WHAT IS AN ICO

​Introduction

Initial Coin Offering in full letters, an ICO is a practice of seeking funds for blockchain projects.

An ICO is more like a digital version of an IPO (Initial Public Offering). Cryptocurrencies’ experts referred to it as an IPO taking place within the Blockchain environment.

ICOs are a way to raise funds for a new cryptocurrency or digital money. There are thousands of cryptocurrencies on the financial market, but only a few are known to the public. Since the launch of Bitcoin in 2009, developers around the world are coming up with new cryptocurrencies to solve existing problems and improve people’s lives. Cryptocurrencies are a decentralized money system, which means that no entities can regulate their cash flow. They are a pure function of demand; the higher the number of its users, the higher the value.

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Cryptocurrencies machinery

Cryptocurrencies are built upon a revolutionary technology called the blockchain. A blockchain is a distributed ledger that verifies and records anything of value, including financial transactions, titles, royalties, medical records, etc. No central authority exercises control over the blockchain. Instead, the transactions and creation of new coins are verified by a network of computers spread across the globe.

More and more people are drawn to cryptocurrencies because they enable simple, transparent, and cheap transactions. They also offer user anonymity, and some constitute a store of value. Besides, the fact that the blockchain technology is decentralized with no counterparties like banks or governments monopolizing the system makes them a great catch. Moreover, the prices of certain cryptocurrencies have risen meteorically in the last few years and attracted many investors. 

Further, the number of online merchants accepting payments in cryptocurrencies is also growing. People can now use digital currencies to buy goods and services, trade, or invest them for long-term purposes. You can also cash them whenever you want.

When developers or other investors come up with an excellent idea for a new digital currency, they are going to need money to launch their new project. They could try going to a bank or get venture capitalist investors to put money into your project. They could also launch an IPO on stock exchange platforms and sell shares of the company. By doing so, the project's owners are accepting to sell ownership parts of their firm.

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 Investors then compete to buy the shares if they believe in the feasibility of the project and the vision of the new company. In exchange for their funds, they will get a fraction of the company and take part in decision making. Also, between the company issuing shares and investors, there is an exchange platform like the NYSE and the SEC in charge of regulating activities and enforcing strict IPO criteria. Now, what if the developers don’t want to sell ownership of their company or use a third party to raise funds?

In our era, many things are digitalized, including raising money for new projects. There is now a way to finance your project digitally by launching an ICO. You can convince people to invest in your start-up in exchange for a new digital currency. All you need is a project plan or white paper plus the coins you want to sell. A white paper is a document that showcases the vision of your project and details how it would work. 

ICO starts when a group of people decides to raise target funding for the development of a new cryptocurrency. They need to present a white paper highlighting the new currency key features and usages. The owner also has to fix the price of the new coins. They also need to determine when to launch the ICO and how long it will last. Most importantly, they need to define how much they plan to rise.

The next step is to advertise the new project online through social media and on their website. The owners will propose investors to buy the new coins to invest in their project. Investors interested in the new project can buy the new currencies or tokens using other cryptocurrencies like Bitcoin and Ethereum, or traditional currencies. Investors participating in an ICO are hoping to find a successful project to back. They speculate that the coins or tokens they invest in will rise in value in the future.

ICO investment boundaries

An ICO achieves its goals once it reaches a soft cap. A soft cap is a minimum amount required for the project to move forward. ICOs also have a hard cap, which is the maximum amount they will accept in investments. If an investment doesn't reach the soft cap, they mostly return funds from investors.

Early investors will buy the new coins at small prices until it reaches the soft or hard cap. When the new currency achieves the preset goal, the owners will apply to get it enlisted on exchange platforms. Once listed on exchanges, the token value will depend on the supply and demand factor. Thus, it wise to be prepared for massive volatility. If the crypto drives demand, its price will rise and create a win-win situation for the creators and the investors. However, if the coin doesn’t attract any attention, people who put money in the project would end up losing.

