Have you not heard of Initial Coin Offering or ICO? I am sure you have. It looks like the Initial Coin Offerings or ICOs phenomena is here to stay.
ICOs have taken the cryptocurrency world by storm. They have not only proven to be controversial, but have also helped set up many new ventures. In this article, I will explain why ICOs have got the fame that they have in the community.
ICOs have received a lot of backlash in the crypto community. Mainly because ICOs manage to raise millions of dollar equivalent funds with the help of only a fancy white paper and a website. As of August 2017, ICOs have raised over $1,500,000,000 from 124 ICOs only. You can find this info at coinschedule.com/stats
In the earlier days, if a company wanted to seek funds, it would launch an Initial Public Offering. Well established companies still use IPOs to obtain funds, so this trend has not slowed down. For smaller teams or startups, the new buzz was crowd funding. That saw websites such as kickstarter and indiegogo taking the cake. Nowadays, if a product or venture has anything to do with blockchains or sometimes not even blockchains, then ICO seems to be the way to go.
Are ICOs really only a scam or are they meant to be the model for collecting funds in the future?
In order to answer that question, we need to start at the beginning and understand what an ICO is.
- 1 What is an Initial Coin Offering – ICO?
- 2 How to launch your own Initial Coin Offering (ICO)
- 3 How to invest in an ICO
- 4 History of ICOs
- 5 ICO Hacks or Scams
- 6 Conclusion
What is an Initial Coin Offering – ICO?
An Initial Coin Offering or ICO is a method to gain access to funds from investors in cryptocurrency. Developers or companies look at an ICO as a means to obtain quick and unregulated access to currency that will help them start or finish their projects. ICOs are a crowdfunding campaign for new cryptocurrency ventures. Think of it as kickstarter for cryptocurrencies. Hence, a crowdsale is another name for ICO.
Another name for an ICO is an Initial Public Coin Offering (or IPCO). You may be familiar with the term Initial Public Offering or IPO. The same concept of an IPO translated to blockchain or cryptocurrency is an ICO. The end result is the same. Developers or companies obtain the required cash to start their operation, expand on technology and hire more team members. At the same time, you as an investor will receive a share in the project.
ICOs help bridge the gap between buyers and sellers since in most cases, investors become end users of the product offered in an ICO. Conversely, it is also the most effective way of making people familiar with any blockchain initiative. While ICOs allow individuals to purchase cryptocurrencies or tokens at discounted prices, it may not be the case always. Pure demand or supply governs the cryptocurrency or token price on and after its release. Prices may subsequently drop even below the initial ICO levels.
Please see below an image that I created to highlight some key differences in an IPO vs an ICO.
Among the popular cryptocurrencies that made use of the ICO route includes Ethereum amongst others.
How to launch your own Initial Coin Offering (ICO)
So lets imagine that you would like to launch a cryptocurrency ICO. You have an amazing project in mind that leverages blockchain technology in the field of either sports, healthcare, music or real estate or any other field. This is an important aspect before you launch an ICO – have something of value for the cryptocurrency community.
I am simplifying the process for you to launch an ICO. Here are 5 key steps.
- Gather a team
The team should include at least some of the following members:
- Developers – in the platform that you choose to launch your ICO.
- Lawyers – who understand virtual currency and the regulations that matter.
- Marketing Specialists – so that you can manage your campaign in a polished manner.
- Decide on the platform that you wish to base your cryptocurrency on
You can set your token on the Ethereum platform or the Waves platform.
- Do some math and estimate the money you need.
Based on the amount of money you need, you will need to set a cap for your crowdsale. Then set how many tokens you will issue and how many you will keep for the team. You can also decide to organise a pre-ico and sell some tokens to early adopters.
- Develop your marketing material
Two key items that you need to develop would be the technical white paper and a roadmap. Investors should clearly understand why the token will gain value along with the success of your company.
- Announce and get your money
Once the marketing is taken care, announce the dates for the ICO and get your funds. Let the platform take care of issuing the tokens to your investors.
Then go deliver on your words and complete your project.
