By conducting an ICO, a project creates a certain number of digital tokens and sells them - usually in exchange for other coins, such as Bitcoin or Ether.
Why would anyone buy tokens of some company?
There are several reasons. For example:
The token will benefit the owner in the future by helping to use the services of the project when it starts.
When the project becomes popular, the token price will increase. So, having invested a small amount, one can get much more after some time.
Tokens are usually traded on stock exchanges: initial buyers sell their stocks there, and those who want to invest money pick out items of investment.
Some history
The first ICOs were carried out in 2014 - 7 projects raised $ 30 million. By the way, at the same time, the world heard about ethereum. As a result of the Ether sale, $ 18 million was attracted.
2015 was a quieter year: there were only 7 ICOs, they raised a total of $ 9 million. The largest of the projects, Augur, attracted more than half of this amount - $ 5 million.
In 2016, the ICOs began to gain popularity. Tokens were sold by 43 projects who raised $ 256 million.
There was a burst of activity in 2017. ICOs were conducted by 342 companies which attracted only $ 5.4 billion. Here we had a tendency shown up that had to be fought over the next year. In a hurry, investors looked only at the concept of projects, almost ignoring their technological side.
As soon as the sale of tokens gained popularity, the US Securities and Exchange Commission (SEC) drew attention to the ICOs. Now, if the token had a security characteristic (gave ownership of something or promised income in the future), then it was to be regulated in accordance with the US Securities Act.
Why is ICO profitable?
For startups and developers:
The fastest way to get financing.
Ability to create new decentralized applications quickly
Quick project test: the users base allows you to test the business ecosystem without the participation of a large number of users
No need to use the equity in the project
Almost no limit on the investment amount
Investors
Access to innovative service
Possible profit due to project development
Participation in a new concept, role in the development of a new technology
Risks
For a startup or developer:
No clear rules for controlling tokens.
Investment instability (if users don’t like the project, it will definitely affect its final cost)
Nontransparency of the target audience (it is not clear who bought and works with project tokens)
For the investor:
No guarantee that the project will be implemented.
No detailed information about the project and its basic principles
Nontransparency of token allocation structure
Development forecast
Now the popularity of ICO is growing. The market is growing, investors are becoming more experienced, and the quality and viability of business models are improving. Most likely, new types of tokens will appear in the future.
Regulators will pay more attention to ICOs, which means that there will be advisers who help projects to approach ICO correctly from a legal point of view, and banks that work with investors.