Moreover, investing in an ICO is more like gambling. Investors are ready to buy a worthless currency in the hope that it will rise in worth in the future. Some have enjoyed sizeable gains, while others lost all their investments.Also, ICO investors are easy prey for online scammers.

Therefore, Initial Coin Offerings are high-risk investments. There are many examples of start-ups that managed to raise funds and vanished with the money. As an aspiring ICO investor, you need to do extensive researches around the project before spending your cash. You should read the white paper, understand the usage of the crypto, and whether it will add value to its users. What more, conduct a thorough search of team members and if they have prior experience with the blockchain technology. Also, if you feel like the owners’ promises are good to be true, you are probably right.

Although many praise ICOs to be democratic with no central authority overseeing activities, it makes them a tempting market for scammers and hackers. Nevertheless, the spectacular advancement of ICOs markets in the last years has attracted the attention of the SEC (Security and Exchange Commission) regulator. Regulation entities can now jump in and close projects that seem to be ripping off investors. For instance, the SEC cracked down a California company named Munchee. The food review app was trying to raise funds to create a token that would work within the app.

Moreover, the SEC has labeled ICO tokens as securities, and they are to be regulated under federal securities law. When a token has a fixed utility and can be used to buy goods and services of the company launching it, it is called a currency. However, a token will be considered security when its only motive is to appreciate in value.

The estimated amount put into ICOs to date surpasses $28 billion. However, the ICO market dropped considerably this year, making only $366 million by November 2019.

​How Does It Work

Also called coin or token sales, ICOs can be a source of capital for start-ups. MasterCoin organized the first ICO in July 2013. A year after, Ethereum held an ICO and managed to raise 3700 BTC in the first twelve hours (around $2.3 million at the time). MasterCoin wanted to create a project that would offer the public a Bitcoin exchange and transaction platform. 

ICOs only became popular in 2017. In May, the ICO organized by Brave browser raised about $3.5 million in less than a minute.

To kick start an ICO process, a start-up has to establish the blockchain and set up rules and protocols. The next step consists of mining for new coins they intend to sell during the ICO. 

After, they need to determine the new currency pricing and distribution. Now that the owners got the coins and the white paper ready, the next step would be to start advertising on social media to attract investors. They can publish the ICO on Reddit or other blockchain-related websites to get the news to the right audience.

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As a project owner, the white paper is the first thing that potential investors will read; thus it has to be convincing and fully detailed. It can be a lengthy document with multiple pages or a one-page file, depending on the utility of your new currency and the people you need to advertise to.

You will have to keep in mind that there are two kinds of people who will read the project plan you propose, those with knowledge of how crypto and blockchain work and those with little to no experience in the digital world. As you prepare the document, you need to determine who you want to attract the most. For example, if your project offers a payment method that could facilitate transactions in underdeveloped areas, your white paper needs to include a precise definition, history, and benefits of the digital currencies. Then again, if you wish to propose a solution to an already established cryptocurrency, you might need to advertise to knowledgeable investors already in the crypto business.

As the owner of the project, you have to attract as many investors as possible not only to gather the required funds but also to drive the demand after the fundraising.What more, make sure that you have a team of experts ready to answer questions on social media.

Most importantly, project owners have to address concerns raised by their potential investors before sending out a final version of the white paper. The ultimate business model would outline the details of the project, the total amount they wish to rise, the timelines, and the coins to be sold during the ICO. The document will also show the price of the new currency plus the rights of the investors. Once the final white paper is signed, the owners would announce its start date.

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The project creators have to join an exchange platform to enlist their ICO. Investors interested in the new crypto will also need to open an account with the exchange if they don't own one already. They can also purchase the new coins directly from the creators' website.

An effective marketing campaign is key to attracting the right audience and raise the necessary funds. You may want to consider whether you want to target big institutions or small investors.  For investors who want to play on the safe side, there are trustworthy ICO platforms on the Internet that only enlist ICOs they consider to be legit such as Coinschedule.com, Bittrex, SpaceBTC, Kraken, and more. Besides, some ICO require investors to complete a KYC (Know Your Customer) file. The document contains the customer’s personal information like names, address, date of birth, photo ID, etc.).

