Initial Public Offering (IPO) has been the leading way for companies to raise funds. That is apart from private funding. Things are, however, beginning to change with the increased crypto use.
Most currencies are embracing the Initial Coin Offering (ICO) as a way to gain funding. It involves the use of cryptocurrencies.
This analysis looks into everything to know about ICOs. It seems the concept and how it works. It also covers the impacts on cryptocurrency trading.
What is an ICO
An ICO is where DLT-based ventures create cryptocurrencies and distribute them among investors. The companies use this as a means to raise capital for start and operation.
Over $28b was raised in ICO between 2016 and 2018. Around 1601 ICO campaigns occurred in this period.
How ICO Works
An ICO involves a detailed process that looks to leverage technology, finance, and the law. It rolls these to make use of the decentralized systems of blockchain technology in capital raising.
The ICO process involves;
1. Identifying potential investors
Every company needs money to start. The first step to securing the money is by looking for potential investors. After which, they come up with materials relating to the investors. They can only buy into the idea if it’s relatable.
2. Creating tokens
With a potential investor in mind, the company can create a token. A token is a representation of a utility or an asset in the blockchain. They are like shares in IPOs. The only difference though, is that tokens don’t give an equity stake of the company to the investor. It instead offers a stake of a product within the company. They are also tradable and fungible.
Tokens are relatively easy to create. There is no need to start from scratch, building a commodity.
Companies can rely on support like Ethereum. It supports the establishment of other tokens on its platform.
3. Promotion campaign
The next phase is to reach as many people as possible. The token goes into a market mode. Most of the marketing plans are online-based. This way, it gets to reach many users. Some campaigns had also been using celebrities and other public figures.
Most social media sites are, however, banning ICO adverts. This follows several cases of scam launches. There have also been cases of celebrities arrested over failure to disclose payment to advertise.
Either way, they still have to reach the intended audience. Some ICOs offer a promotional gift. They provide free tokens for early investors. Some also offer referrals and affiliate marketing.
4. Initial offering
This is the point where investors get tokens while the company gets funding. Most of the time, the funding is in the form of Bitcoin and Ethereum.
The company can present the offering in several phases, depending on needs. The investors meanwhile wait to gain from the tokens in the future specified data. They can also sell them off once the value rises.
Impacts of ICO on Cryptocurrency Trading
ICOs have changed how companies raise funds for the better. That is why they have been growing in popularity. Most virtual currency users regard it as fundraising for the future. It means it’s only a matter of time before the extinction of IPOs.
Here are some of the significant impacts of ICOs on cryptocurrency trading;
1. Increased Institutional Investors
For a long time, institutional investors have been wary of cryptocurrencies. They have shied off due to the volatility and unregulated nature of cryptos. Investing In cryptos has been full of uncertainty. Institutional investors would not take such risks.
As cryptos become integral in fundraising, then they would have to join. Most of the institutional investors have been the leaders in the IPO. Banks are the platforms for offering shares. A dying IPO means they have to look for alternatives. Cryptos, for now, provides the best option.
The institutional investors are always willing to embrace change. That is when they can make the needed gains.
2. Increase Crypto Acquisition
One of the reasons for crypto growth is its usefulness. And nothing gives cryptos usability as its role in ICOS. Most of the crypto tokens rely on the existing cryptocurrencies like Ethereum to operate.
After a successful ICO, the tokens tend to grow into digital currencies of their own right. This has seen a bulging number of virtual currencies in recent times. As the cryptos become part of the market, it keeps expanding.
Increasing ICOs means more acquisition than ever before. It will, with time, become more mainstream, leading to even higher liquidity.
3. Increased Regulation
Even though cryptos are becoming integral, they still come with concerns. Scams in ICOs are the major challenge at the moment. For example, Giza raised more than $2.4m in a fake scam in 2018. It involved more than 1000 investors.
As long as these concerns persist, there is a need for regulation. Several countries are coming up with regulations to ensure investor safety. The European Union is leading in providing open space. It recently released a detailed regulatory framework for crypto-assets.
This would cover everything crypto-related. It would look into the coins, exchanges, service providers, and the ICOs.
In some countries, the current financial regulations apply to ICOs. For example, the US Securities and Exchange Commission (SEC) froze FlexCoin’s $15m raised in 2015. The company was promising an unattainable 1354% in returns.
Started almost a decade ago, crypto influence is ever-growing. Of all the sectors, the financial sectors remain the most disrupted. Cryptos have impacted transactions and cross border money transfer. It is now upto how companies raise funds.
IPOs have been the to-go-to way to raise funds by companies. It involves a lengthy bureaucratic process before going live. It is also costly as it requires documentation and compliance. Still, the IPOs are limiting as it mostly for local investors. All these are different when it comes to ICOs.
The ICOs are offering a convenient means for companies to raise funds. There is no need for documentation or regulatory threshold to meet. The company can offer the tokens immediately after declaring an interest.
The ICO is impactful to digital currency trading as it has increased institutional investors take up. It has also increased acquisition and improved regulations.