- 1. What is an ICO?
- 2. How are ICOs created?
- 3. History and evolution of ICOs
- 4. ICOs vs. IPOs: What is the difference?
- 5. How to participate in an ICO?
- 6. Advantages of investing in ICOs
- 7. What are the risks of investing in ICOs?
- 8. How to evaluate an ICO?
- 9. How do you spot an ICO scam?
- 10. How to trade ICOs
- 11. What are the regulations in the ICO world?
- 12. Should you invest in ICOs?
- 13. How to set up your own ICO?
- 14. What might be the future of ICOs?
1. What is an ICO?
Many have wondered, “What is ICO?” A blockchain ICO, or Initial Coin Offering, is a new means for businesses to raise funds. In an ICO, a new cryptocurrency is sold for fiat or other cryptocurrencies, usually Ethereum or Bitcoin. ICOs are largely unregulated. Startups use them to avoid the complicated and restrictive requirements of banks and other traditional sources of capital.
2. How are ICOs created?
When a cryptocurrency project wants to raise money through an ICO, it creates a plan on a whitepaper which answers these questions:
- What the is the project about?
- What need(s) will project fulfil when completed?
- How much money is needed?
- Will the project founders keep any of the tokens for themselves? How many?
- What currencies or cryptocurrencies are accepted for the tokens?
- When are the tokens available for sale, and when does the ICO campaign end?
The project then attempts to have their new ICO listed on every initial coin offering list it can find. During the ICO campaign, the project accepts funds for the purchase of a new token, which enthusiasts and supporters buy some with fiat or an established cryptocurrency. There are many parallels to shares of a company sold to investors in an Initial Public Offering (IPO) transaction, but an ICO and IPO are not the same things.
If the ICO does not raise enough money to meet their goals, they return the funds to their backers. If the ICO does raise sufficient funds, it is deemed successful, and the project is launched.
3. History and evolution of ICOs
ICOs date back to 2013 when Mastercoin launched the first ICO. Ethereum held a similar token sale in 2014 and raised 3,700 Bitcoin in its first 12 hours.
ICOs exploded in popularity in 2017. In May, a new web browser named Brave raised more than $35 million in 30 seconds. Kik, perhaps the most well-known ICO of recent memory, raised almost $100 million. In total, ICOs brought in about $6 billion in investments in 2017. Many of 2017’s most successful ICOs were for blockchain-based projects that aimed to make blockchain easier to use or to provide functionality not previously available.
In September 2017, the People’s Bank of China issued a decision banning ICOs in China. U.S. regulators took a less restrictive approach, issuing cease-and-desist letters to operations that they deemed fraudulent. Cryptocurrencies often fell in value but quickly recovered, and exuberance drove ICOs to even greater heights. By January 2018, the Filecoin ICO brought in nearly $257 million. The regulatory status of ICOs has continued to evolve with time, with increased regulatory action sometimes discouraging and sometimes emboldening investors.
4. ICOs vs. IPOs: What is the difference?
In determining an ICO meaning it becomes important to compare it to an IPO. ICOs have many parallels with IPOs but also bring in elements of crowdfunding; the funds are returned if an ICO does not raise enough money. IPOs shares can be purchased only with fiat currency (usually), and ICOs typically accept cryptocurrencies. While not entirely unregulated, ICOs are subject to less regulation than IPOs. ICOs tend to be more community-based. IPOs can usually be launched only by established businesses, but ICOs can be used to create entirely new ventures.
IPOs have a built-in means of distributing the profits to investors who purchase shares; investors who buy shares own part of the company and may be entitled to dividends or voting rights. With ICOs, the mechanisms for giving the benefits of the newly-launched project back to backers are not defined.
5. How to participate in an ICO?
The most important thing to do before buying new tokens is to do your due diligence. Check out the ICO online. Be wary of unsolicited sources. Take a look at a trusted ICO list to see what reviewers and analysts think. Find out what the funds will be used for, and inquire into the reputation of the project founders. Make sure that they are reputable and have the expertise needed to complete the project.
