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What makes an ICO different from an IPO?

23 December 2020 | ZebPay Trade Desk

The world was ready for digital currency and Bitcoin was born, and soon after the concept of owning digital assets came into existence. 

ICO (Initial Coin Offering) is pretty close to the well-established IPO (Initial Public Offering) with two major differences:

  • It is connected to blockchain technology.
  • It does not entail owning a stock/share in a future company.

In an IPO, an investor receives stocks/shares in exchange of an investment. The Initial Public Offering (IPO) is a well defined and documented process initiated by a private company in order to expand and become publicly traded. It involves some formalities in the duration of the process. IPO refers to the public sale of the shares of a company, with the goal of collecting funds for development.

In the case of an ICO, there are no shares, but instead companies raising funds via ICO provide a blockchain equivalent to that (a cryptocurrency asset). In most cases, investors pay in a popular existing token such as Bitcoin or Ethereum and in return receive ‘n’ number of new tokens in exchange.

Key Differences Between ICO and IPO:

When a company wants to issue an IPO, it creates a legal document called a prospectus. This is a legal declaration that has to include key information about the company and the IPO.In the case of ICOs no legal document is required. They have a document in the form of a white paper where everything about the project and its purpose is explained. 

There are some requirements that a company must accomplish in order to list its shares via an IPO. This entails a track record of earnings, which must be audited by a professional accounting firm. In the ICO process, companies do not have to have a track record or any regulatory framework. Most ICOs have just a white paper, and that too is not necessary.

The IPO process is a long process that can take up to 6 months. That is because of the requirement of legal processes. But the ICO process is much shorter. The duration of an ICO depends on the nature of the project. When a company issues white paper and a smart contract, they can start with the crowdsale. The duration of a crowdsale depends on the project and its maximum hard cap, and it usually takes up to 1 month.

IPOs are primarily oriented to  institutional investors such as banks, though retail investors also participate, but only to a limited extent. On the other hand, ICOs are opened for anyone. All you need to have is a currency of Bitcoin or Ether which you will convert into the token of the particular ICO.

Startups and ICOs:

ICO’s are a relatively new concept, yet these days many start-up’s prefer ICO’s as a mode to raise capital rather than IPO’s. This is due to the inherent advantages that an ICO provides for start-up’s and it’s owners:

  • Full Control: The owner is not sharing his/her company with an investor. He/She gets the capital, and yet retains full control over the company.
  • Globalization: While some companies go door to door seeking  investors, with ICO one can immediately raise money from anybody anywhere in the world.
  • No Regulation: That means no bureaucracy, and hence much more cost effective and efficient. 

It’s also worth noting just how easy it is for a company to launch an ICO to create tokens. There are online services that allow for the generation of cryptocurrency tokens in a matter of seconds.

Investors and ICOs:

Investors should keep in mind that, when considering the differences between shares and tokens; a token does not have any intrinsic value or legal guarantees. Early investors in an ICO operation are usually motivated to buy tokens in the hope that the plan will succeed after it launches. If this actually happens, the value of the tokens they purchased during the ICO will climb above the price set during the ICO itself, and they will achieve overall gains. This is the primary benefit of an ICO, and that is the potential for very high returns.

As ICO’s have come to the forefront in the cryptocurrency and blockchain industries, they’ve also brought along challenges, risks, and unforeseen opportunities. As ICO’s are largely unregulated, ICOs are prone to fraud and scam artists looking to prey on poorly informed investors. And since they are not regulated by financial authorities,  funds that are lost due to fraud or incompetence may never be recovered.

 To avoid getting caught in ICO scams, investors should:

  • Make sure that project developers can clearly define what their goals are. Clear, straightforward and concise explanations should be given in whitepapers pertaining to the token.
  • Research and get to know the developers, to ensure complete transparency prior to the ICO launch.
  • As nobody governs an ICO, the developer is responsible for ensuring that the ICO is legitimate. Investors must do their due diligence and understand the terms and conditions associated with the ICO before investing.
  • Ensure that the ICO funds are stored in an Escrow wallet. This is useful protection against scams, particularly when a neutral third party is a holder of one of the keys.

Conclusion:

The way in which companies raise capital through investor funding has come a long way in recent years with the likes of crowdfunding campaigns and ICOs. Some might argue that company funding via IPOs could very well be a thing of the past sooner than we think. ICOs present numerous benefits over IPOs such as their vast outreach, efficiency,decentralization, and large interest. While there are negative aspects of ICOs in which IPOs do not have, these things will soon be worked out with the advent of regulation and growth in the industry. All in all, the future looks bright for ICOs.

In ZebPay’s weekly reports and insights compiled by the Trade team, we aim to provide market updates, technical analysis, breakdowns of new coin launches, and more. All to help you unlock the full potential of trading and investing on ZebPay. Happy Trading!

References:

https://www.investopedia.com/

https://coinmarketcap.com/

https://hackernoon.com/

https://cointelegraph.com/

Disclaimer :

This report is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. The Company has prepared this report based on information available to it, including information derived from public sources that have not been independently verified. No representation or warranty, express or implied, is provided in relation to the fairness, accuracy, correctness, completeness or reliability of the information, opinions or conclusions expressed herein. This report is preliminary and subject to change; the Company undertakes no obligation to update or revise the reports to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events. Trading & Investments in cryptocurrencies viz. Bitcoin, Bitcoin Cash, Ethereum etc.are very speculative and are subject to market risks. The analysis by Author is for informational purposes only and should not be treated as investment advice.

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