What Is an Initial Coin Offering (ICO)? Benefits, Drawbacks, and Use Cases

What Is an ICO?

An ICO (Initial Coin Offering) is a fundraising method where a project issues new cryptocurrencies to raise capital. Also referred to as a crowdsale or token sale, ICOs are recognized as an innovative mechanism that leverages blockchain technology.

Project developers create new coins or tokens and offer them directly to the public, enabling quick and efficient fundraising. Investors purchase these tokens with the expectation of the project's future growth and returns driven by potential appreciation in token value.

As blockchain technology has advanced, ICOs have gained global popularity and have been adopted by numerous cryptocurrency projects. Compared to traditional initial public offerings (IPOs), ICOs involve a streamlined process—making them a more accessible funding solution for startups and emerging projects. As a new form of fundraising for the Web3 era, ICOs are likely to see even broader adoption in the future.

There is a similar structure known as an IEO (Initial Exchange Offering). In an IEO, a cryptocurrency exchange conducts the token sale on behalf of the project, whereas in an ICO, the company or project raises funds directly from investors.

Advantages of ICOs

ICOs offer multiple advantages that set them apart from traditional fundraising methods. Below, we examine three major benefits in detail.

Lower Barriers to Fundraising

The most significant advantage of ICOs is the low barrier to raising capital. Traditional fundraising through stock issuance (IPO) requires complex processes—such as exchange listing reviews, detailed investor disclosures, and extensive legal procedures—that are both time-consuming and costly.

In contrast, ICOs eliminate these complexities, allowing projects to raise funds quickly and at relatively low cost. Specifically, projects conducting ICOs only need to prepare a document known as a "white paper" and launch a token sale to complete the fundraising process.

The white paper outlines the token details, project objectives, technical specifications, and intended use of funds. Investors review this document to decide whether to participate in the token sale. This streamlined process enables startups and small projects to access funding more easily.

Access to Global Investors

Another key benefit of ICOs is the ability to raise capital from investors around the world, free from geographic constraints. Because ICOs leverage the internet and blockchain technology, they facilitate global fundraising across borders.

While domestic IPOs primarily target local investors, ICOs allow participation from overseas investors—expanding the potential investor base. Projects can conduct token sales on international exchanges or platforms, enabling token purchases by investors worldwide.

This global fundraising model enables projects to secure more capital and accelerate growth. The ability to attract support from blockchain communities worldwide is a major strength of ICOs.

Potential for Substantial Investor Returns

For investors, the main appeal of ICOs lies in the potential for significant returns by investing at an early stage. If the project succeeds and token demand increases, tokens purchased during the ICO can appreciate far beyond their initial price.

Historically, some ICO tokens have multiplied in value dozens or even hundreds of times upon listing. Investors can realize capital gains by selling these tokens at higher prices in the future.

This high return potential has established ICOs as a popular investment method. However, alongside these opportunities, ICOs also carry risks—so investors should exercise caution in their decision-making.

Disadvantages of ICOs

While ICOs present several advantages, investors must also be aware of the associated drawbacks and risks. The following outlines two key disadvantages.

Risk of Fraud and Misconduct

One of the greatest disadvantages of ICOs is the heightened risk of fraud and misconduct. Because regulations are comparatively lax, there have been multiple instances of malicious projects deceiving investors and absconding with funds.

Some projects provide misleading business models or propose unachievable plans, only to abandon development after raising capital. It is also common for projects to exaggerate feasibility, overstate business models, or neglect to specify the actual utility of their tokens.

Investors should carefully scrutinize the white paper, verify the track record and credibility of the project team, and assess technical feasibility. Additionally, reviewing community reputation and third-party evaluations can help identify fraudulent projects.

High Price Volatility

Tokens purchased in ICOs are highly volatile. While they may appreciate if adopted for various use cases, they also face the risk of sharp price declines.

Early ICO investors often sell tokens en masse immediately after listing to lock in profits, which can lead to steep price drops right after exchange listing. If project development stalls or fails to meet expectations, token values can decrease rapidly.

Valuing tokens is more complex than with traditional financial assets, and speculative market activity can cause extreme price swings. For this reason, additional investments during periods of high volatility are discouraged. Always invest with discretionary funds—never with amounts that could impact your daily life if lost.

Major ICO Case Studies

Below are two globally recognized projects that exemplify successful ICOs.

Ethereum

Ethereum is widely regarded as one of the most successful ICOs in history. In 2014, Ethereum raised approximately 31,500 BTC (about 1.6 billion yen at the time) through its ICO.

Ethereum used these funds to advance development and grew into a blockchain platform featuring smart contract functionality. Smart contracts are programs that automatically execute contractual terms, and many organizations and developers leverage this feature on Ethereum.

Ethereum enables the issuance of proprietary crypto assets and the development of decentralized applications (DApps). It plays a leading role in the development and adoption of decentralized applications, and its ICO is recognized as one of the industry’s most successful.

