ICO is an abbreviation for Initial Coin Offering. ICO means that a cryptocoin developer is offering investors coins or tokens in exchange for funds to develop a startup or a new company. Unlike IPOs (Initial Public Offerings), ICOs are unregulated and therefore bypass the rigorous capital-raising process required by banks and traditional investors.
Before proceeding, you’ll need to know more about what cryptocurrency is. Cryptocurrency, or cryptocoin, is a digital currency made to work only in a specific exchange network. The network, not a centralized governing agency, controls the number of currency units, or coins. The network also safeguards the assets and verifies transactions within the network.
The first cryptocurrency exchange network was Bitcoin, developed in 2009 by Satoshi Nakamoto. Bitcoin was the first digital currency and has set the standard for cryptocoin development. However, Bitcoin was not funded by outside investors at all. As far as we know, Nakamoto invented and developed the coding for the Bitcoin blockchain without funding from any sources.
Cryptocoins are currently exchanged at over forty cryptocurrency exchanges worldwide.
Things You Should Know About ICOs
In order to further familiarize yourself with ICO’s, here are a few things to consider.
The ICO has Only Recently Taken Great Strides
Although Bitcoin has been around since 2010, it has only been since 2013 that ICOs, also known as token sales, have been used to finance the development of a cryptocurrency blockchain.
The popularity of ICOs has grown in the last two years. Since 2016, more than 250 teams have started and finished their blockchain development. Some of these firms have closed down, but others, such as Ethereum, are still operating and some are even making money for their investors.
ICOs have democratized funding for startups. These token sales have made it possible for anyone anywhere to participate in developing the digital currency market. There are several online sources for ICO lists if you are interested in investing through ICO.
ICO is Only Mildly Similar to IPO
Both actions are made to increase funding for a company or firm.
However, IPOs are very strictly regulated by the Securities Exchange Commission in the US and similar agencies in other countries. Although the SEC is beginning to see the need for regulations of ICOs, there is currently no front-end regulation of the ICO process. The SEC intends to monitor ICOs and will determine the regulations for them on a case by case basis.
An IPO is the public sale of stock or shares in an existing company for the first time in order to gain money for the business to expand or develop new products or services. IPOs are generally offered to an exclusive group of investors, venture capitalists, and investment groups, whereas ICOs are offered to anyone and everyone.
In fact, traditional venture capitalists and institutions tend to avoid ICOs, if they are even offered the option to buy in. Because the digital currency arena is unregulated and decentralized, traditional capitalists are mostly opposed to cryptocurrency.
Successful ICOs Combine a Strong Knowledge of Economics and Game Theory
These are well-planned events that have generated interest before the actual opening of the ICO. Well before the actual offering occurs, a successful firm will have created the blockchain for the currency, determined the exact capital needed to fund the project, and written whitepapers—probably several versions.
Non-profits, scientific research, open source projects and volunteer organizations (entities that are not heavily incentivized but provide a real service or value to the world) are great opportunities for ICO. The firm’s team must market the project to investors who are likely to support their idea.
All Reputable Startups Will Offer a Whitepaper
Whitepapers will delineate a plan for proceeding after the ICO and how they will use the raised funding. Many firms are dedicated to solving real-world problems, such as reducing ocean pollution, and their whitepapers will explain how they plan to do that.
Whitepapers should include most of the following:
- A clear table of contents
- A good introduction, explaining the proposition
- Easy to read diagrams and statistics
- A clear explanation of the product or service
- The plan for future development and generation of future revenue
- An explanation of the distribution of cryptocoin or token
- Pages that describe the leader and the members of the team
In addition, the whitepaper should also briefly explain the technological and coding background of the blockchain tokens they are offering.
The Right Landing Page and a Whitepaper
These two elements can raise significant amounts of money and can be done through Bitcoin or Ether.
As with any venture, there are those who will present a wonderful sounding fraud. There are some key warning signs that an ICO is either not legitimate or destined to fail.
- The ICO does not require some a formal registration with identity verification
- The whitepaper is not well prepared or is filled with technological jargon, making it hard to understand
- The people involved are not willing or able to make an appearance
- The vision and mission are not clearly expressed
- It sounds too good to be true
- They promise high returns on your investment
- The blockchain currency or tokens are not already created
A startup that has not already developed an operational currency code is not likely to be successful. If a firm has not done that bit of legwork, then they are a very risky investment. This is especially true because Ethereum freely offers the code to create smart contracts specifically for creating an ICO.
When investing in cryptocurrency or for any kind of investment in a startup company, for that matter, keep these things in mind:
- Look for a strong leader—without a strong leader nothing will get done—the leader should be a visionary, willing to stand by and in front of their idea, and able to present themselves and their ideas successfully in public relations events.
- Look for a strong team behind the leader and chemistry within the team. If possible, meet with or interview the team members. Try to determine their level of commitment and how they respect one another. To determine their level of commitment to their project ask them about their plans if the ICO is not successful.
- Look at the community. The community is the global community, around the world. Determine the kind of community the startup is nurturing or creating. Are they forward thinking? Do they promote growth? Is the community positive and promoting awareness of their issue?
- Ask if they are solving a specific problem. The leader and team should be clear in what they are doing to improve the status quo. Every new product or service should be working to fulfill a specific and clearly defined need. More importantly, the members of the company should be able to explain how they are doing that.
- Consider the timing. Is the marketplace ready for this product or idea? Some people might consider timing to be a matter of luck, but it is more a matter of thoughtful planning.
- Finally, remember that you aren’t investing in the technology. You are investing in the idea and the people.
When you purchase tokens or cryptocoin during an ICO, you should buy them because you are interested in supporting the project. Purchasing these tokens with the idea that you will become rich is a risky proposition.
Sometimes, there is little financial gain from the purchase of an ICO coin. Once an ICO is ended, the tokens are distributed to your wallet, so you can save, trade, or exchange them. But don’t purchase the cryptocoin or tokens with the intent to get rich quick.
Yes, you may become lucky enough to have high returns on your investment. As long as you have invested in a startup that you believe in, rather than one that promises you the moon, you can be satisfied that you are contributing to the greater good of the world.
Always remember: when contributing to any startup, whether through ICO or IPO or any other means, never invest more than you can afford to lose.