What are ICO’s
An Initial coin offering (ICO) is a type of crowdfunding or crowd investing tool using cryptocurrency and most are done completely on top of the Ethereum blockchain. By using a smart contract, Ether or Bitcoin is collected and is exchanged for the new type of token. The process takes place entirely P2P without any exchanges or brokers. It is commonly used as a source of capital for start-up companies and to fund the development of new cryptocurrencies. Companies can presell units of the new cryptocurrency or tokens in exchange for already established cryptocurrencies like Bitcoin and Ether.
The campaign process usually starts off with the presentation of a whitepaper. This whitepaper provides all the key information such as the business model details, the technical specifications of the project, the project timeline, the target budget where they detail how the future funds will be used and finally distribution. Distribution is a key area to include in your research as it tells you about the available token supply and how many coins the team intends to keep for themselves.
The Short History of ICOs
Initial coin offerings are still a new concept, however, on August 7th, 2017 CNBC reported that initial coin offerings have raised $1.2 billion and now surpass early-stage venture capital funding for internet companies. This is an impressive achievement considering the first possible ICO was for Ripple in early 2013, and in late 2013, Mastercoin ran their own ICO campaign. The Ethereum project broke all crowdfunding records to date in 2014 within a 4 week period. The Ethereum blockchain has come to play a very important part in the gaining popularity of ICOs as it’s platform has simplified the process of issuing tokens. This technology can be directly related to the recording break ICOs that have occurred in 2016 and 2017 – the most notable was when a project called The DAO which was able to raise $150 million.
CIO VS Crowdfunding VS IPO
ICOs have common traits with both crowdfunding and IPOs to which they are often compared. While they do share traits, they end up being more a hybrid. ICOs and IPOs (Initial Public Offering) both offer their investors potential future profit but also potential risk and failure. An IPO will sell a stake in the actual company so that investors have a portion of ownership. Most ICOs to date haven’t sold what are called tokens that act as a stake in the platforms. The only exception to that rule was in 2016 when the DAO campaign offered tokens that were attached to voting right. Also, an ICO is supported by those who want to invest early in a product or service that hasn’t been launched yet. This makes them different from IPOs and more like crowdfunding campaigns. Then again, crowdfunding usually is based on donations while investors in an ICO hope to gain a return on their investment. ICOs are therefore a mix between a donation and investment
Law & Regulations
ICOs are still largely unregulated, and this is a dangerous situation for investors who lack education. Circumstances are changing rapidly because of the extreme success of ICOs like The DAO bringing ICOs and the cryptocurrency market into the light. There are geographic areas where they are regulated similarly to that of share and securities sales although enforcement is still a challenge. Standards, regulations, and laws may help to protect both investors and entrepreneurs. However, it will most likely come with some negatives such as the cost and effort to meet compliance could reduce the advantages of an ICO over regular funding options.
More on Law & Regulations
Due to the lack of regulations mentioned above, developers and startup companies can run ICOs in any way they choose. This has lead to a variety of different approaches on how campaigns are run and makes it very difficult to cover each situation. Some common types of pricing have begun to rise above the rest. We will review these options.
Price will increase: The ICO is set up to run in stages, and the exchange rate for tokens is increased with time. Early investors who took the biggest risk get the best price per coin ratio
Price will decrease: The Gnosis team introduced the Dutch auction method where the sale starts at the highest price per token and is lowered until there are enough bids to sell all tokens. All the tokens are then sold at that price.
Price is fixed: In this scenario, all tokens are sold at the same fixed price. Investors find this an appealing method because large investments will not generally influence the price. After the offering ends, it is not unusual for there to be a period where the investors are not allowed to transfer their coins. After this cooling off period, exchanges can list the token and have other people trade it at market price.
Price is not determined: This happens when the development team or start-up company decide not to sell at a fixed price. Instead, they collect whatever amount investors choose and at the end distribute new tokens in proportion to the amount given by each investor.
Instead of a traditional business plan or formal prospectus, ICOs use technical white papers. A well written ICO whitepaper will tell you a good deal of the information you need to know before investing. They should cover how the platform will work, the potential uses, the ICO pricing structure, the development plans using the ICO proceeds, etc.
