What are ICOs and how do they work?

What are ICOs and how do they work?

Not every new project has enough resources to fund its operations from the get-go. To receive these funds they use ICOs, which stand for Initial Coin Offerings. This helps them find investors and gather the necessary resources in order to start their project. While running the ICO projects have to provide different kinds of information to the public and show them what their road map looks like.

Here we will tell you everything you need to know about ICOs.

Things to Know About ICOs

  • ICOs are similar to IPOs, but coins that are issued here can have some sort of utilities
  • ICOs are not strictly regulated, so before investing it is necessary to do research and risk analysis
  • ICOs can be structured in different ways. They can have both fixed and variable supplies and prices

What Is ICO?

An Initial Coin Offering is the crypto equivalent of an IPO. Companies that are just starting their operations and need funds to develop their services have the option to offer investors Initial Coin Offerings. Investors who are interested in the project and believe that it will succeed are then given an opportunity to purchase these tokens. These tokens might have some utilities associated with the services provided by the company, or they can just be similar to stocks and represent stakes in the company.

In essence, they are crowdfunding operations that attract investors and give them opportunities to invest in upcoming projects with the possibility of high profits.

"I think there will always be need of trusted voices in the investment community, but what the ICO markets are showing is that the world has incredible demand for future-looking projects!" - Adam Draper

How Do ICOs Work

Using the ICO model, startups and new companies can raise funds by creating their native tokens on the blockchain and selling them to investors. These tokens can then be traded on different exchanges and platforms. Usually, these tokens are either utility tokens that allow holders to use services of the company or security tokens which give investors stakes in the company. It is really important to know what type of tokens are offered when an ICO is run. Utility tokens might not be worth investing in for a specific company, but if they are offering security tokens then investing in them might be beneficial and yield good profits.

Before we discuss what utility and security tokens are, let's take a look at how these ICOs sell their tokens. These tokens can be sold both in fixed and variable quantities and for both fixed and variable prices.

Fixed Prices & Fixed Quantities - Company is selling 500,000 tokens for $5 each

Fixed Prices & Variable Quantities - Company is selling tokens for $5 until the ICO ends in unlimited quantities

Variable Prices & Fixed Quantities - Company is selling 500,000 tokens and prices change depending on how many tokens are sold

Utility tokens

Utility tokens are a sort of access card to the company's future services. If the startup is developing some sort of blockchain-related service by offering utility tokens to initial investors, they are offering their future services to those who get involved at the start. In most cases, utility tokens are not classified as shares in the company. Because of this, they are not being regulated, which many see as a huge red flag.

These utility tokens work similarly to let’s say game developers offering users pre-orders of a game that might not be released for a long time to come and no one knows if the game will turn out well, or launch at all. Filecoin is a great example of a utility token. In 2017, Filecoin ran an ICO to gather funds for their upcoming decentralized cloud storage. Investors poured in more than $275 million and purchased utility tokens offered by Filecoin and in return, they gained access to their upcoming service. 

Security tokens

Security tokens, unlike utility tokens, attain their value from external tradable assets and are subject to different security regulations. This is seen as a safe investment in ICO as companies should abide by different regulations and rules. When the company meets all the regulations and the token gets classified as a security token, it comes with some sort of application, with the best being the ability for tokens to represent shares in the company. 



A whitepaper is a tool that upcoming companies use when running their ICO. Here companies write down important information about the company and its goals. This information can be anything that relates to the company and its success. The most common information you will find in these whitepapers are what the project is about, the goals and ambitions of the project, how long the ICO run for, which cryptos can be used to purchase tokens, how much money the project will need for development, and more things along those lines. These whitepapers are issued prior to the ICOs' start as this is what investors are looking at when making decisions about investing in the project.


Differences Between ICO and IPO

Regulations and oversight are the main differences between Initial Coin Offerings and a stock's Initial Public Offerings. IPOs are more regulated and tightly looked at. Before a company goes to IPO, they need to create different legal documents, one of them being a prospectus. This prospectus is similar to the whitepaper, but companies also have to include their intent to issue their shares to the public and have to meet different regulatory requirements as they are being monitored.

On the other hand, ICOs need to provide similar information and pass similar regulations if they plan on releasing Security tokens. Utility tokens are not considered assets that represent the company. Because of this, projects are free to launch ICOs with no regulations, then can just give up on the project and pocket the money generated by ICOs.

Advantages and Disadvantages of ICO

ICO is a form of investing that is still new to the market. Because of this, with advantages come some problems that ICOs have. Each investor has to do intensive research before making a decision to invest.


Possible high returns - tokens you purchase from ICO have a chance of returning high profits. Usually, these tokens cost less, and if the company succeeds, initial prices might increase by more than 500%.

They are more accessible - anyone can invest in ICOs. Companies usually announce their ICO on social media platforms and let everyone who is interested have the opportunity to invest. While some IPOs are unavailable to everyone for certain reasons.

The most effective way to raise funds - If you have a startup idea that you believe will succeed, raising initial funds for it can be hard as you will be going to different investors and will only be able to present your idea to a limited number of people. But, if you use an ICO it is much easier to get the word out about your startup and raise funds through crowdfunding.


Volatility - When you participate in ICOs you receive cryptocurrencies. As we all know, crypto is known to be volatile, so the price of your crypto might depreciate even before the ICO finishes.

Not beginner-friendly process - To participate in an ICO you need to have some knowledge about crypto wallets and how they work. Because of this, newcomers might find it difficult to participate in them.

Possibility of fraud - ICOs are not regulated when they are offering utility tokens. Because of this, there are different scam projects who launch ICOs and promise good services. In the end, these scam projects don't deliver any final results or deliver mediocre results at best, just so they can say we tried but failed.

"Well I think I'd like to be a little more cautionary about this one of the things that's happened is it's such a popular fundraising vehicle because it has genetic roots with crowdfunding and so one of the problems is is that everybody has like a cousin that is doing an ICO and that is actually a little scary" - Miko Matsumura

FAQs About ICOs

Are crypto ICOs good investments?

They certainly can be. If you do intensive research into the project and decide that the project has good potential to succeed, investing in that project might return high profits. ICOs usually don’t have high prices and in case a company succeeds, the value of the tokens can go up by more than 500%.

Are ICOs legal?

Yes. While ICOs that give out utility tokens are not being regulated and may be run by scammers, ICOs which offer security tokens are fully legal as they are being regulated and need different permissions from governing bodies.

Do ICOs offer a limited number of coins?

It depends on the ICO. The project can decide if its ICO should have a limited number of tokens or not. Alongside the number of tokens, projects can also decide to place fixed prices on tokens or make them variable.