By Larry Wright
Let’s say you’re in a position where you have some cash on hand, and you’re trying to decide whether it would be better for you to save it in a bank account or put it to work elsewhere. You have a lot of possibilities running through your mind, and you have trouble picking one. A typical situation, for sure! It’s been suggested that you should never just let your income linger in a bank account doing nothing. You should always put your money to work; that’s one rule you should always hold onto.
Bitcoin and other cryptocurrencies are incrementally becoming the dominant financial system worldwide. As we all know, there has been an explosion of exciting new investment opportunities recently. Initial Coin Offerings (ICOs), often known as cryptocurrency-based fundraising, is one form of investment opportunity now available. There’s another term that often follows ICO, which is IPO. But what is it? Are the two same?
In this guide article, we will explain the primary distinctions between an initial coin offering (ICO) and an initial public offering (IPO). Let’s get going.
What is an ICO?
Initial Coin Offering is an acronym that describes a kind of crowdfunding that is used to raise capital for a cryptocurrency-related venture that is still in the pre-launch stage. During an initial coin offering (ICO), a firm has the opportunity to generate capital for the development of innovative products or businesses by offering prospective participants the chance to purchase a new cryptocurrency token.
Throwing some light on the history of ICO, initial coin offerings (ICOs) were at the height of their popularity when speculators realized they might get their paws on certain tokens at a discount in 2017. Who doesn’t want such valuable tokens, anyway? Nevertheless, this was indeed a huge hit for con artists, who used them to try their hand at soliciting monetary contributions for a wide variety of dubious endeavours, some of which did not even exist.
When a new crypto start-up seeks to raise money via an initial coin offering (ICO), it will often write its ideas on a “white paper” to give investors vital information about the offering. This knowledge will include a description pertaining to the development of the project, its primary goals, which the proposal will strive to accomplish once it is completed, the amount of money needed to undertake the endeavour, and required necessary virtual tokens that perhaps the issuers will maintain for themselves, and a great deal of other significant specifications.
The initial coin offering (ICO) business is responsible for drafting the white paper before to the release of the new currency. When considering whether or not to participate in an initial coin offering (ICO), many prospective buyers first request a draught of the associated white paper.
If approved, tokens are awarded to small businesses for their start-up. The initial coin offering (ICO) fundraising approach is highly advantageous, especially for young entrepreneurs as it allows firms to generate funds by creating tokens on a network (a list of facts safeguarded by cryptography) and afterwards transferring those in return for economic support. This technique is known as the token sale.
Those tokens, which must be moved throughout the platform and exchanged on bitcoin exchanges, have the potential to fulfil a variety of purposes. For example, they can provide access privileges to a certain business or give them the right to receive dividends from the issuing corporation.
What is an IPO?
Initial Public Offering, or IPO for short, is yet another term that is frequently used in the cryptocurrency industry. This is a description of the procedure that a firm goes through in order to sell shares of its corporation in return for money. In contrast to an initial coin offering (ICO), the fundraising mechanism for standard companies is an initial public offering (IPO) as it brings a company many financial benefits. Not only does IPO assist in a company’s transformation from a small private firm to a public firm with shares and a significant market hold, but it also opens the door for private and public customers alike to participate in the sale.
When it comes to the history of IPOs, it can be noted that the phrase “initial public offering” (IPO) has been a popular term for generations. It can be traced back to the East India company times when Dutch East India Company shares were sold to members of the general population. Since that time, initial public offerings (IPOs) have been utilized by businesses to raise funds from members of the general public in the form of issuing public shareholdings.
Over the course of their history, initial public offerings (IPOs) have been renowned for both rising and falling circulation patterns, though. Due to technological advancement and various other financial concerns, issuance patterns might fluctuate positively and negatively within certain industries.
When a business goes public via an initial public offering (IPO), one of the primary benefits is that it may then acquire funds by soliciting investments from the general investing public. Because of this, share conversions are made simpler, and the firm’s visibility, reputation, and brand persona are enhanced, all of which may contribute to an aggressive growth strategy for the business.
When it comes to analyzing IPO and ICO, a shareholder will get a share of the firm in the case of an initial public offering (IPO), but they will only obtain a token in the case of an initial coin offering (ICO), that would not reflect any shares in the business. This is the primary distinction between the two types of offerings. IPOs are subject to more stringent level of regulation compared to ICOs.
ICO VS IPO: Key Differences?
Initial coin offerings (ICOs) are a brand-new kind of investment opportunity made possible by the emergence of cryptocurrencies. If you really have any capital to invest, your choices are to either go with a well-known firm that is founded on an Initial Public Offering (IPO) or you may promote one of the new companies that use an ICO. Which option would you pick, or what are the key differences between the two?
The initial public offering (IPO) is often reserved for established businesses, but initial coin offerings (ICOs) are more common among start-ups that are still developing their business models and are more prone to taking risks. To demonstrate this point, let’s compare the initial public offering (IPO) to the owner of a farming machinery firm which is 58 years old and the initial coin offering (ICO) to a young computer nerd who is 20 years old and is developing a powerhouse in his basement.
The latter had a reputable and lucrative company, a healthy checking account, and a successful track record in the business world. The second one lacks all of these qualities; he has just begun his ride into this business world.
The goal of making an investment is the same regardless of whether you want to put your money into a young mathematical genius or a known, well-settled, middle-aged entrepreneur. You harbour the dream that the company will expand, and with it, your profits will follow suit.
Now, let’s look at the specific ways in which these two things are different from one another:
Stage
In most cases, an initial coin offering takes place at the very beginning stages of a business or project as discussed in the example earlier. In many cases, the company needs operating cash for it to have any functional items and services and to bring its dream notion or proposal to reality.