You will need cryptocurrency wallets to participate in the early stages of an ICO. Every ICO online should provide a detailed, step-by-step guide to joining; after all, it is in the founders’ best interest to ensure that backers have an easy time placing orders for tokens.
Of course, you should be well-versed in how blockchain technologies work before you start looking for ICOs. Avoid depending on an ICO whitepaper to answer fundamental questions such as: “Whats ICO?” and “What does ICO mean?”
Make sure you understand how you will receive your tokens. Does the ICO mean to send them out immediately or do you have to contact them and ask them to release to your wallet? When you are sure you are ready, send cryptocurrency or fiat to the addresses provided by the ICO. At the conclusion of the ICO, follow the instructions to ensure that you receive your tokens.
6. Advantages of investing in ICOs
- Early access to tokens.
- Provides incentives to innovate.
- Gives opportunity to projects that might not be funded otherwise.
- Builds community.
7. What are the risks of investing in ICOs?
There are many risks in investing in ICOs. You could lose your entire investment. Scammers often see ICOs as an attractive means of stealing funds. Low liquidity may make it hard to sell your tokens at market value. The relation between ICOs and existing regulations is sometimes unclear. While the full array of securities laws may not protect you, some ICOs may be subject to enforcement actions.
8. How to evaluate an ICO?
The offerings on an ICO list generally cannot be evaluated by the traditional means that apply to stocks and other commodities. It is essential to look at the credibility and expertise of the team who will be working on the ICO project. The reputation of advisors and partners matters as well. Does the project use the blockchain? Where will the funds be spent?
9. How do you spot an ICO scam?
The U.S. Securities Commission suggests looking out for the following:
- “Guaranteed” high investment returns.
- Unsolicited offers.
- Sounds too good to be true.
- Pressure to buy RIGHT NOW.
- Unlicensed sellers.
- No net worth or income requirements.
It can also be helpful to review a notable and unbiased initial coin offering list to see what expert opinions are offered.
10. How to trade ICOs
Once you have obtained your tokens from a blockchain ICO, you have two options: You can trade your tokens over the counter (OTC) with individuals that you meet through Internet forums, at church, in line at the grocery store, etc. You can also trade them on a cryptocurrency exchange. Not all tokens will be listed immediately on every transaction. Some of the most popular trades are Bittrex, Kraken, Bitfinex, Binance, and Poloniex.
11. What are the regulations in the ICO world?
The regulatory status of ICOs is complicated. Cryptocurrencies are fundamentally hard to regulate due to their distributed nature. Of course, all cryptocurrency fraud is illegal. Some countries ban ICOs. They are illegal in China. Most countries are still preparing regulations relating to ICO tokens, generally treating them as commodities or securities. It is not completely clear how these regulations will play out. Regulators in most countries have made it clear that they support ICO technology and want to see it made safer for investors.
12. Should you invest in ICOs?
No one can decide whether to invest in ICOs but you. You should only spend money that you are prepared to lose. If you find a project that you believe in, an ICO can be an opportunity to get involved in the early stages. Your tokens may appreciate in value, or you may lose your entire investment.
13. How to set up your own ICO?
Setting up an ICO is a complex undertaking that should be performed with the right expertise. Many new applications streamline the process and reduce the amount of work involved, professing to allow anyone to launch an ICO with a few mouse clicks, but it is essential to follow industry best practices to achieve the highest success and to avoid running afoul of regulators.
You will need to prepare a whitepaper detailing your project, your partners, and your expertise. You will also need to create or adapt an ICO platform for supporting the technical aspects of the ICO itself and supporting token trading following the ICO. You are well advised to talk with a lawyer who is familiar with ICOs and securities law.
14. What might be the future of ICOs?
Over time, the ICO market will mature. It will become less susceptible to hype and fraudulent schemes. Investors and financial institutions will participate in ICOs in more significant numbers. Tokens will become subject to more laws. More regulatory actions will target them. With the right regulatory framework and a means of enforcing contracts, the blockchain could eventually replace the stock markets. Whether that will happen is hard to say, but one thing is clear: ICOs are here to stay.