Table of Contents
1. What Is An ICO?
ICO stands for Initial Coin Offering platform. It is a popular term in the cryptocurrency space used to refer to fundraising for the creation of a new coin.
Think about it as a company seeking to create a new coin but does not have enough capital.
It then decides to make this project open to the public with promises of profit to anyone who supports the project with funds.
This profit will be determined by how well the new coin fares in the market.
ICO is common among startups desiring to provide products and services in the cryptocurrency/blockchain space.
While some ICOs have yielded huge profits for investors, many others have turned out to be a scam or did not perform well.
Examples Of An Initial Coin Offering
1. Ethereum’s ICO in 2014 raised $18 million over a period of 42 days.
We can say that this is the most successful ICO in history as Ethereum is doing very well today.
It also opened the channel for more ICOs.
At its launch, Ether was priced at $0.67. Now it trades at $379.81 (as of Oct. 21, 2020).
2. NEO’s ICO of 2015–2016 raised about $4.5 million.
Many early investors received huge ROI as NEO increased in value.
At the time of its offering, the price of NEO was about $0.03, but today it is traded at $17.19. It was once traded at $187.40.
3. Dragon Coin’s ICO of 2018 received a whooping sum of $320 million
Moving on, we will see how the Initial Coin Offering Works.
2. How Does An ICO Work?
Launching a new coin is easy. One can generate cryptocurrency tokens in a short time.
The steps involved in organizing an ICO include the creation of a whitepaper, collection of funds, generation of tokens, and then distribution of them to investors according to plan.
A whitepaper provides information on the coin being created.
It is where the company states:
- What the project is about
- Problems it will solve
- The number of funds needed and the type of money that will be accepted
- How long the ICO campaign will last
- Price of the coin during the ICO
- Road plan for the development and deployment of the coin
- Scheduled date of public listing of the coin after the ICO
- Projected future performance of the coin after public listing and trading
- Coin supply during the ICO and the maximum coin supply
- The number of tokens that the company will reserve
In the course of the campaign, interested individuals donate funds to support the project with the hope that when the project succeeds, they will receive huge ROI.
That is to say, they buy part of the project’s tokens in advance.
Read also: Steps To Launch Your ICO
Usually, investors make payments using a popular token like bitcoin or ether.
Structures Of An ICO
There are 3 different structures that an ICO can take.
The only common feature in the three structures is that the duration of ICO is known.
Firstly, a company can set a limit for funds. Here, the token will be sold at a pre-set price, and the total supply of tokens is static.
Another structure is where there is a static supply of ICO tokens, but no limit is set for funds. In this case, investors will receive tokens based on the funds raised.
This means that the higher the total funds received in the ICO, the higher the overall token price.
Lastly, an ICO can also take the structure of a dynamic token supply. Here, the total token supplied will be determined by the number of funds received.
So, the price of a token is static, but the total tokens supplied are not limited.
By the time the ICO is concluded and the expected funds are raised, the company will go ahead and execute the project.
On the other hand, if the funds did not reach the set amount, the money will be returned to the investors. And the ICO will be termed unsuccessful.
But then, some unfortunate investors do not get their money returned to them. I guess this is why some people now opt for IEOs.
3. Initial Exchange Offering (IEO)
An Initial Exchange Offering is also a fundraising method in the crypto sector.
It is just like ICO except that it is conducted by crypto exchanges.
Here, the crypto exchange raises funds on behalf of the startup company.
The exchange presents some commitments that the company must meet.
If the project involves a token sale, then the company will pay the exchange platform a listing fee.
Additionally, only users of the exchange platform can participate in IEOs. It is not open to the public.
4. Advantages and Disadvantages of ICOs
1. Investors will receive an equivalent number of new tokens in exchange for the number of existing tokens they contributed.
2. It is easy to conduct an ICO.
3. Early investors can gain double their investment if the plan of the ICO succeeds after it launches.
Read also: What are Some of the Benefits of an ICO?
Did you know? In 2017 alone, 435 successful ICOs raised $5.6 billion. And the tokens purchased returned about 12.8 times the initial investment in dollars.
1. ICO is not regulated by any financial body hence any money lost due to incompetence or fraud may not be recovered.
2. Scam artists can use an ICO as camouflage to steal funds from uninformed zealous investors.
3. New coins may not fare well in the market, and as such, investors will not gain a high return on investment.
5. What To Consider Before Investing In An ICO?
Say you are interested in an ICO, you should be cautious so that you will not lose your money.
You will find the following tips helpful:
1. Are the goals realistic? Read the whitepaper carefully and be sure that the goals are concise and clear.
Check whether the coin has real-life uses which are also in demand.
That’s how you can be sure that the coin will be adopted easily, and this will eventually drive up the price.
For example, Bitcoin serves financial purposes, Ethereum offers multiple use cases, Steem is relevant in social media, etc.
2. Find out who the developers are. Can you trust them? Are they transparent enough?
When the developers have a good reputation, it can also affect the price of the coin positively.
3. Check for legal terms and conditions. This shows that to an extent that the company is legit as no external authority is involved.
4. Confirm that the ICO funds are being stored in an escrow wallet since it requires multiple keys before it can be accessed.
Additionally, It is best when a neutral third party holds one of the keys.
5. Don’t proceed without seeking professional advice from cryptocurrency experts.
Read also: How to Find the Best ICO Service Provider?
You can find them on BitcoinTalk, Coindesk, Cointelegraph, and so on.
6. How Do I Find An ICO To Participate In?
If you are interested in ICO, the best way to go about it is to read about new projects online.
ICOs generate a lot of buzz and you will easily find investors coming together to discuss new opportunities online.
Popular sites where you will find information on ICOs are ICObench, ICObazaar, CoinSchedule, and others.
7. The Difference Between Coin And Token
Coin and token are used interchangeably by most people, but they have different meanings.
A coin is a cryptocurrency that is built on its own blockchain.
It is created to serve a particular purpose.
For example, Bitcoin was created to serve as a store of value and a medium of exchange.
Other popular coins are Ether, Ripple, Litecoin, etc.
On the other hand, a token is a cryptocurrency that is built on an already existing blockchain.
It serves as the measure for different activities on the blockchain.
Each cryptocurrency project has its interpretation of its token.
For example, Ethereum’s ERC20 token standard is basically a protocol for creating a token on the Ethereum blockchain.
Some ERC20 tokens are EOS (EOS), ICON (ICX), and Ox (ZRX).
We also have tokens that are NEO-based, like RPX and ACAT.
Therefore, the main difference is in their structure, coins have their own blockchain while tokens are made on those blockchains.
Usually, coins and tokens are listed in different cryptocurrency exchanges.
8. What Is The Best Exchange To Invest/Buy Tokens, IEO, And Coins?
Today, there are many trusted exchanges where you can invest in tokens, IEO, and coins.
However, you should find answers to the following questions before choosing an exchange:
Does the exchange accept fiat as payment or only cryptocurrencies?
What are the transaction fees like?
Read also: Top 6 ICO Platforms You Can Trust
What tokens, IEO, and coins are available on the exchange?
ICOs provide good earning opportunities, but investors must be careful to avoid being scammed.
Remember to follow the tips shared in this post before investing in an ICO.
Blog Credits: Medium