At the end of a successful ICO, projects owners can enlist the new coins on an exchange platform to be traded.

Crypto tokens are coins offered during an ICO. They are equivalent to shares bought during a public offering. An ICO token refers to the investor's contribution to the start-up. The more money they give, the more tokens they get in return. Once the project starts, you can use the coins to buy their services or sell them when their value rises. Besides, when you participate in ICOs, you are acquiring the right of ownership of the project. It means that you can have an input on how the project runs. However, you should know that you only have the decision-making rights only on the project, but not on the company launching it.

Since the investors would not own a part of the company, the owners have to set up a beneficial agreement between them and the future token holders. Therefore, the white paper should stipulate a promising future for investors who will buy the tokens. Let's say that you want to set up a tech company; you can promise the investors a lifetime license of software, or voting right in proposals.

Creating a new digital currency requires you to create a blockchain. However, there is a possibility to use an existing one, which is why many altcoins ​were built upon the Ethereum ERC-20 standard. 

​Difference Between ICO And IPO

The main differences between the fundraising methods reside in:

​1.Requirements:

  • IPO is generally launched by well-established firms looking for capital to expand its activities. Companies need to fulfill several requirements before listing their shares on an IPO. Issuing an IPO is a lengthy process that includes many parties, such as banks, lawyers, and other partners.  It requires preparing all the information about the company, a legal document that displays the intention of the firm to issue a public IPO, a track record, etc.
  • Nowadays, ICOs are the go-to fundraising method for new and risky companies. If you are a young computer genius with ideas that might change people’s lives, you could raise the money you need by launching an ICO. ICOs don’t really require a legal protocol to list your tokens. Creators only need to have a well-written white paper.

​2.Utility:

  • Participants of IPOs will acquire shares representing an ownership stake in the future of the company. Some investors will also have decision-making rights in how the company runs. Besides, the shareholders of a company will receive yearly dividends as the company progress. What more, when the company succeeds, the price of its stocks will go up on the financial market. You can either sell your shares when they reach a specified amount or trade them on trading platforms.Investors in IPOs are somehow protected since the activities are highly regulated. However, if the company becomes bankrupt, investors will lose all their money.
  • ICOs are a way to raise capital by selling cryptocurrencies. Usually, ICOs do not grant any rights to the crypto holder. Nonetheless, depending on how the new currency is structured, investors can reap incredible benefits. They can enjoy privileged access to the new project's products and services or a promising revenue redistribution. Coin sales also offer the opportunity to buy new crypto at low prices in hopes of getting good returns. For example, NEO cryptocurrency started to trade at $0.33. It is worth $12.84 as of November 14, 2019.

​3.Timeline:

Unlike an IPO that takes place in a one-time event, Initial Coin Offerings can be opened for months.

​4.Investors:

  • It is hard for international investors to put money in an IPO. If you need to invest in a foreign company, you will have to complete an additional legal procedure and use the services of a broker.
  • Anyone can invest in an ICO, no matter his geographical location. All people need is to own enough crypto to buy the new tokens. Besides, since new crypto sells for low prices, many people can afford them. As a creator, all you have to do is create a problem-solving project and set up an efficient advertising campaign.

​How to Launch an ICO

If you are thinking of raising capital for your future project, you can launch an ICO campaign. ICOs will allow you to get your project to a broad audience. They are also opportunities to raise money quickly. But, starting an ICO may be time-consuming and expensive, depending on your project's goals.

As a project owner, your team needs to include investors, financial and legal advisors, developers, blockchain specialists, and marketing agents. There are no set rules in ICO, but you should prepare for vicious competition. 

Your newfound project has to offer a solution that your community or the market needs. Besides, make sure that your idea is unique because, for your token to gain value, it has to be in high demand. Equally important, you need to learn about the current ICO's regulations.