A simplified example follows:
Lets say you want to create a new product for the Healthcare industry and you need at least $20 million to develop this amazing product. You choose to create an Ethereum-based token and call it Amazing Coin with the initials AMAZ.
The great minds behind the ICO decide to peg the value of 1 AMAZ to $5. You then offer 4 million AMAZ during the ICO to reach your target of $20 million. Since you do not want too much administration, you decide to avoid a pre-sale or pre-ICO and go straight to the ICO.
You post about your amazing product on multiple sites including Bitcointalk and Reddit. Because many believe in your product, you collect sufficient funds in a couple of days. The investors in your product get the AMAZ tokens which they can use with your product or can trade on any cryptocurrency exchange.
How to invest in an ICO
Are you bogged down with the number of ICOs that keep popping up?
As an investor, finding a successful ICO can be challenging. I will try and guide you through this maze. Here are the steps that I follow for finding a potentially good ICO.
Scour the BitcoinTalk Forums
This might sound rather unconventional, but you should keep visiting this forum and check out the Altcoins Announcement board. In there you will find many companies or developers announcing their ICOs.
Find something that interests you. It could be that the field the cryptocurrency is targetting is interesting, such as sports, or music or healthcare or finance.
Based on how recent the ICO has been announced, you will get to assess the opinion of the community on the ICO. You should pay particular attention to how the developers respond to queries that have been raised. Do they answer the though questions posed or just ignore them? Do the responses provide clarity on the operations that they wish to run?
If you think its interesting, then add it to your shortlist.
Research the Developers
After having identified a suitable ICO, take your time to thoroughly unearth every bit of information about both the team behind it and their plans.
Visit the website
The team behind the ICO is very important. Look up the team on professional networking sites such as LinkedIn. Do the team members have relevant experience – be it in the field that the cryptocurrency is targeting or in blockchains.
- Whitepaper or Roadmap
Evaluate the white paper and / or the roadmap. Does it provide details of the project description, costs, goals and a blueprint to state how the developers will turn their ideas in to a product that is viable and sustainable.
- A demo or existing product
Does the team have a demo product or an existing product? If so, you should inspect it. Try it out and see for your self if you will be using the product in the future.
Most of the teams behind ICOs setup their own social media channels. This could be on Facebook, Twitter, Slack, Telegram, etc. You should join at least one or more of them to follow the conversation. See how the community reacts to the ICO. Are there many questions that are unanswered or is the team dealing with everyone with importance.
You should also ask questions such as:
- What are the plans with listing on exchanges?
- How soon will the product be launched?
- When will you get access to your tokens?
Red flags to watch out for
- The ICO does not have a clear team behind it.
- The communication is very slow and does not address key questions.
- The white paper or roadmap does not provide sufficient details.
Investing: Receiving tokens
On identifying an ICO campaign that is suitable for you, and which you believe has great potential, you need to transfer funds. There are many scams that target ICO campaigns, so be extremely cautious of the address that you transfer your funds to. DO NOT Transfer Funds to an Incorrect Address. I cannot stress this enough.
You should only transfer funds from a wallet that you own the private key too. Hence wallets from exchanges should not be used for an ICO campaign.
Use the escrow wallet of the ICO campaign. In some case you will receive your tokens immediately and in some cases you have to wait for a predetermined date.
Congratulations. You have just participated in the ICO world.
In order to encourage investors, ICOs typically offer bonuses for early participation. So in case you do believe in the ICO campaign, you can benefit from investing early. In some cases, ICO campaigns meet their cap in a matter of minutes.
History of ICOs
While the ICO concept is still somewhat fresh, it has made momentous strides since its debut back in 2013. ICOs have been evolving from a simple idea to huge campaigns that successfully raised millions in a matter of minutes. So how did it come to this?
In early 2013, Ripple Labs started to develop the payment system called Ripple created around 100 billion XRP tokens. The company sold these token to fund the development of the Ripple platform. This was probably the first cryptocurrency distributed using what we call an ICO nowadays.
Mastercoin, a blockchain firm took the crypto industry and the entire globe by storm. A creation of J.R Willett made a proposition that the already existing Bitcoin set-up could function as a standard protocol layer and subsequently empower higher levels of protocol and facilitate new contract rules. This led to the establishment of other new currencies with no alteration to Bitcoin or even mandating for creation of a subsequent alternative blockchain in order to handle newly established regulations.
