What Is an Initial Coin Offering?

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.

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.

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 a coin through a cryptocurrency exchange.

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): 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.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

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