This article will explain what an ICO is and delve into the benefits and drawbacks from a crypto investor standpoint.

What does it mean?

First off, the acronym ICO stands for ‘Initial Coin Offering’, which is crypto spin-off of the Initial Public Offering (IPO). The two share a few general similarities and some major differences.

For traditional startups, there are a few notable ways to go about raising the funds needed for development.

  • They can start off small and later grow as its profits allow. With this method, the company is not indebted to any shareholders and may have to wait longer for scalable growth while they build up business.
  • In lieu of this, companies can look to outside investor(s) for early support. These early investors provide a cash infusion to the startup company with the expectation of owning shares and potentially profiting from their portion of the ownership stake.

The IPO model

An additional method involves the company going public in what is called an Initial Public Offering (IPO). This gives investors at large the opportunity to buy shares in the company. Essentially, startups acquire funds by selling shares in their company.

Companies that are continuously growing and need capital will frequently use IPOs as a means to raise money. Other startups may use an IPO to allow the owners to exit either some or all of their ownership by selling shares to the public. During an initial public offering, the issuer (or the company raising capital) will bring in underwriting firms or investment banks to aid in determining the most suitable type of security to issue, the offering price, number of shares, and the time frame for the market offering.

The ICO model

An ICO is typically defined as the cryptocurrency space’s rough equivalent to an IPO within the mainstream investment world. What commonly happens is that a company who is looking to create a brand new coin, app, or service will launch an ICO. Investors that are interested will buy into the offering, usually getting these first out ‘shares’ at a highly discounted price. In order the participate. Generally, they’ll purchase the newly minted tokens using Ether, bitcoin or USD. In exchange for their approval and support, investors will be given a new cryptocurrency token that is specific to the ICO project.

What happens after the ICO?

From here, the investors hope that the token will perform incredibly well later on in the future. Or, as what has happened, at least during the first month or so giving token holders an opportunity to cash out. Regulatory authorities in countries like the US and Canada consider ICO tokens to be securities, which are under their jurisdiction. As a result, many projects holding ICOs have fallen under scrutiny for not treating the ICO as an IPO and following their guidelines.

In a perfect world, the people participating in the ICO would hang onto their tokens. Indeed, many Founders and Advisors are allocated large amounts of tokens when it is first rolled out. But they often can’t trade them in for a certain lock up period, for instance 18 months or 3 years.

The company that is hosting the ICO will utilize the investor funds in a myriad of ways:

  • To further its own development and business goals
  • For launching their product or service and paying for future development
  • It also could be a get rich quick scheme within the unregulated atmosphere
  • To fund a project without the watchful eyes of regulators
  • Avoiding the challenging venture capital funding mechanisms
  • Sometimes it’s a combination of the above factors and others

Risks and Challenges

ICOs come with an array of challenges, risks, and unforeseen opportunities. Investors will abruptly buy into ICOs with the hope of receiving quick and effective returns on their investments. Some of the more successful ICOs that have occurred during the past several years have given investors reason to preserve this hope. A multitude of ICOs in 2017 and early 2018 did manage to raise millions this way, though many of these coins today have little if any value.

This excessive amount of enthusiasm from investors has also led many people astray. Because they are predominantly underregulated, ICOs have actively become a focal point for frauds and scam artists. who prey on investors who are considerably cocky, overzealous, and above all else, uninformed.

In the next part of this guide, we’ll delve into the ICO process. Following that, we’ll examine more of the risk and benefits.

The Basic Elements

Whenever a cryptocurrency startup firm wants to raise money by way of an Initial Coin Offering, the team will typically construct a plan on a whitepaper. This whitepaper will establish the following:

  • What the project is primarily about
  • A problem and their solution
  • Why the market is ready for their product/service
  • How they make a case for blockchain; what are their user cases for the token?
  • The specific needs of the project
  • How much money is required
  • The breakdown of what tokens the founders/advisors will eventually keep for themselves
  • What type of money will be accepted
  • How long the ICO campaign will run.
  • Team information and a roadmap

Throughout the duration of the ICO (for instance, it can by 2 weeks or 2 months, it varies), enthusiasts and supporters of the firm’s initiative alike will purchase some of the crypto coins with either fiat or virtual currency. These coins are commonly referred to as ‘tokens’. They are similar to the shares of a company sold to investors in an IPO-type of transaction only in that they provide the opportunity for investors to get it on low prices. But holding a token bought during an ICO in no way guarantees a holder will have probable, favorable returns.

If the money that has been raised fails to meet the minimum funds that are required by the firm, then the money will be returned to the backers and the ICO is deemed unsuccessful. However, if the fund’s requirements are met within the specified time frame, then the money that was raised is used to either commence the new scheme or complete it.

Similarities with Crowdfunding

ICOs are very similar to crowdfunding. While IPOs handle the investors, ICOs primarily deal with supporters that are keen on the idea of investing in a new project; not unlike a crowdfunding event.

