What is an ICO? Initial Coin Offerings Explained

Key Takeaways

New cryptocurrency projects require funding in order to launch. One way to raise enough money for the development and marketing costs of a new crypto project is launching an ICO. But what is an ICO, and what does it offer crypto users? 

In this article, we’ll explain initial coin offerings. We’ll cover how it works, how to avoid ICO scams, what makes an ICO different from an IPO and the advantages and disadvantages you should be aware of.

What is an Initial Coin Offering (ICO)?

An initial coin offering  – or ICO – is a way for aspiring crypto projects to raise funds. It sees the project launch its own native token or coin, and offer those tokens to the market at a low price to fund the development of the project. The tokenomics such as supply, distribution and utility are all determined by the team behind the project.

Anyone with knowledge of crypto can launch an ICO, and until relatively recently, the practice was unregulated. The absence of barriers to entry, coupled with promises of huge profits in the crypto space gave rise to the ICO boom of 2017, when hundreds of new crypto projects launched via this crowdfunding approach. 

How does an ICO work?

 A project using an ICO offers its native token to the community at a low price to raise capital and develop a project. There are a couple of different distribution models projects can use to achieve this.

Static supply and static price

With a static price and supply, there is a limited amount of tokens and the price is constant.The project has a specific funding goal in mind and investors can buy as many tokens as they want until the supply runs out. Example:

Token price starts on $0.25 on day one and it won’t change for the duration of the ICO event. Early investors don’t have any sort of advantage.

Static supply and dynamic price

The second method combines a static supply with a dynamic price and funding goal. The ICO token supply is capped and concludes when the supply runs out. The amount raised by the ICO determines the price per token. Example:

At the start of the ICO, the price per token might be $0.05. As the project gathers funding, the price of each token can increase to $0.10 or even more.

Dynamic supply and static price

In this scenario, the token price remains a constant but there’s no limit on the number of tokens that’ll be sold. The more funds the project gathers, the more tokens will be added in circulation. Example:

If a token sells for $1 and the project gets $1 million in funding, that’s an additional 1 million tokens added to the max supply. If the funding grows to $100 million, then 100 million tokens will be added and so on.

The ICO ends when the time for the event runs out or the project meets its funding goal.

What’s the point of an initial coin offering?

The point of an ICO is to provide enough funding for a cryptocurrency project so it can launch at a later date. 

In theory, it’s a win-win situation for everyone involved. Investors get potentially good returns by buying tokens much earlier at a preferential price and the team receives the necessary money to bring their project to life. What could go wrong?

ICO scams explained

The structure of an ICO makes for a great launchpad for different types of crypto scams. Add to that the fact that ICOs are mostly unregulated by a governing body and usually not very transparent. The result you have is the Wild West of crypto. Investors putting their money in an ICO are often in high-risk territory, once invested the money’s not coming back for some time, if ever. Here are a few examples of the most common ICO scams we’ve seen in the past:

• Pump and dump/exit scam
• Bounty scheme
• Whitepaper plagiarism
• Fake websites
• Ponzi schemes

Pump & dump scam

A pump and dump is when developers of a fake or low quality project generate hype and makes big promises to potential investors. Victims buy into the project, causing its price to inflate (pump). Once the price is high enough, the scammers (who hold most of the supply) sell their assets and leave investors with worthless tokens.

Bounty scheme

A bounty scheme involves the developers promising “bounties” to users for promoting the scheme on social media and other platforms to increase the project’s reach. The bounty scheme can be disguised as an ambassador program that offers different perks and bonuses to participants. Said bounties are usually never paid out and this method is often combined with a pump & dump.

Whitepaper plagiarism

If you want to know more about a crypto project, your best bet is to read its whitepaper (if there is one). To make the scheme look more legitimate, scammers might copy the whitepaper of an existing project.

Fake website

Another quite common strategy used by scammers is to simply create a fake website. This website is visually similar or even identical to a currently ongoing legitimate ICO. The goal here is to trick investors into sending funds to the wrong address.

Ponzi scheme

In a Ponzi scheme, scammers use capital gathered from new investors to pay old investors. There is no real profit and once the scammers gather enough funds they cut the whole thing off, and disappear with the money. One famous example of a crypto Ponzi scheme is Bitconnect.

How to avoid ICO scams

We’ve gone through all the ways scammers can deceive you, now let’s see what you can do to avoid them. Understanding the blockchain ecosystem is crucial and if you don’t want to become a victim of a crypto scam, you can make use of all the information available online. Before you even consider investing in a crypto ICO, it’s worth checking some boxes.

Read the whitepaper

A project’s whitepaper serves as an introduction to the project and explains the goal it is trying to achieve. This is your chance to understand whether the project has an interesting use case, and therefore a bright future. If not, you may want to reconsider. A use case would mean that the project is solving a problem and doing something different than an already existing project.

Research the developer team

Perhaps the most important aspect of every crypto project is the team behind it. Find out more about the team members, their areas of expertise and past projects they’ve worked on and their social following. Stay on the lookout for any red flags such as connection to past scams.