Whether it is a landing page or a full website, every ICO will have some sort of official online presence. Don’t be fooled by a flashy layout and smooth marketing language – they mean very little to your research. If a coin or ICO website/landing page easily provides you with a good deal of information to answer your questions in a straightforward manner – that is a good sign. They should provide access to their whitepaper and could have other useful links to supporting information. But if you leave feeling confused and/or not having learned very much, beware.
Social Media, Discussion Boards & News
The cryptocurrency market and ICOs are becoming a very popular everyday topic. You should be able to easily find information, people’s opinions, expert reviews, etc. on a variety of different online channels. Reddit and other cryptocurrency forums are an excellent way to discuss amongst enthusiasts, especially if you are a new trader. You will find plenty of individuals who can answer questions that you may have or share information that you may have missed. Try to see if the ICO has any social media channels running or if they show up in any themselves. The more active they are on social media, promoting and keeping the public aware of their developments, the better it is for investor confidence and research potential.
ICO Rating Websites
ICO rating websites are a very good resource to be able to compare different ICOs, read ICO news, become aware of any alerts or cautions and finally, to find ICOs to participate in. Here are a few options to get you started listed:
- Coin Schedule: A little overwhelming when you first visit but this site provides solid analysis on current and upcoming ICOs
- Smith and Crown: A curated list of ICOs as well as current market information on established cryptocurrencies
- ICO List: A popular international ICO site that categorizes its information by ICOs that are over, starting soon and ongoing
- Token Market: This site not only includes information about ICOs but about already established coins as well
- Sense Token: Shows countdowns for upcoming ICOs and a wealth of other information like whitepapers, videos, alerts you should be aware of, etc.
ICO & Coin Rating Checklist
Here is a compiled list of questions you should gather information on when performing your market research. These questions apply in both situations – deciding on an ICO to participate in or on an already established coin in the market.
Does the coin have a clear objective? A coin needs to clearly state its purpose since not all coins are meant to act like a traditional currency.
Does it solve a real problem or have a strong use? The more common a problem or greater the impact of the problem the coin solves, the better value the coin will have. If the coin is the first of it’s kind and has a strong use, then it will have a strong advantage over the competition.
Is the info provided full of fluff? When you do your research, can you get to the facts or is it full of hype? The more marketing jargon designed to sell you typically means you should probably stay away. If you can only find a website or landing page, you should avoid this opportunity.
How does the whitepaper read? Is it well written and structured? Does it handle well against experts’ opinions? Does it explain the technology in depth? The stronger the whitepaper, the more confidence potential investors will have, and better the coin will perform in the market.
Who is backing the project? If the project was and/or is still backed by prominent investors, then the coin will appear to be more credible.
What is the Consensus Mechanism of the coin? This is how changes to the decentralized systems are decided upon. Common examples are Proof-of-Work or Proof-of-Stake. It is very good to know how the coin works.
Is the coin centralized or decentralized? This is a basic but important to know how the network is structured. Cryptocurrencies are meant to be decentralized in nature. However, centralized coins do have their own advantages.
Is there a development plan? You can gauge the development team’s commitment by whether or not there is a clear timeline for the development of a coin.
How much money has the ICO raised and how much was spent? Any financial info on spending habits will show you a great deal about the team behind the coin.
How different is it from the nearest competitor? If the coins are all the same, there is little incentive to try something new.
How strong is the target market? Coins that appeal to small niche groups won’t be strong in the market. The group needs to be large enough to support growth but still well defined.
Any legal barriers? This technology is new and always changing. The legal and government bodies are still trying to catch up. So, you need to make sure there are no issues with the coins you choose.
Founding Team Members? The success of a coin depends largely on the core founding team. This is important regardless if you are looking at an ICO or a more established coin.
Are they actively communicating? The more open a team behind a coin is, the more they appear to be committed and the larger their desire to succeed appears. Do they openly talk about their development progress and stick to that timeline or is everyone pretty much in the dark?
How many coins will there ever be? Many coins have a finite supply, and this makes a coin have a stronger value. All coins with defined supplies have that information posted someplace. Usually, you can find out how big the total supply is and how much has been released so far.
How many of those coins have been given to the founding team? The higher the percent of coins given to the team, the worse it looks. Also, if most of the coins are owned by a few people, then this is a bad indication as well. These individuals can easily manipulate market price
What is the market capitalization of the coin? This is easily found online on many exchange sites and is the measure of the coin’s value.