However, ICOs differentiate themselves from crowdfunding in that the backers of an ICO are chiefly motivated by a prospective return in their investments. The funds that are raised in a traditional crowdfunding campaign are basically donations. It is for these reasons that ICOs are labeled as ‘crowdsales.’

Structuring the ICO

ICOs can be composed in a wide variety of ways. In some cases, a company will set a specific goal or limit for its funding. This means that each token that is sold in the ICO has an established price and that the total token supply is static. In other cases, there is usually a static supply of ICO tokens and also a dynamic funding goal, which essentially means that the distribution of tokens towards the investors will be entirely dependent upon the funds that are received. In that case, the more funds that are collected in the ICO, the higher the overall token price becomes.

Nevertheless, other ICOs possess a dynamic token supply which is ultimately decided according to the amount of funding that is received. In these particular cases, the price of a token is static, but there is no discernable limit to the number of total tokens, with the exception of parameters like the length of the ICO.

The benefits

To start off, when working with an IPO, an investor will typically receive shares of stock in a company in exchange for their investment. Now in the case of an ICO, there are absolutely no shares to speak of. In lieu of this, companies that are raising funds by way of an ICO provide a blockchain equivalent to a share: a cryptocurrency token. For the most part, investors will pay in a popular existing token (such as Bitcoin or Ether) and will consequently receive a compatible number of brand new tokens in exchange.

It is important to note that it is incredibly easy for a company that is launching an ICO to create tokens. There are online services that exist such as Token Factory that allow for the mass generation of cryptocurrency tokens within a matter of seconds. It would be wise for investors to keep this in mind when remembering the differences between a share of stock and a token. One of them being that a token does not retain any fundamental value. ICO managers will generate tokens based on the terms of the ICO, receive them, and will later distribute them as per their plan by transferring them to individual investors.

Founder liquidity

Investors working early on in an ICO operation are typically motivated to purchase crypto coins in the hope that the plan will turn out to be a success following its launch. If this is what ultimately occurs, then the value of the tokens they bought during the ICO will climb above the price that was established during the ICO itself, and they will achieve the overall gains.

This, above all else, is the primary benefit of using an ICO: the potential for outstanding returns.

It’s apparent that ICOs have made lucky investors into millionaires over the last few years. Judging by the figures for 2017, there were a total of 435 successful ICOs that year alone, with each raising an average of $12.7 million. The total amount that has been raised for 2017 was roughly $5.6 billion, with the 10 largest projects raising 25% of this total. Moreover, tokens purchased in ICOs returned an average of 12.8x the original investment in dollar terms.

The ICO space has continued to grow at a tremendous rate as time goes by. In fact, in the first quarter of 2018, ICOs brought in about $6.3 billion in funds, which already outpaces the entire total of 2017 in just 59% as many distinct ICO projects. In the first four months of 2019, ICOs raised $748,437,843.

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Successful campaigns

As the ICO continues to see more development and grow bigger and bigger, the largest ICOs in history have also seen astonishing growth. When going over ICOs based on their size, one can take into consideration the amount of money that is raised in the ICO as well as the return in investment. There are times when ICOs with an amazing return on investment are not among the highest-earning projects and vice versa.

In 2014, Ethereum’s ICO was an early pioneer that managed to raise $18 million over a period of 42 days. Ethereum has further proven itself to be crucial for the ICO space. In general, this is due to its innovations in regards to decentralized apps (DApps). Back when it debuted, Ether’s price was around $0.30 and at the start of April 2019 was trading at $161.34.

In 2015, a two-phase ICO commenced for Antshares, which would later be rebranded to become NEO. The first phase of the ICO concluded in October of 2015 with the second phase going until September of 2016. It was during this time that NEO earned about $4.5 million. While admittedly it is not one of the largest ICOs in terms of the money that was raised, it has still provided an excellent ROI (Return on Investment) for many early investors. The overall price of NEO at the time of the ICO was roughly 3 cents and at its peak, it traded about $50, which marks an increase in the price of about 150,000%.

Most recently, ICOs have produced larger amounts in terms of total funds that were raised. By far the largest ICO by this metric is Filecoin, which is a decentralized cloud storage product. During an ICO that ran for one month and wrapped up in September of 2017, Filecoin managed to raise roughly $257 million.

How to find ICOs

Now we will start getting into how one can find an ICO. But first, if you are an investor who is looking to buy into ICOs, then familiarize yourself with the cryptocurrency space on a broader scale. In the case of a majority of ICOs, investors must buy tokens with a pre-existing cryptocurrency. What this means is that an ICO investor is required to already have a cryptocurrency wallet set up as well as some digital token holdings.

From here, we will walk through the steps that are crucial to investing in an ICO modelled after the cryptocurrency KIN. It should be noted that the steps may be different, depending on the type of ICO.

