What Is An ICO?

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What Is An ICO?

An ICO is a twist on an age-old way to raise money from markets. This twist is due to the fact that all businesses engaged in this funding request are based on Blockchain concepts. Keep reading to understand what is an ICO and how you can be part of its process.

The ICO meaning is Initial Coin Offering, and in many ways, this fundraising exercise copies Initial Public Offerings (IPOs) which are frequently available in stock markets. ICOs came about to help promising startups or businesses which need to accelerate their growth get the funding they need.

What are Crypto ICOs?

ICOs are commonly described in a variety of ways. Crypto ICOs,  Token ICOs, UK ICOs, and US ICOs are just a few terms which are commonly thrown around in announcements and forums. In reality, these offerings are all very similar and only feature minor differences, such as where they are based or whether they are offering a coin or token.

ICO Benefits

ICOs, in general, are becoming increasingly popular as they provide benefits to both the company and the investor. The key benefits to the business are:

  • Getting much-needed funding without the burden of complying with extensive regulation
  • Proving market interest in the proposed solution
  • Receiving funds whilst, in most cases, not giving away valuable company equity
  • Financial wiggle room to carry out further research and development

Similarly, by buying into new ICOs, the investor can look forward to:

  • Getting a great deal as part of a new cryptocurrency release with the potential of selling it for a sizeable profit in a future date
  • A preferred status which provides early access to new solutions and, potentially, shares in the company’s earnings
  • Being part of an exciting project as a supporter early on

ICOs: How Do They Work?

How do ICOs Work

Now that we have answered the question of what is an ICO, let’s move on to how do they actually work. 

New ICOs are born out of an idea by a company to venture into a new business or project. The first step to launching this offering is to publish a whitepaper. In this document, the company provides details of the project and any other information which it believes could help to attract interest and, eventually, investors. The level of detail varies between whitepapers, but in the good ones, you would expect to see, as a minimum, project milestones and projections, capital required, and potential.

When an investor reads the whitepaper and is satisfied that it is worth investing in, the purchase is made. Initial Coin Offerings are normally sold on the project’s website. In return for their investment, investors normally receive new cryptocurrencies or tokens. These tokens are issued on Decentralised Application (DApp) platforms, such as Ethereum.

The Story of ICOs

The history of Initial Coin Offerings started in 2013 when Mastercoin sought to raise cash for a new digital currency. The company successfully raised around $5 million for its communications protocol, and this naturally led to great interest in this new funding mechanism. In 2014, Ethereum’s ICO raised a surprising $18 million in just 42 days.

For the next couple of years, the number of ICOs continued to increase slowly, but between 2016 and 2017 over 900 pre-ICO whitepapers were published. Collectively, these led to over $6.2 billion being raised in 2017. This record was smashed just a year later, with $7.85 billion raised across 1,200 new ICOs.

The Most Successful ICOs

To date, the ICO which raised the most funds is EOS. It took just five days for $185 million to be raised. In multiple funding rounds carried out in 2017 and 2018, EOS raised over $4 billion. Other successful ICOs include:

  • NEO – Raised $5 million in multiple rounds in 2015 and 2016
  • IOTA – Only raised just over $400,000 in 2015 but provided an ROI of 332,500%
  • NXT – Raised just $16,800 but provided investors with an ROI of 1,477,000%
  • Lisk – Raised $6 million in a single round in 2016

Are ICOs and IPOs Similar?

Now that you understand what is an ICO, let’s compare it to an Initial Public Offering (IPO). Both these mechanisms provide an effective way for businesses to raise money, normally, from a large pool of investors. Whilst new ICOs produce a whitepaper, a new IPO will detail its project in a prospectus.

There are several differences between the two, however, with the first one being regulation. Whilst IPOs are highly regulated and scrutinised by authorities, ICOs are generally unregulated, and therefore, considered to be a riskier investment. This makes launching an IPO exhaustively more expensive and bureaucratic than an ICO. However, the number of investors looking at IPOs is significantly higher than the ICO market.

How to Create an ICO

Create an ICO

Although this guide is focusing primarily on what is an ICO and how it benefits businesses and investors, we will briefly look at how you can set up your own ICO. The main steps to follow are:

  1. Define the project. No ICO can hope to be successful, or even useful, unless it presents a problem and a viable project to address it.
  2. Validate the funding mechanism. Is an ICO the right route for your idea or should you look at angel investors, crowdsourcing or other alternative sources of funding?
  3. Research your competition. As with any business, you need to understand if and how your project will be better. Remember, at the moment you are competing for investors, not users. However, investors will be more easily convinced if you prove that you can attract more valuable users than the competition.
  4. Ensure compliance. Speak to a competent person about ensuring that launching ICOs is legal in your country. Be sure to adhere to any regulation so as to reassure investors that you are well prepared and professional.
  5. Create the token. From planning how many rounds of fundraising you will hold to what form of rewards will be given to investors, there is a lot to think about at this stage. Each token ICO is different, but you will need to answer many important questions, such as will you organise a pre-ICO and what is your distribution plan?
  6. Write it down. The next step to create an ICO is to create the first draft of your whitepaper where you list the details of all the previous stages. Remember to be clear about the capital required and what milestones you aim to acheive in the future.
  7. Promote your project. You’ve done a lot of work so far, but this is where things get even trickier. An ICO can only be successful if it raises the minimum target funds, and you can only hope to do this if investors know about you. Create a website detailing the whitepaper in visually-appealing ways and carry out marketing and PR campaigns to ignite the market.
  8. Launch the ICO. By now you should have already determined in which way you will sell the project’s tokens. The important part of this and later stages is sticking to the plan as much as possible and being honest of any changes. The last thing you want is for investors to doubt the legitimacy of your offering.

ICO Drops

As an investor, trying to locate ICOs can be tricky, buy ICO Drops can help. This independent database provides details regarding most coin offerings, including upcoming and completed/ended ones.

Lending Block

Lending Block is a platform designed to facilitate cross-chain lending and offer an alternative to ICOs. This open exchange connects cryptocurrency loan lenders with borrowers in an efficient and transparent way.

Most countries around the world have yet to provide any sort of legal framework in which cryptocurrencies, and, by extension, ICOs, can operate legally. This does not mean that ICOs are illegal in these countries, but rather, there is no specific law that governs them. This grey area has led to several ICO scams which have raised serious doubts about the future of this fundraising option. However, efforts are being made to regulate the industry by, amongst other measures, introducing elements of KYC and AML in line with banks and traditional exchanges.

The challenge for authorities remains the fact that ICOs are decentralised and it is often difficult to determine under which legal jurisdiction an offering falls under. It is likely that as authorities develop a legal framework they will outline conditions for participating ICOs to be approved. Such an approval from a reputable authority, such as the US SEC, would likely attract a higher number of investors and provide much-needed credibility.

The Definition of a Token

Whilst some ICOs might offer coins, others might just be token ICOs. The difference could affect what existing regulation companies raising funds must adhere to. In the US, for example, providing a utility token in exchange of investment does not classify as a form of financial security. Equity coins, however, are a form of security and must adhere to existing legal frameworks.

Avoiding ICO Scams

Unfortunately, an unregulated and decentralised market is the ideal breeding ground for fraudsters and scams. One of the most notorious ICO scams took place in 2018 when 32,000 investors lost a combined $660 million investing in Ifan and Pincoin.

With no authority or financial advisor to turn to, it is up to you to protect yourself and your funds from such scams. Here is a list of measures you can take to stay safe:

  1. Read the whitepaper. Ignore the hype around a particular ICO and instead read the whitepaper. Research the team and, as a minimum, check that the project has clear future milestones and is seeking to solve a problem.
  2. Be wary of FOMO. Fear of Missing Out (FOMO) is a common vulnerability of investors and one which fraudsters seek to capitalise on. If an offer looks too good to be true, it is likely a scam.
  3. Look for transparency. Another important element to look out for is the code of the project. Reputable ICOs feature their code publically, normally on GitHub, where it can be scrutinized by competent persons.

China’s Ban on ICOs

In September of 2017, China announced that it will be banning all ICOs in the country. Citing the risks which ICOs pose on the existing economic and financial order of the country, the country’s government declared that several exchanges would be audited by the authorities periodically. China is not the only country where ICOs are banned. South Korea also banned their sale in 2017, and several other nations are warning the public about their potential risks.

Investing in ICOs

Once you are confident in your understanding of what is an ICO, you might be interested to invest in one. The process to do this is fairly straightforward.

  1. Register with the project’s website and open an account with a reputable cryptocurrency exchange
  2. Exchange fiat currency for Bitcoin or Ether, depending on the project’s supported currency
  3. Transfer your funds from the exchange to a wallet under your control
  4. Transfer the appropriate funds to the project’s wallet address and provide your address to receive the tokens

When choosing which wallets and exchanges to use, ensure that they are ICO-friendly. In the case of exchanges, Binance and Changelly offer multiple options to pay whilst charging low conversion fees. If you’re looking for wallets, you cannot get much safer than a Ledger wallet which is able to support over 1,000 different coins and tokens.

What About IEOs?

A close alternative to an ICO is an Initial Exchange Offering, where only registered members of a particular exchange can purchase the initial tokens. IEOs are normally subject to enhanced due diligence by the exchange and are often seen as a safer option for sceptical investors. You can read more about IEOs in this detailed guide.

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