Check out the community

Once you’ve inspected the team, it’s time to take a look at the community. Which channels is the project active on? What’s the total number of users on each of them? Is there an organic response rate when the project makes a post? 

For example, if a project has millions of followers on Twitter but only gets a few interactions on each post, something is probably not right. Check if the team is also active on community channels. This will give you a good idea of how they handle potential issues and whether they’re transparent with the community. Dodging questions that the community needs an answer to is usually a bad sign.

Beware urgency

You should be especially careful if the majority of the comms on social channels are community or team members trying to create a false sense of urgency and fake hype. Asking users to “buy because it’s going to the moon” doesn’t just look unprofessional but outright suspicious. Think twice before you decide to invest in such projects.

Investigate the smart contract

On the more technical side, you can always check the ICO source code via its smart contract. You can find the smart contract using a blockchain explorer (for Ethereum projects that would be Etherscan). Here you can view the source code to check it’s secure and see the most recent transactions. You can also chcek out the number of token holders and what percentage of the supply each of them is holding, allowing you to scan for potential points of failure.

ICO vs IPO what’s the difference?

As a concept, an ICO is quite similar to a stock company’s initial public offering (IPO), since both methods are used to raise funds. The main difference is that an ICO sells tokens while an IPO sells stock.   IPOs are also heavily regulated by the government but the same can’t be said for ICOs. 

Initial coin offerings and initial public offerings are both methods for raising capital, but they differ in a few aspects:

• Regulation – IPOs fall within the scope of a security, meaning they will always be regulated. ICOs
• Issued Asset – ICOs issue digital tokens to fund blockchain projects. IPOs issue shares of stock in established companies.
• Accessibility – ICOs are available on a global scale and there are almost no barriers to entry. IPOs involve strict disclosure and compliance requirements, making the accessible only to certain groups. 
• Transparency – ICOs often lack enough transparency when it comes to funding rounds, the team, the roadmap and more. As a result of their heavy regulation, IPOs provide more transparency and investor protection.
• Accepted Assets – ICOs accept exclusively cryptocurrencies. IPOs handle fiat currency.

Advantages and Disadvantages of ICOs

ICOs are far from perfect and have their set of advantages and disadvantages:

Advantages of ICOs

• Potential for high returns – The returns of ICOs have the potential to be in the hundreds of times.
• A global audience – ICOs are available to a global audience and can attract a wide range of investors.
• Funding innovation – Cryptocurrency projects aim to push the envelope and develop revolutionary new technology.

Disadvantages of ICOs

• High risk of scams – Due to the lack of regulation, ICO scams are quite common.
• Volatility and uncertainty –  The tokens purchased by investors can quickly lose value depending on the global crypto market performance.
• Limited investor protection – If investors fall victim to an ICO scam, there is little they can do unless they manage to find out more about the people behind the project. With no regulation in the sector, if the team is anonymous to start with, your funds could be lost forever.

Famous examples of Initial Coin Offerings

Ethereum

Ethereum is currently the second-biggest cryptocurrency in the world by market capitalization. Home to a thriving ecosystem with thousands of developers, decentralized applications and millions of users, Ethereum’s humble beginnings date back to 2014 when it had its ICO, offering ETH for $0.31 per coin and raising $18 million. Ten years later the price is over $3000.

TON

Telegram’s blockchain network known as The Open Network (TON) managed to raise more than $1.7 billion back in 2018. Despite some legal trouble and technical delays, TON was launched in 2020. Fast-forward to 2024 and the TON network is not just a reality but one of the top 10 cryptocurrencies by market cap in the world. 

EOS

Created by a private Hong Kong company named Block.one, EOS is an open-source blockchain platform where developers can deploy blockchain games, decentralized applications, NFT collections and more. The ICO lasted from 26 June 2017 to 1 June 2018 and set a record for the largest ICO ever as EOS gathered more than $4 billion. EOS’ native token is also named EOS and can be used for transactions, staking, governance and apps on the network.

Closing thoughts

ICOs are a crypto native funding method giving projects an alternative to traditional financing. This posed both new opportunities and new risks due to the digital nature of crypto ICOs. 

The ICO boom of 2017 made investors wiser and taught them to thoroughly research a project before investing in it. ICOs present great opportunities for both investors and developers but being aware of the risks that they carry is just the first step. To mitigate these risks, crypto investors must have due diligence to safely navigate the ICO landscape.

Frequently asked questions

What was the 2017 ICO boom?

The 2017 ICO boom saw a massive increase in the number of ICOs and funds raised, driven by the surge in interest in cryptocurrencies. Back then, crypto ICOs were largely unregulated, allowing anyone with basic crypto knowledge to launch an ICO.

What was the largest ICO ever?

EOS conducted the largest ICO ever, raising $4.1 billion.

What are the main risks of an ICO?

The main risks of participating in an ICO include falling victim to scams, the lack of regulation in the space, and the potential for significant financial losses.