  1. Sign up for either Coinbase or another digital currency exchange. There are a wide variety of different exchanges and wallets to choose from, so you have an abundance of options.
  2. Stock up on the currency that you will need to order the buy into the ICO.
  3. Take your holdings and transfer them to a digital wallet that supports them. The most important thing to remember in this particular case is to make sure that your wallet can hold cryptocurrency that’s compatible with the ICO. (i.e. if the ICO needs payments in Ether, your wallet must hold Ether).
  4. Be sure you have the official page for the ICO itself. Always check the URL against the one that is given on the teams official ICO page. Read through the whitepaper, the terms and conditions of the ICO, and any other information that you can obtain. Research the team, the problem and solution, and the market readiness. Once you are ready to begin, look for buttons to “enter the token sale” or “participate now.”
  5. Register for the ICO. In order to do this, you will need to provide your public wallet address. You may also need other information as instructed at the ICO site.
  6. On the day of the launch, follow the site’s instructions for buying into the ICO. More often than not, this will involve transferring Ether from your wallet to the ICO’s public address. In return, you will receive some of the ICO’s cryptocurrency at a rate and date that are specified by the terms of the offering. Be sure to remember that there are small fees associated with transferring cryptocurrencies like Ether, so you will have to keep a bit of the original token in reserve in order to cover these costs.
  7. Also remember that it takes time and money for a token to get listed on any exchanges. The tokens you buy in an ICO are often not yet on any exchanges.
  8. The ICO will then send the new token to your cryptocurrency wallet.
  9. The company that initially provided the ICO may offer a service that allows you to transfer the token back to the previous cryptocurrency. Or, you may have to go to another digital currency exchange if you want to properly make the transfer. There are times when you may have to hold onto the token until it becomes listed on an exchange that you can access.

There is no concrete method of staying informed about the latest ICO, but here are three general tendances:

  • Many people sign up to receive notifications about ICOs through services like ICO Alert and CoinSchedule.
  • Others like to read assessments and reviews of ICO projects, like those that can be found at Verified ICOs or ICO Rating.
  • Interested investors can use these sites to gather data about these projects that are holding ICOs. Then, they can further their reserach by reading the whitepaper, researching the team, and checking out their community and presence.

ICOs typically generate an ample amount of hype and there are several places online where investors flock to in order to discuss new opportunities. Reddit is among some of the online communities that provide a space for these kinds of conversations. Furthermore, there are sites that aggregate ICOs for investors, such as ICO Watchlist. This investors to discover new ICOs as well as compare and contrast an array of different offerings.

Risks and criticism

Investors have been repeatedly cautioned to be wary due to some ICO or crowdsale campaigns turning out to be fraudulent. Because these fundraising operations are not regulated by any financial authorities like the previously mentioned SEC, funds that are lost on behalf of the fraudulent activities may never be recovered.

The hasty ICO surge in 2017 led to the creation of cryptocurrency regulations from a series of both governmental and nongovernmental groups. In early September of 2017, the People’s Bank of China officially banned ICOs. Their reasoning was that is it’s disruptive to economic and financial stability. The ‘central bank’ said tokens cannot be used as a form of currency on the market and banks cannot offer services that are related to ICOs.

This resulted in bitcoin and Ethereum tumbling in a way. It was also interpreted as a sign that regulations of cryptocurrencies are fast approaching. The ban also penalized offerings that were already completed. In early 2018, ICO advertisements were banned from Twitter, Google, and Facebook.

In order to make absolutely sure that you don’t wind up investing in a scam project, here are some important steps to follow:

  1. Make sure that the project developers can clearly establish what their goals are. The more successful ICOs usually have straightforward and understandable whitepapers with clear-cut goals laid out inthe roadmap.
  2. Know your developers. Investors should typically expect 100% transparency from a company that is launching an ICO. What this means is that you should know who is involved with the project, what exactly their business plans are, where they are located, what the timeline and duration of the project is, and so on.
  3. Seek out the legal terms and conditions set for the ICO. Due to the fact that outside regulators do not usually oversee this space, it’s entirely up to you as an investor to ensure that any ICO you buy into is authentic. A good many ICOs are not available to American, Chinese and other investors. This should be clearly spelled out on the website and often a rating site will also include this information.
  4. Make sure that the ICO funds are being stored inside an escrow wallet. This is a wallet that requires a multitude of keys in order to be accessed. This is a beneficial form of protection against potential scams, particularly whenever a neutral third party is in possession of one of the keys.
  5. Check to see if the project’s founders and advisors will have their tokens locked up for any certain time. A vesting period that prohibits founders from cashing out during or right after the ICO is a good thing to look for.

In the end, there really is no way to guarantee that you won’t wind up on the losing end of a scam whenever you invest in an ICO. However, as expected, that is a risk you will just have to take. The best advice for investors is to take precautions to avoid any irrational decisions and to learn as much as you can about the system in order to capitalize on the astonishing potential.

Conclusion

Like with most investments, ICOs are usually a gamble. Be sure to do your due diligence when investing in any type of asset, and look for ways to hedge your bets, like with our tokenized app, HedgeTrade.

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