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Your next step to launching an ICO will be to determine the structure of your new currency and how the tokens will be distributed. After, you will need to write a white paper detailing the vision of the project, your team, the goals, market analysis, development strategies, funds available, and more.

The next step includes building an attractive website. Your site has to have clear information about your project’s goals (roadmap), your team, and security measures. Also, if you are targeting a global audience, you should consider translating your site into multiple languages.

At this level, you will need to start promoting your offer. You will need to allocate some money for your marketing strategies like paid ads or email marketing or PRs. As you advertise your new project, make sure that you and your team are communicating with potential investors and take part in the crypto communities like Forums, Reddit, Quora, Facebook groups, etc.

When people start to show interest in your offer, it is time to launch the ICO campaign and start collecting funds. It is up to you to plan how long the ICO should last.

If your ICO is a success, you can use the funds to start or continue developing the project. As you deliver your promised project, your tokens will be in demand, which will increase its value. Most importantly, when the project offers something valuable to the crypto community, it will be easy to enlist the coins on a crypto exchange. To get listed, a currency needs to have a name, a specific trading symbol, a logo, launch date, project description, and source code. The owner also has to pay a compliance fee.

​How To Buy ICO Tokens

As a buyer of a new token, you have registered to an ICO via the project's website. Most legit ICO campaigns demand investors to register. To participate in an ICO, you need to own crypto like Bitcoin or Ethereum in a compatible digital wallet. If you don’t have those cryptocurrencies, you can purchase them with fiat currency on exchange platforms like Coinbase, Binance, Robinhood, etc. Since many developers build their projects on the Ethereum platform, Ether is highly used to buy new coins during ICOs.

Once you got your crypto, you need to store them in a software wallet for better security. There are many wallet options on the Internet, but you have to choose one that supports the ERC-20 token standard.

Now that your funds are available, you can send your crypto to the campaign’s address. However, you need to be extra attentive at this step because any mistake can cost you your investment. You need to check the website address, the project logo, and the wallet address very carefully. Many fraudsters will set up an identical website, symbols, or fake addresses and list them as ads on your search engine results. Thus, be careful not to send money to the wrong address.

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When your order goes through, you should receive the new tokens in the wallet. If you are participating in a hot project, your transaction may take time to go through. You can review the status of your transactions on cryptocurrency platforms by entering your wallet's address.

What are the common signals of a fraudulent ICO?

  • ​Many scammers avoid publicizing their team. Also, you may need to check if they are members of legit cryptocurrency’ forums like BitcoinTalk.
  • ​Their project’s offer seems unfeasible and too good to be true.
  • Lack of a transparent roadmap
  • Most trustworthy blockchain-related projects use qualified marketing strategies and a specialist to engage with their audience.

​Conclusion

Briefly, ICOs are revolutionizing the way start-up companies raise capital. New companies are now managing to raise millions of dollars with just a convincing and motivating white paper, plus an underlying cryptocurrency to sell.

However, ICOs are for brave and knowledgeable investors. They risk their money to invest in cryptocurrencies expecting that the new coin will get adopted by many people, thus increasing its value. Token holders also risk putting their cash in an unregulated market with no guarantee of returns.

ICOs are risky for the project's creators, as well. They also have to work in a market with uncertain regulations that may involve fines and other sanctions. Also, the cryptocurrency market is very volatile, and they might see their project die at the very beginning. Besides, they have little to no information about the investors. Some may be interested in creating hype and quickly sell off their tokens.

Despite the multiple risks, ICOs are also an opportunity to take part in the next big project and make enormous returns. They are still the quickest way to access seed funding with fewer regulatory restrictions. There is no precise regulation around ICO to date. For now, only equity tokens are considered securities, and they must comply with the legal processes of the SEC.

To measure the success level of an ICO, one can consider its return on investment (ROI). To calculate an ROI of any given cryptocurrency, you need to compare its coins' value at the time of an ICO to its current price. Some of the most successful ICOs over time include NXT, IOTA, NEO, Ethereum, Spectre, Stratis, Ark, Lisk, DigixDAO, and QTUM.


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