Telegram

Telegram conducted an ICO in 2018, raising a record-breaking $1.7 billion (approximately 187 billion yen). This unprecedented fundraising achievement is notable in ICO history.

Telegram, a widely used messaging app with over 200 million global users, is renowned for its privacy and security features. Despite participation requirements, the ICO attracted substantial investor interest.

Telegram allocated the raised funds to develop its own blockchain platform, Telegram Open Network (TON). TON is a high-speed, scalable blockchain platform developed to extend Telegram's messaging capabilities and has been listed on major domestic exchanges.

How to Participate in an ICO

Below are the three main steps for participating in an ICO.

Purchase Required Cryptocurrency

To join an ICO, first purchase the required cryptocurrency. Most ICOs accept major assets such as ETH (Ethereum) or BTC (Bitcoin) as payment for tokens.

Before participating, open an account with a crypto exchange and buy the necessary cryptocurrency. It’s also essential to prepare a wallet for securely storing your crypto assets.

Investigate in advance which exchanges are likely to list the project's token. This allows you to assess token liquidity and the ease of selling your tokens later.

Research ICO Information

Before joining an ICO, thoroughly review the project’s white paper to make an informed investment decision. The white paper covers the project overview, business model, technical details, token mechanics, and use of funds.

By reading the white paper, you can assess project viability and the potential for token appreciation. Always check the team’s background and track record—an experienced, credible team is critical for investment decisions.

Additionally, research community sentiment, monitor discussions on social media, and refer to third-party reviews for an objective perspective.

Participate via the Official Website

After completing your research and deciding to invest, go to the project’s official site and follow the instructions. This typically includes creating an account, completing KYC (Know Your Customer) verification, and transferring cryptocurrency.

Verify the official website URL to avoid phishing scams. Always double-check the recipient address before sending funds, as mistakes can result in permanent loss of assets.

Follow the official instructions closely to complete your ICO participation. Tokens are usually distributed to your wallet after the ICO ends or once the token is listed on an exchange.

Conclusion

ICOs represent an innovative fundraising mechanism powered by blockchain technology and are emerging as a new investment vehicle in the Web3 era. By participating, investors can support the growth of new projects and potentially benefit from token appreciation.

Compared to traditional fundraising, ICOs offer streamlined procedures and lower minimum investment thresholds. However, risks such as fraud, misconduct, and price volatility require careful attention by investors.

As ICO regulations are strengthened in the future, risks associated with fraud and misconduct are expected to diminish, creating a safer environment for investor participation. The ICO framework is groundbreaking and is likely to become an even more effective tool for startups and new projects seeking capital.

FAQ

What Is an ICO (Initial Coin Offering)? How Is It Different from an IPO?

An ICO enables companies to issue proprietary tokens on the blockchain and raise capital from investors. While an IPO lists shares on a stock exchange, an ICO involves issuing crypto assets. ICOs are generally aimed at early-stage companies, and investment-oriented tokens have evolved into STOs (Security Token Offerings).

What Are the Benefits of Participating in an ICO? How Do Investors Gain?

Participating in an ICO allows investors to purchase tokens at low prices during a project's initial phase and potentially realize significant returns if the project succeeds. Investors can also support project growth from the outset and become part of its community.

What Are the Main Disadvantages and Risks of ICOs? How Can You Spot a Scam?

The primary risks of ICOs are sudden price declines and fraud. Always verify the reliability of the white paper and check the project’s track record and transparency. If you notice anything suspicious, consult the consumer hotline (188).

What Are Some Examples of ICO Projects? Which Have Been Successful?

Ethereum raised about $18.7 million in its 2014 ICO and became a leading example by realizing smart contract technology. Other notable cases include the DAO (2017), Filecoin, and Polkadot, which also achieved major fundraising milestones and significantly advanced the blockchain industry.

How Should You Evaluate and Select ICO Investments?

Carefully review the project’s white paper and thoroughly research the team’s structure and history. Assess technical feasibility, market demand, token liquidity, and determine whether the project operates with high transparency.

How Do ICO Regulations and Oversight Differ Across Countries?

ICO regulations fall into two main categories globally. The US, Singapore, and Switzerland apply existing securities laws, while France, Dubai, and Russia have developed ICO-specific regulations. The scope and rigor of these rules vary by country.

What’s the Difference Between a Token Sale and an ICO?

An ICO is an initial coin offering where a business issues tokens to raise capital. A token sale is a broader fundraising term that includes ICOs. ICOs tend to follow stricter regulatory processes, while token sales allow for more flexible sales methods.

How Are ICO Funds Used for Project Development?

Funds raised in ICOs are primarily allocated to development, operations, and marketing. Based on the business plan outlined in the white paper, funds are strategically distributed to support project execution and market expansion.