ICO Launch & Participation
Let’s look at the entire ICO process. In this section, we will cover what needs to be done by the ICO team and you; from when the ICO is announced all the way to when you cash out.
ICO Team: The Announcement
Announcements usually take place within cryptocurrency investment communities such as Bitcoin Talk, Reddit, and similar sites. The project team usually give a presentation typically on the purpose of the ICO project along with a whitepaper, other documentation, timelines, goals and any other information a potential investor might need to evaluate the opportunity. Then the team makes themselves available to receive any questions or comments that the community might have.
ICO Team: The Offer
After the announcement, adjustments based on the community’s feedback are made to finalize the business model and whitepaper with further details. This is a very important step as ICOs happen before a project is completed; making it crucial that the team is transparent and thorough with their documentation, so investors trust the ICO. An offer proposal is created and includes all the details and terms of a project such as desired investment amount, project deadlines, etc. The financial instrument is always in the form of tokens. At this point, the start date of ICO sale is announced and marketing kicks in to target smaller investors.
You the Trader: Register with a Cryptocurrency Exchange
Your first task to participate in an ICO is to buy cryptocurrencies that you will use to purchase the ICO tokens. Again, this is usually Ether or Bitcoin. ICOs don’t accept fiat currency. The recommended way to purchase enough Bitcoins or Ether is through an online exchange. You will want to do this well before the start date of an ICO sale as the registration process can take a few days. Once that is done, simply transfer money from your bank account to your cryptocurrency exchange account. For those who either don’t have bank accounts, credit cards or would rather not use their ID in this process, you can still buy Bitcoin/Ether from a crypto ATM, or you can try a peer 2 peer exchange and trade locally.
You the Trader: Exchange Traditional Money for Bitcoin or Ether
Assuming you decide to use an exchange and not some other method of obtaining your cryptocurrency, the process is simple. Using your registered account, you exchange your fiat currency like USD or EUR for the cryptocurrency you want to buy which take a few seconds. Exchanges typically provide you with an online wallet when you register so that is where your new cryptocurrency will show up. However, don’t keep a large amount of money in this wallet as online exchanges are targets for hackers and these hackers have been successful in the past. Instead, you will be transferring your new cryptocurrency money to a more secure wallet.
You the Trader: Set Up Your Wallet & Transfer Your Coins
Most ICOs happen on the Ethereum network, and so you will likely need to acquire an Ethereum wallet. Sometimes an ICO will recommend a type of wallet because not every wallet is a good choice to use when participating in an ICO. One example of an ICO suitable wallet is MyEtherWallet. This is a website that allows you to create, send and receive Ether but you keep control over your private keys. You can generate a wallet and then protect it with your own passwords. You get a downloadable file with a public-private key pair. To send Ether, all you need to do is upload the file and provide the password.
ICO Team: The Launch
The official start date of the ICO sale or launch date is when cryptocurrency tokens are made available. The preferred currency to purchase ICO tokens is usually Ether or Bitcoin. The ICO company will provide a method to buy the tokens on the launch date which was outlined in the offer. ICOs usually last at least a few weeks but can be open-ended with no end date. The project will try to raise as much money as possible but a good practice to look for is when an ICO places a cap on the total amount raised. Once they have reached their target, the project can continue
You the Trader: Time to Buy
If you haven’t for some reason already, you need to make sure you read the token purchase agreement and the general terms of the ICO that was covered earlier. You will have access to step by step instructions on how to participate from the ICO team which will make the process easier for you. Other useful tips are: make sure you convert the ICO start time to your time zone if the ICO starts by time, watch the ICO news online just in case there are issues, and an ICO might start by block number so check out the Ethereum block explorer to monitor that. When the token sale starts, you will have to send the Ether payment to the address specified by the team.
ICO Team: The Close
An ICO usually closes once the investment cap is reached. ICO tokens can be listed on cryptocurrency exchanges once the ICO is complete and the project is launched. Note, that there may be a mandatory cooling off period right after tokens are released to investors. During this cooling off period, you will not be able to trade. Once this period is done, you are free to trade them for other cryptocurrencies or back into a fiat currency.
You the Trader: Cash Out & Secure Your Tokens
Once you have received your tokens in the wallet you set up for the ICO, you will need to transfer them to a more secure wallet. You will need a bit of extra Ether in your wallet to pay for the usual wallet to wallet transaction costs.