What Is an Initial Coin Offering?

Initial Coin Offering (ICO) Explained

An investor buys coins from an ICO.
•••

Tim Robberts / Getty Images

An initial coin offering (ICO) is a term for the initial release of a new digital asset. Like an IPO in the stock market, an ICO is the first time new buyers can tap into a currency. But an ICO isn’t limited to cryptocurrencies like bitcoin and ethereum. Companies also use them to raise funds, just like companies entering the stock market. Learn more about initial coin offerings and if they make sense for you.

Definition and Examples of Initial Coin Offerings

An initial coin offering is the launch of a new coin, a type of digital asset. While ICOs may launch new cryptocurrencies, those are often created through a different process called mining. ICOs work more like the launch of new stock.

When an ICO takes place, a large group of investors can buy the coin. Unlike a regular stock market account, however, coins in an ICO are generally created and distributed using o a blockchain, the technology behind cryptocurrencies and other modern asset tracking solutions.

Cryptocurrency website Coindesk maintains an updated list of current and upcoming ICOs. Before you buy, however, it’s important to understand how they work and the risks involved.

  • Term: Initial Coin Offering
  • Acronym: ICO
  • Definition: An initial coin offering (ICO) is a crowdfunding event to raise money for a new cryptocurrency asset, company, or venture.

How Initial Coin Offerings Work

Initial coin offers typically start with a new or established company that’s looking to raise capital for growth. Traditionally, many companies would turn to angel investors, venture capital, or a stock market IPO to raise funds.

For practical purposes, you can think of a digital coin as equivalent to a share of stock. When a business has an ICO, it sells coins for dollars. The new currency should theoretically follow the value of the company or underlying service. That’s why the SEC often treats ICOs similar to other securities offerings and requires compliance with its laws.

ICOs can be quite risky. In one case, the SEC charged an ICO founder with defrauding investors amid a $42 million ICO launch.

Unlike traditional investments, ICOs may not be insured by the Securities Investor Protection Corporation (SIPC), so you have little recourse in the event of fraud.

But when ICOs go well, everyone involved may be a winner. Ethereum was released through an ICO in 2014. The initial sale minted seven million new ether coins worth about $2.2 million in the first 12 hours, according to cryptocurrency exchange Gemini. At the time it went live, ether was worth around $0.30. Today, one coin is worth over $3,000; that’s a huge ROI.

Types of Initial Coin Offerings

ICOs typically take place as private or public events. Private ICOs are typically limited to accredited investors, and the company has more control over who invests and can enforce minimums. With a public ICO, anyone can buy the coin through a cryptocurrency exchange.

Beyond those two main categories, you may find these types of ICOs when browsing the coin markets:

  • Security token offering (STO): A security token offering is most similar to an IPO because the coin acts as a share of stock. These are heavily regulated by the SEC.
  • Interactive initial coin offering (IICO): An IICO is a type of ICO where there is a limit on how much each investor can buy. This ensures more people can participate.
  • Initial supply auction: An initial supply auction is a strategy of releasing a coin by setting a high initial price and lowering it until an active market price is achieved.
  • Simple agreement for future tokens (SAFT): With a SAFT token, initial buyers are protected by a contract that gives the token a future use case. These are quite risky, as it’s the equivalent of investing in a pre-revenue startup.
  • Airdrop: Airdrops are a fun way to pick up new coins. With an airdrop, the company gives away a small number of coins for free to help seed a new market.

Some currencies and coins launch with no ICO. These coins are mined from the start. Litecoin is an example of a cryptocurrency that didn’t have an ICO.

Alternatives to Initial Coin Offerings

ICO’s present an interesting, albeit risky, investment opportunity. If you don’t think you can stomach the risk, there are a wide variety of investment alternatives. 

Instead of an ICO, you can focus on individual coins and wait to see which cryptocurrencies find the most use and popularity. Some coins flop while others skyrocket. It’s hard to be sure which ones will do well initially, so you can wait to see what happens before investing.

If you’re new to cryptocurrencies, the best place to start could be an established option like Bitcoin or Ethereum. As more cryptocurrency ETFs and mutual funds become available, they may also act as a route into the cryptocurrency markets without investing in an ICO.

Initial Coin Offerings vs. Initial Public Offerings

Initial Coin Offering Initial Public Offering
Asset Created Cryptocurrency Coin Share of stock
Regulated Sometimes Always
Risk Level Extremely high risk High risk

We’ve compared ICOs to IPOs a few times so far, but it’s also important to note how they are different. Here are some key features of ICOs and how they differ from IPOs:

Pros and Cons of Initial Coin Offerings

Pros
  • Relatively new investment asset

  • Open to almost anyone

  • Potentially high returns

Cons
  • Not always regulated

  • Very high risk

Pros Explained

  • Exciting investment asset: ICOs and cryptocurrencies are a newer asset class with unique features. Many enthusiasts find cryptocurrencies to be fun and exciting investments.
  • Open to almost anyone: Nearly anyone in the world can participate in the open cryptocurrency marketplace. You just need a cryptocurrency wallet to get started.
  • Potentially high returns: Some coins yield astronomical returns to long-term investors.

Cons Explained

  • Not always regulated: While securitized ICOs should fall under SEC regulation, many ICOs are not regulated or skirt the rules.
  • Very high risk: Unlike traditional, regulated investment markets, you have little recourse if something goes wrong, and there’s a risk that your asset could become worthless.

Are Initial Coin Offerings Worth It?

Initial coin offerings are worth it for investors who don’t mind the speculative risk of volatile, new cryptocurrency markets. If you participate, try not to invest more than you can afford to lose.

For investors who want to take a more stable and conservative approach to their money, ICOs are not a great idea.

What It Means for Individual Investors

The volatility of crypto markets makes them an ideal place for day traders who buy and sell multiple times per day. Passive or conservative investors should take a different approach, keeping their cryptocurrency holdings to a minimum. Even high-ranking strategists at JPMorgan Chase have said investors could keep up to 1% of their portfolios in Bitcoin but they didn’t mention ICOs.

If you want to buy and hold, keeping a small stash of coins, including ones from ICOs, isn’t necessarily a bad idea. Just don’t sink in more than you can afford to lose, and keep your portfolio diversified to offset the risk ICOs present.

How to Get an Initial Coin Offering

If you’re ready to get started with your first ICO, find the coin you want to buy and when it will be released. Sign up for or buy a cryptocurrency wallet that supports the asset, or create an account with an exchange that will let you trade.

Follow these main steps to buy a coin through an ICO:

  1. Open an account with a cryptocurrency exchange.
  2. Set up a hardware, software, or paper cryptocurrency wallet.
  3. Make the ICO purchase from the ICO’s website and send assets to your cryptocurrency wallet.

For the most part, ICOs require exchange accounts but that may not always be the case.

It’s simple, but those steps are easier said than done for people who don’t have a lot of computer or technology experience. If you’re patient and work with a good cryptocurrency service or wallet, you should have an easier time getting started.

Key Takeaways

  • An ICO is the initial release of a new cryptocurrency or crypto securitized asset.
  • Some ICOs are regulated by the SEC, but many are not.
  • Unlike stock market IPOs, an ICO’s lack of government oversight means higher chances of losses and volatility.
  • When you pick the right asset, you could see big returns.
  • If you’re new to ICOs and cryptocurrencies, start small and avoid investing more than you can afford to lose.