What is an ICO?
The acronym ICO stands for Initial Coin Offering. An Initial Coin Offering is much like its real-world counterpart, the Initial Public Offering (IPO), in that it refers to the means by which a project is backed by the public for the first time.
During an Initial Coin Offering, investors can exchange their cryptocurrencies for shares in a particular idea. These shares are referred to as tokens, which are the recipient’s way of saying “thank you” to all those who invested.
It’s the developer of the idea who decides what these tokens can be used for. They might be coins for a new cryptocurrency, or they might be subscription vouchers for a new software product.
Every ICO is unique, which means that you’ll have to read the white paper (an authoritative guide published by the creators) to know things like:
- How you can invest in the ICO,
- What you’ll get in exchange for investing,
- What the project aims to achieve,
and other such details.
For now, let’s talk about ICOs from a more analytical standpoint, and towards the end of this guide you’ll see how you can participate in one.
What characterizes an ICO?
IPOs and crowdfunds have existed for decades, so you might be wondering what makes an ICO unique. In the list that follows, we’ve laid out some of the most defining characteristics of an ICO.
- Blockchain technology. Most, if not all, Initial Coin Offerings have some relation to blockchain technology — hence the ‘coin’ part of their name. As a result, many ICOs are used to fund either cryptocurrencies themselves or platforms which are built onto preexisting blockchains, like the highly-popular Ethereum.
- Informal documentation. ICOs aren’t regulated, which means that developers have no legal obligation to provide accurate documentation or realistic statistics. This is why many of the most successful ICOs bank on the reputation of their core creators.
- Little identification. It’s a common theme throughout the crypto world and ICOs are no exception: many offerings require little to no identification on behalf of the investors or even the developers. Again, this is why many successful ICOs are lead by known owners — to improve trust levels.
- Tiered pricing. ICOs often give out tokens based on a tiered pricing structure. Those who invest first get tokens at the most favorable prices, and vice-versa.
- Reserves, goals, and quotas. There are a few other characteristics of the token distribution in an ICO. Normally, a small portion of the supply is reserved to act as funding for the project’s development (as the token appreciates, hopefully); the project sets a goal for funding (which may or may not have any significance); and various quotas are set along the way. Most of the time, these quotas are used to change the price of a token or stop funding.
Are ICOs legal?
One of the biggest concerns with ICOs is their legality. Anonymous developers could quite literally ask others to fund their idea without any legal obligation to pay them back, in a completely unregulated and highly unmonitored system.
As of now, ICOs are neither legal nor illegal. That’s right: not a single country in the world has chipped in on their legal status.
Although many believe that an unregulated market of ICOs is sure to cause their downfall, the fact of the matter is that — at least for the time being — it’s totally legal (or at least, not illegal) to create or participate in an ICO.
This leaves it up to the parties themselves to make sure what they’re doing won’t cause any trouble, as otherwise governments will probably start to step in.
What were the top 5 ICOs so far?
Past ICOs have raised huge amounts of money — even hundreds of millions of dollars. In order to show you the scale of these crowdsales, we’ve compiled a list of the 5 biggest ICOs by market cap in USD:
The Bancor Protocol – $152,000,000
The Bancor protocol is a standard for particular cryptocurrencies (called smart tokens) which allows them to be automatically traded without any second party.
The Bancor project holds a healthy reserve of each smart token and allows users to trade between them at a dynamically-adjusted rate. This self-adjusting rate is what prevents the reserves from ever being depleted.
The Bancor Network Token (BNT) was the token distributed to backers of the ICO. BNT acts as a “connective tissue” for the platform, tieing together the value of all smart tokens.
The DAO – $150,000,000
The DAO was a Decentralized Autonomous Organization (DAO) — an organization run solely by computer code — with the purpose of automatically storing and transmitting Ethereum assets.
The DAO was built as a venture capital fund where backers could collectively direct the investments by voting. The ICO for The DAO raised 11.5 million Ether, giving investors voting tokens in return.
Unfortunately, The DAO was hacked within a few months, thus allowing hackers to drain a third of the funds. This caused the Ethereum community to split in half. Ethereum Classic came to refer to the community which maintained the hacked blockchain; Ethereum (without any additional label) came to refer to the community which attempted to reverse the hack.
Status – $103,000,000
Status is the third largest ICO to have been recorded to date. It was designed as “an open source messaging platform and browser to interact [with the Ethereum Network]”.
Status aims to make the Ethereum platform’s applications available to almost anyone with a mobile phone — Android or iOS.
As the first implementation of Ethereum on mobile, it will be interesting to see how Status pans out.
TenX – $80,000,000
TenX is looking at the evolution of blockchain technology from a more financial perspective, with a focus on making cryptocurrencies as usable as possible.
This project is trying to make paying with cryptocurrencies in person a reality, starting with a crypto-funded debit card that can be used worldwide, among other things.
The tokens from funding TenX’s ICO will give backers royalties from every successful transaction conducted on their platform.
