The concept of ICO (Initial Coaching Offering) has many years since it is a way of financing for the emergence of a new entrepreneurial venture, however, it has taken life again thanks to the emergence of cryptocurrencies, because currently they are used to finance the birth of each new cryptocurrency.

What are the ICOs for?

The cryptocurrencies, as we explained in the previous article entitled What is blockchain technology? They are digital assets that are based on a complex security network that is encrypted in such a way that only new tokens can be added if high-level mathematical operations can be deciphered, with the approval of network members as a premise be considered valid.

But all this system requires initial financing so that it can begin to work, there is an investment that must be made in development, purchase of equipment, and initial mining. To put an easier example to understand, an ICO is like the crowdfunding of the cryptocurrencies in which users of a community place money that is already in circulation to finance the new cryptocurrency and that it can begin to circulate.

How do ICOs work?

To understand well the operation of this form of financing it is good to also know a little about the traditional means of financing, which today are known as financing means 1.0. These were a bit simpler methods, based on the concept that any initiative that wants to be brought to reality requires an investment because it has a cost, whether it is higher or lower, there will always be a cost to cover.

The traditional financing or 1.0 basically consisted of three methods quite bureaucratic and difficult to specify how they were the sale of shares, in which they made available to a group of people the participation of dividends of the company, the application for loans or credits banking, with all the complex process and paperwork that implies or the subsidy of some entity, whether public or private.

Given the complexity of this type of system, a few years ago another kind of ways of financing an initiative arose and this is what is known as crowdfunding, collective financing or micro-patronage. A financing method in which money is obtained to finance a project through a network of people, in a previously defined period. At the end of the terms, the money that will be obtained will be the money that will be used to pay the costs of the project that you want to start.

The ICOs would enter what can be called “Financing 3.0”. Its name comes from Initial Coin Offering because its way of capturing the financing is through the sale of a cryptocurrency that is beginning to circulate. This is exchanged for a currency that is already in circulation and with that money obtained the costs of mining and putting into operation are financed.

Influence of ICOs on the birth of Ethereum

Ethereum was one of the first cryptocurrencies to use an ICO to get up and running. In 2013 approximately, they made a pre-sale of some cryptocurrencies and put them on sale to finance all the subsequent work. With this method, they managed to raise around 19 million dollars in bitcoins, and in 2014 they officially launched their cryptocurrency.

This method allowed Ethereum to redefine the traditional financing of cryptocurrencies and mark a milestone that would later be used as a model for other cryptocurrencies that emerged and that copied some of Ethereum’s principles such as Smart Contracts, and of course, ICOs as a method of financing.

Advantages of ICOs

One of the main advantages is that cryptocurrency developers do not have to seek financing through traditional methods but, on the contrary, they can obtain the money they need directly in crypto actives and with greater benefits than they would have obtained through credits, subsidies or even sale of shares.

Another thing is that individual investors can finance really innovative companies directly, only with small figures, which is very positive since the traditional means of financing are tied to a fairly high amount of money, limiting small projects because they do not they will generate enough income to cover too high funding figures.

What do you think about this topic? Did you know this financing method?

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Image of geralt via under the creative commons license.

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