Initial-Coin-Offerings (ICOs) are a method of crowdfunding, that is carried out by cryptocurrency providers and blockchain projects to gain capital. ICOs are unregulated, and therefore do not offer any legal protections to investors. However, inversely with this deregulation, there is a very low barrier to entry for potential investors.
ICOs are comparable to the Initial Public Offerings (ICOS) that companies use to gain capital, by floating on the stock market. However, as previously mentioned they are deregulated.
Investors will give either FIAT currency or other cryptocurrencies to the blockchain company that is performing the ICO, and in return, the investor will receive a pre-established amount of cryptocurrency, relative the ICO. Investors do so with the hope that the cryptocurrency that bought into, will continue to grow and eventually provide them an asset that is much more valuable than the price they paid to invest.
The company who made the ICO, will then generally use the funds that were invested, to grow their business. These companies will normally make an ICO so that they can secure funds for the launch of their cryptocurrency, launching any other products and generally furthering their visions and goals within the blockchain industry.
ICOs are generally used by businesses as a way to side-step the long-winded and expensive traditional securities and capital raising processes.
The massive profits that have been gained by investing in ICOs have created a market that was initially full of blind optimism and a total lack of caution from investors. This is understandable, due to the huge gains that certain people have made from blockchain so far. However, this has created a situation where scammers are a real problem in the blockchain industry. With some estimates stating that over 70% of ICOs that were launched in 2017, were scams.
Due to this, there has been a new-found caution around the market. This has also led to people slowly transitioning from traditional ICOs to Security Token Offerings (STOs).