AEternity – $62,500,000
AEternity (stylized as æternity) is a blockchain computing platform that builds on the work of Bitcoin and Ethereum
AEternity was built to provide users with a decentralized virtual machine which can be used to carry out smart contracts in exchange for a fee in the network token — æternity token.
The project is meant to be unique in that it offers off-chain transactions and oracle machines which can interpret real world data in smart contracts.
Do ICOs make/lose money for the investor?
Newcomers to the world of ICOs — and the world of blockchain technology in general — often wonder if a particular coin-based investment will make them money.
The truth is that the success of an ICO can vary greatly, and the market is often highly sensationalist. You might have heard of the many profitable examples, like:
Ethereum, whose Ether token was sold off at $0.30 during the ICO, and has since risen to over 1000x the value ($300).
Gnosis, whose network token has appreciated from $30 a piece to over $240.
Digix Global, whose token has increased from $3 at the ICO to over $84 now.
However, you probably won’t have heard of the thousands of ICOs which turned out to be worthless, such as Prism (which lost investors over 99% of their money).
Anyhow, as in every financial sector: there is always and will always be plenty of money to be made in cryptocurrency. However, blindly investing in coins and ICOs is akin to gambling.
If you’re considering investing in ICOs or existing cryptocurrencies, it would be wise to have a good understanding of the technology involved and why a particular project is worth it — not just why the developer says it is.
How do I participate in an ICO?
Participating in an ICO isn’t difficult at all. We’ve put together a step-by-step guide below that will allow you to invest in almost any Initial Coin Offering:
1. Find an ICO of choice. The first step is to, of course, pick an ICO which you want to back. You can do this by browsing cryptocurrency forums to see what’s hot or using ICO listing sites (those such as CoinSchedule and Smith + Crown) to see the latest projects.
2. Explore their website. For the next step, you’ll have to find the offering’s website (or at least some kind of an official outlet*). It’s on their website that you’re most likely to find a link/button to join the ICO. Click this and proceed to the next step.
*Note: If the ICO doesn’t have some kind of an official news outlet (preferably a well-made website), you shouldn’t definitely be wary about investing.
3. Pick a means and fund. Finally, you’ll have to pick a currency with which you can fund the ICO (most accept either Bitcoin or Ethereum, but you’ll have to double check). Then you can complete your participation in the ICO by creating an account — if necessary — and sending the designated amount of the cryptocurrency to the fund’s address.
That’s all there is to it! If you get caught up on the last step because you don’t have the right cryptocurrency to fund the project, then it’s not wrong to buy yourself some through a reputable service or cryptocurrency exchange.
What should I expect from an ICO?
Before you participate in any ICOs, it’s essential that you know what to expect. Below, we’ve collected four questions that a new investor should definitely know the answers to. These are:
What will I get in exchange for my investment?
Almost every ICO will give you some kind of a token in exchange for your investment. The value of this token is derived from what it can be used for — is it a coupon for a blockchain-based subscription service, or does it represent the coin of a new cryptocurrency?
If you want your investment to be a successful one, then you should understand exactly why the ICO’s token would be valuable to a buyer.
How and when will I be able to cash out?
To cash out your investment, you will need to sell on your tokens. The process is exactly the same as selling a cryptocurrency — find a trusted buyer to use directly or sell through an exchange.
As for the timeframe, you can sell your tokens as soon as you are given access to them. Some ICOs might take a while to distribute the tokens, while others might do it instantly.
There may also be a grace period during which transactions can’t take place. You’ll have to find out these details individually for each project you invest in.
Will I get updates about the project?
In most cases, updates regarding an ICO will be published online (on the relevant website, forum, or information board), so you’ll have to remember to check in regularly.
It’s possible that your ICO will have taken down your email during the investment process, in which case you might receive updates that way.
If the project is highly unsuccessful or fraudulent, there might not be any updates at all.
How will I know if the project is succeeding?
To know if the project is succeeding — and, to an equal extent, if your investment is succeeding — you’ll have to rely on two things: the updates and the price of the token.
Arguably, the value of the token is what matters most to an investor. However, the updates given out by the developers can signal progress and perhaps future success.
Further reading
Hopefully, this guide has given you everything you need to understand the basics of an Initial Coin Offering. In case you were hungry for more knowledge, here are some resources you can use to learn more about ICOs:
Getting in to ICOs – A Guide and Some Tips & Tricks
This fantastic guide to ICOs approaches things from an investor’s perspective. If you’re considering participating in an ICO, then this is the guide to follow word-for-word.
Investopedia Guide to ICOs
If you come from a stock-trading background, you might like Investopedia’s down-to-earth guide to ICOs. It’s short and brief, but it might help you understand the basics more comfortably.
ICO and Crowdsale: A Legal Guide for Cryptocurrency Investors
Feeling unsatisfied that no governments have taken a firm stance on the legality of ICOs? This excellent guide covers the legal side of things in plenty of detail.
Smith + Crown: What is a token sale (ICO)?
There’s not much left to be covered, but one thing Smith + Crown covers which many others don’t is the history of ICOs. Along with a solid guide to the basics of ICOs, this page features standalone sections about the history and evolution of token sales..