An ICO (Initial Coin Offerings) is a means of raising funds for a new cryptocurrency venture. Its unregulated nature is a huge selling-point for startups who do not want to have to undergo the vigorous financial testing inherent with banks loans and venture capitalists. Usually, a startup firm will develop a proposal akin to a business plan showing exactly what the project entails and what the expected returns will be.
Interested investors can buy into the venture through the purchasing of tokens – similar to stocks – using flat or virtual currency. If the business venture is successful, its crypto coin value will increase. An example of a successful UK based ICO is Stratis, where the business offered the opportunity for companies to set up and test apps without the need to set up their own infrastructure. Those who invested at the very beginning saw their invest increase by 56,000%.
Crowdfunding allows startups to obtain funding by asking a large number of people to fund small amounts. Usually, a crowdfunding venture will use incentives increasing in value depending on how much a person invests. An example of a successful venture would be the game Exploding Kittens, where the original concept was placed on Kickstarter by its creator and is now widely available online and in shops and supermarkets.
There are two biggest differences between ICO and crowdfunding:
1) Real versus virtual money
This is a generalisation, but crowdfunding tends to work for fiat currency whereas ICOs rely on the usage of cryptocurrency and blockchain technology.
2) Buying a product vs invest opportunity
Those who buy into a crowdfunding venture are usually paying for early access to a product or to buy the product at a reduced rate when it becomes available due to their investment. ICOs, on the other hand, are investment schemes, offering both a greater gamble and the offer of a greater final payoff.
Crowdfunding is quickly losing ground to the new ICO framework. For those starting out with a new business venture, ICOs are more tempting because they are run as a proper investment scheme. The investor is taking the gamble with you, whereas with a crowdfunding project the investor is expecting a specified return, usually in the form of a product. For investors, an ICO, though a gamble, offers far more lucrative returns with a monetary value, rather than the product based service offered by crowdfunding. If you are looking to startup a business, or are looking to invest, ICOs may be the best avenue for you to raise capital rather than using the older crowdfunding model.