ICOs and IPOs - Two Different Ways For Businesses To Raise Capital

What is IPO?

An IPO (Initial Public Offering) in its present form refers to when a company offers its shares for purchase to the public for the very first time. The company does this through investment banks known as underwriters. There are very stringent regulations all over the world that govern IPOs. This means that a company needs to have years of healthy activity before it can raise money from the public through an IPO.

What is ICO?

An ICO (Initial Coin Offering), on the other hand, is a recent phenomenon that started in 2013 with Mastercoin’s ICO. An ICO refers to when a blockchain company raises money from the public by offering its own “coins” or cryptocurrency in exchange for fiat currency or established cryptocurrencies like Bitcoin and Ethereum. It’s a completely decentralized, way of raising money from retail investors. However, ICOs have resulted in many scams and failed projects too.

Unlike in IPOs which require years of healthy activity and steady revenues, an ICO can be done with as little as a proof of concept. In some cases, ICOs have gone through with just a whitepaper, some partnerships, and good media relations.

They are offered through decentralized platforms that are regulation resistant (although countries like China, South Korea, and the USA have started regulating them recently). This has made them increasingly popular among blockchain startups as a way to raise funds.

In fact, $6.2 billion was raised through 875 ICOs in 2017, and this number had already been surpassed by April 2018. This has been an exponential jump from 2015 when $6 million was raised through 3 ICOs. However many of these were legit and survived, however, are much less than those which were started.

The 3 Biggest ICOs in 2018

Although 2018 has seen a sharp fall in Bitcoin and other crypto prices, and has brought with it a fear that the blockchain bubble is about to burst (it probably has, in part at least), there has still been a total of $7.3 billion raised through as many as 1,181 ICOs.

$4.1 billion of this was raised by Block.one for its much-awaited scalable contracts platform EOS, making it the largest ICO in history. EOS is a blockchain platform for the development of decentralized applications. It is similar to Ethereum in functionality but many believe its focus on security and scalability will make it far superior to Ethereum.

This was followed by the Telegram messaging app’s ICO which raised $1.7 billion. This money will be used (it is said) to develop a blockchain network, the Telegram Open Network, which will allow Telegram’s users to pay for services on the blockchain using the cryptocurrency Gram.

Another big ICO in 2018 was the DragonCoin ICO that raised $320 million. Dragon coin will act as a low-cost and transparent financial mechanism within Casinos. DragonCoin has been created by the British Virgin Islands-based Dragon Inc.

Are ICOs Riskier than IPOs?

An IPO does carry with it the risk that the price at which a company makes its Initial Public Offering may fall in the near future with changes in the company’s performance and market speculation. The fact that a company going for an IPO has a massive track record on which the share price is based on reduces this risk greatly.

For investing in ICOs on the other hand, most people often have little more than a whitepaper and media hype to go by. Moreover, making the right investment decisions when it comes to ICOs needs a lot of in-depth expertise which most retail investors lack. Finally, the fact that ICOs are decentralized and largely regulation-free makes them more prone to frauds and companies unable to produce the results they promised. This makes ICOs a much riskier proposition for small investors.

ICOs are still in their infancy and will see many more changes and adaptations as they continue to mature. As of now, they are a new and interesting alternative to the conventional way of raising money from the public. Here’s an infographic that will help you better understand the differences between IPOs and ICOs:

This infographic was created by Cyberius

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