Initial Coin Offering
Initial Coin Offering (ICO) is the mechanism by which Blockchain start-ups gather funds from Investors to kick-start their projects. ICO is not equivalent to a Initial Public Offering (IPO) as it doesn't necessarily translate to Equity (shares); ICO is more akin to a seed A funding or an Angel Investment. It is a good way to gain investor buy-in. ICOs are however exchange traded, making its value (in Fiat currency) dependent on market speculations.
ICOs tokens are created and distributed via smart contracts (usually on Ethereum Platform).
This is a high level mechanism of how ICO works.
- The startup hoping to raise funds issues new crypto-currencies (Token). (In Ethereum or other platforms)
- Dollar value is assigned to the Tokens based on subjective evaluation of the network.
- Investors send crypto-currencies (Bitcoin/Ether) to the company's wallet in exchange of the issued Tokens.
- Supply-Demand in the market determines the prevailing price of the Tokens in the secondary market. [This property makes the token similar to a security and perhaps within the purview of Securities and Exchanges Commission.]
ICOs give better liquidity to the venture capitalist, as they can easily exit the investment by selling their Tokens in exchange of Fiat currency.
There are currently ICOs by companies trying to create platform for Gamers to Artists to Investors to Medical professionals and money more. Coinbase is one of the popular exchanges to buy-sell crypto-currencies, there are many more such as Bitrex and Kraken.