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What are the differences between Crypto ICO and Stock Market IPO?
12/21/2018

To answer this question, we first have to explain what an IPO and an ICO is. While both of them are ways for a company to raise funds from potential investors, the mechanisms behind them are very different.

What is an IPO?

An IPO, or an Initial Public Offering, is also known as “going public”. It means that a company sells its stocks to investors for the first time. An investor who owns stocks essentially owns a part of the company, and receives voting rights as well as the rights to dividends - part of the company’s earnings.
The IPO market is quite mature - the first IPO took place way back in 1602.

What is an ICO?

ICO stands for Initial Coin Offering. In case of an ICO, a company raises funds by selling their virtual currency to the investors at a discounted price. The coins can be purchased using cash, or, more commonly, another cryptocurrency, like Bitcoin or Ether. The investor receives the product - the company’s new cryptocurrency, but no ownership rights to the company and no direct link to it. This means that no voting rights or dividends come with this type of investment.
Unlike IPOs, ICOs are quite a new concept and would not be possible without the blockchain technology. The first ICO was organised in 2013.

What are the other differences between ICO and IPO?

Now that we understand what ICO and IPO means, let’s take a look at other differences between the two.

As we have mentioned, IPOs have been around for decades. In contrast, ICOs have only existed for a couple of years. As such, the IPO market is understandably more heavily regulated, and it is governed by financial institutions such as the SEC in the USA.

This means that an IPO is much more difficult to prepare. A company has to be thoroughly audited by a third party to provide potential investors with detailed financial information. This in turn allows the investor to analyse the company they wish to invest in and make a fully informed decision.

Due to all the legal and compliance processes, organising an IPO is quite lengthy - it can take a few months for the company to actually go public after starting the process. The due diligence required also means that there are many middle-men involved - which causes IPO to be also quite costly for the company.

Because of all the above-mentioned issues, an IPO is not a realistic way of raising funds in case of a start-up, or a relatively young company. In fact, an IPO is usually done by a mature organisation after many years of operation.

On the other hand, ICOs can be easily used by a start-up to raise funds. Due to the virtual lack of regulations, there is no lengthy and costly process to go through - and no middle-men to be paid.

Thanks to that, a successful ICO can offer the investors a potentially high return of investment. But, unfortunately, lack of due diligence makes it quite difficult to assess the situation of the company, especially if you’re not an experienced ICO investor. As such, ICO investments are quite risky compared to IPO investments - though the risk is rewarded by a high potential return.

Many companies use ICO to collect money for an upcoming project - in that respect ICOs work similarly to crowdfunding, like Kickstarter. While there are no regulations on how the project is presented to the public, it is customary for the development team to prepare a document called ‘whitepaper’. A whitepaper details the key information regarding the purpose of the project, the technology behind it etc.

If an investor thinks that an idea presented by a company in their whitepaper is worthwhile, they can support it by purchasing the cryptocurrency during the ICO, thus helping fund the project. And if the project does indeed turn out to be successful, the investor can count on the price of the currency rising thanks to increased demand.

Since an ICO is done at an early stage of the company’s existence, the investor can usually not take the past track record of the company into consideration. There’s often only future expectations to be considered - which makes the investment all the more risky.

While ICOs were originally done only by companies related to the blockchain technology, nowadays any company can have their own ICO without the need to create their own blockchain. This can be done thanks to the Ethereum blockchain, which allows companies to create and sell ERC20 tokens.

It is also important to note, that virtually everyone can take part in an ICO and purchase the coins. All you need to become an investor is enough funds to invest, and a connection to the Internet. This is not the case when it comes to IPO. The majority of stocks are sold to institutional investors (also known as sophisticated or accredited investors) such as banks, endowments and trust funds. Only a small part of the stocks is available to retail investors through stock exchange.

So, should you invest in IPO or ICO?

Unfortunately, there is no easy, one-fits-all answer to that question. It depends from what you expect from and investment.

If you are looking for an investment that is relatively safe, then stock market is probably the way to go. However, if you are okay with a riskier investment that can bring you a greater return of investment, then an ICO might be for you.

Of course, we always recommend familiarising yourself with both the project and the company you are going to support with your money. Getting to know the team, their vision and their resources is a good way to avoid any potential scams or undelivered promises. It is also important to read whitepaper thoroughly and make sure that no crucial information is omitted. If you’re not sure which ICOs are worth investing in, it might be a good idea to familiarize yourself with the opinions of experienced ICO investors and blockchain experts.

We hope that we made it easier to understand what the difference between an ICO and an IPO is - and how investing in them is different. With all that being said, we wish you happy investing!

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