or a coin.
ICO & Token Sale
What is an ICO?
An Initial Coin Offering (ICO) in the cryptocurrency space is equivalent to an IPO in the mainstream investment world. A company looking to create a new digital coin, app, or service launches an ICO. Then, interested investors buy into the offering, either with fiat currency or with pre-existing cryptocurrency tokens like Ether. In return for their support, investors receive a new digital token specific to the ICO. Investors hope that the token will perform exceptionally well into the future, providing them with a leading return on investment. The company holding the ICO uses the investor funds as a means of pursuing its goals, launching its product, or starting its digital currency. ICOs are used by startups to bypass the burdensome and regulated capital-raising process required by venture capitalists or banks.
ICO benefits for Investors
Early investors in an ICO operation are usually instigated to buy cryptocoins in the hope that the project becomes successful once it launches. If this happens, the value of the tokens they purchased during the ICO will rise above the price set during the ICO itself, and they will achieve overall gains.
Indeed, ICOs have made many investors into millionaires in 2017. But according to statistics provided by ICObench in December 2018, the total funds raised on ICO has been decreasing gradually during 2018 as well as the average funds raised.
According to the December 2018 ICObench report, the total number of published ICOs exceeded 5K with 4.3K out of total ended and the rest is either ongoing or upcoming. The average monthly number of ICO listings for 2017 was 290. The highest number of ICOs to complete in 2018 was a total of 166 ICOs.
A Token Sale or Token Launch refers to tokens generated using the Blockchain network e.g. Ethereum. Ethereum tokens are generated by SCS’s (Smart Contract Systems) and are multi-functional. They are units of transaction or representative of specific items for specific purposes, and the possibilities are almost endless.
TOKEN SALES is not different but one of the stages of the ICO Campaign
Let’s understand the ICO process/stages as below:
Whitepaper – When a startup company in cryptocurrency wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper. Whitepaper, which is the first stage of ICO, states what the project is about, the objective of the project, how much money is needed to undertake the venture, the allocation of the digital tokens, the total budget of the project, and how long the ICO campaign will run for. Investors can get a fair idea about the project by just going through the whitepaper of the startup firm.
Token Sales – The purpose of the token sales is a crucial stage after White Paper. In this stage, you have to ensure that how you are going to attract your contributors with the token issued to them. Investors do their research into the soft and hard token cap number and their implication.
Pre ICO – During the Pre ICO stage, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens. This is also the last chance for the people to get the lucrative discount on token sales.
Unsuccessful ICO – If the money raised does not meet the minimum funds required by the company, the money is returned to the early backers and the ICO is deemed to be unsuccessful.
Active (Ongoing ICO) – If the funds’ requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it. This is the most important stage not only for the company but also for investors because the token has already survived the early stage and reach the soft cap. So from here, people who are engaged with it are at minimum risk.
With tokens and ICOs, you can never really be assured of their success, or even the legitimacy of the people behind it, so you need to be completely sure that you do your research properly before investing any money.
However, ICOs and token sales will keep on growing and developing in the next few years.