As a result, initial coin offerings (ICOs) are associated with a larger degree of risk and need to call for a higher expected return. In contrast, initial public offerings take place at a later point in the growth of a firm. They typically have already a business that is producing income and seeks long-term financing and advancement but just needs to take one step further in their business by distributing shares of their product/service.
Regulation
Regulation is where the second strongest comparison between the two comes into the equation. Unlike initial public offerings (IPOs), in which investors may purchase a share in a company, initial coin offerings (ICOs) often include the sale of security tokens that are disguised as utility tokens. If you really have actually invested in an initial coin offering (ICO), it is possible that your funds may be frozen for some time.
This is because there is inadequate regulatory control of initial coin offerings (ICOs). Initial coin offerings (ICOs) are primarily self-regulated via the use of smart contracts on distributed ledger technology, while initial public offerings (IPOs) are heavily controlled by government regulatory bodies such as SEC, the Securities and Exchange Commission. Consequently, investing in infrastructure offerings of stock is often preferable rather than initial coin offerings (ICOs).
Nevertheless, there’s been some fraudulent initial public offerings in the past too. Even if they are authorized, it does not guarantee the safety of investors; as an entrepreneur, you need to approach with care and ensure that you have done all of your research.
Whitepaper
Companies who are going public for the first time are required to hand out a document known as a “Prospectus” that contains highly critical information regarding the company, corporation, goals, and proven record. Because it is a legal statement, it must adhere to very certain criteria. Contrast this with initial coin offerings (ICOs), where all the entrepreneurs need to do is write a whitepaper, although that step is optional.
This whitepaper will customarily include a characterization of the business situation or market potential, information about the group working on the project, the technological equipment that is being recommended, the current condition of the venture, a roadmap for its advancement, token dissemination, and the framework by which it will be sold. The ICO whitepaper does not need to adhere to any particular criteria, and it is in no way considered a legal document.
Listing Requirements
It is possible to launch an initial coin offering (ICO) before the underpinning cryptocurrency is traded on any exchanges. This ordinary shareholder may participate in an initial coin offering (ICO) and acquire tokens, but if the tokens are never published on an exchange, the participants will never be willing to market their crypto assets.
On the other hand, in order to do an initial public offering (IPO), a company’s shares must first be registered on a marketplace. This assures that both parties will cooperate with one another, which provides the investment with peace of mind.
Beneficiaries
ICOs have been able to function in a manner that is far more effective than IPOs as they eliminate the need for intermediaries like exchanges, brokerages, and regulators. Consequently, an initial coin offering (ICO) can generate far higher profits, which are beneficial to both the purchaser and the organization or project conducting the ICO, as there is no middleman consuming a portion out of your profits. In contrast, initial public offerings (IPOs) are required to pay out brokerage fees of up to 4 percent, along with a variety of additional costs and proportions to the different intermediaries involved in the process.
Profit for Investors
An ownership share on a company’s future profits may be obtained via the purchase of stocks during an initial public offering. Shareholders are paid dividends on an annual basis, the amount of which is determined by the performance of the firm over the course of the year. Investing in a company at a preliminary phase and then selling the shares after its value has increased is still another option to generate income. Recall that buying coins via ICO does not give you possession over the project or any portion of it; this is the most important point.
The token architecture determines many potential avenues for future profit that are available to all investors in the coinage. Hence, it can be deduced that investments in IPOs bestow you some sort of ownership over the business, whereas contributions in ICO doesn’t.
Allocation
The distribution of capital is one aspect where several ICOs have fallen short of competing with IPOs, despite several attempts. For example, some initial coin offerings (ICOs) have an unequal distribution of digital crypto tokens since large investors known as “whales” acquire the majority of the coins.
This exploitation of coins by such giants therefore causes the price to be distorted and makes market manipulation conceivable. On the other extreme, initial public offerings (IPOs) allot their shares using a variety of practical procedures that are validated by authorities and guarantee an equitable distribution of income and wealth. Hence, there are no such whales that’d exploit the system and consume any wealth that primarily falls under your right.
Investor Type
In order for an investor to take part in an initial public offering (IPO), they are required to adhere to and fulfil the stringent conditions laid down by authorities and intermediaries. This involves being in compliance with rules pertaining to “know your customer” policies, as these guarantee the safety of assets and make them regulated and consequently monitored by ruling governmental authorities.
On the other extreme, the majority of ICOs don’t even have any participation criteria, thus, everyone who has a connection to the web is eligible to take part. Nevertheless, this trend seems to be shifting in subsequently new ICOs so as to provide greater customer protection.
Safe and Secure
Now comes the important question- whether an initial coin offering (ICO) or initial public offering (IPO) is a safer and more secure investment option? Well, there is no black and white answer to this question as it’s highly “opinion” based, yet, as per my research, I would say IPOs are safer than ICOs. Initial public offerings are subject to stringent regulations, and the firms that are participating are expected to conform to a variety of codes and standards.
Since IPOs are under the management of governmental authorities, they are constantly being monitored and observed for any fraudulent activities. The initial public offering (IPO) process is distinguished by openness and the availability of information, which enables businesses to make educated choices on their investments. The greater the transparency of a firm, the safer it is to invest in. However, even the most secure organizations that are preparing to launch IPOs have the risk of failing, which will result in the loss of your investment.
ICOs aren’t that at risk either; though there are now no laws in place for initial coin offerings (ICOs) as of now, the enterprise has the potential to either be a tremendous success or an abject disaster.
There is no way for anybody to know with absolute certainty which investments will be lucrative and which will not. Before making a choice on an acquisition, it is necessary to have a healthy sceptical eye for the sake of your very own safety. A little research is no harm.