With this idea, Willett sought to address a number of important concerns not to mention promising to improve Bitcoin’s stability while adding to its value by creating new currencies. Hence, when he developed the idea of a camping to fundraise for Mastercoin, it was welcomed warmly by Blockchain users. This process of building a blockchain over another is called Blockchain 2.0.
Mastercoin, in its first sale to backers, raised $5 million back in August 2013. And 3 months down the line, Mastercoin reached $132 million, a growth in value of over 220x.
With this came the discovery that ICOs were not only an effective capital raising method for business but also surprisingly a lucrative investment opportunity.
Ethereum on the other hand, the biggest and fiercest Bitcoin competitor, boasts among the biggest ICOs with respect to financial success. Having raised a collective total of $18 million, the current market cap of Ethereum sits at slightly over $14 billion which is a significant value increase of 532x all under three years. Why? Because the Ethereum team effectively utilized their funds to create modern software application not to forget a flourishing venture which through Ethereum Enterprise Alliance established partnerships with numerous accredited tech firms.
Decentralized Autonomous Organization (DAO)
Unfortunately, the long ICO history has not been short of incidences and setbacks. One of the most tragic instances of ICO going haywire is DAO (Decentralized Autonomous Organization.) An Ethereum-based firm, DAO wanted to establish a model to facilitate efficient capital allocation for a given entity. In a few months, they collected over $180 million dollars but owing to a small software glitch, hackers accessed and drained over $50 million, consequently destroying the initiative and inspiring a crisis in Ethereum.
Although most of the investors managed to somehow recover their investment, a great deal of them refrained from ICOs. Others even projected the demise of ICOs following this unfortunate event.
ICO Hacks or Scams
Even for the most innovative ideas, they are not free from instances of fraudulence and malice. The rise of the ICO has not come without scams and hacks. Cryptocurrency investors continue to play into the hands of scammers and fraudulent individuals. Nonetheless, you should beware of the most common ICO scam – Phishing.
For those of you who are not familiar with the terms, this is cybersecurity term coined for targeting users with a fake website that looks very similar to the original.
A phishing attack may target your wallet. There are some wallets, myetherwallet in particular that allow users to enter their private key in the browser. Fake sites will send you warning messages and request you to enter your private key on their site. If you fall for the trap, you will lose your wallet’s private key and then all your crypto coins.
Another phishing attack could target the ICO website. In this case, you may receive a message stating that the ICO has begun in advance or some other scare tactic. If you click the link in that message, you will reach a site controlled by the attacker. If you send funds to the address on that site, you will lose your funds.
Look at the image below for an example of a phishing message.
Some of the more recent hacks that targeted Initial Coin Offerings included the below:
With every new venture, come both opportunities and disruptions. It did so with the introduction of automobiles, dot-coms, and computers. Again, history takes its course yet again this time with blockchain.
Blockchain-based token market capitalization is expanding at a significantly fast pace, consequently threatening to cause an upset in the venture capital trade. The rapid developments of blockchain has inspired the sprouting of alternative methods of financing, namely ICOs and it is now no surprise that the world is welcoming new millionaires virtually every minute!
Traditionally, raising capital for an initiative or start-up involved numerous aspects including drafting of business plans, multiple funding rounds, and angel investors. However, with ICOs, not only is it possible for startups to fund their firms devoid of traditional means but now, ordinary individuals have the chance to inject their resources and invest in highly profitable ventures early on.
This is not to state, however, that ICOs are faultless. They operate independent of any central legal frameworks and the regulations to safeguard you from falling victim to scammers are subsequently few. There are some ICOs that gather funds and then disappear, leaving with your money and giving you only worthless tokens.
Many startups are continually implementing self-imposed policies which ease the process of spotting impostors to protect investors from losing money to them. The Securities Exchange Commission is also eyeing regulations for ICOs. So watch this space.
Hopefully, with this guide, you can get proper insight on everything you need to know about Initial Coin Offerings.