On June of 2017, Brave (a web browser maker) hit the news for raising $35 million in under 30 seconds in its ICO. Yes, that is right. But Brave was not alone. A few months later in September, Filecoin raised more than $257 million in its ICO. Other ICOs that netted a lot of money include Tezos that made $232 million in the July 2017 and EOS that raised $185 million in Mid June.
These figures are mind-boggling. If you had not thought about an ICO, you are a step behind. But you are not alone. Many are those who do not understand ICOs, how they work, and risks involved. Here is everything you need to understand about ICOs and make the best decision about them.
What exactly is an ICO?
An initial coin offering (ICO) is a gold rush. It is a great way to raise funds for projects through cryptocurrency projects today. ICO are initials that mean Initial Coin Offering. At times, it is also referred initial public coin offering (IPCO).
ICO is an unregulated method of sourcing funds for startups and new cryptocurrencies. They are used to bypass the complex and regulated capital-raising procedures such as IPO (initial public offering) that demand banks and venture capitalists. This means that the project/startup or cryptocurrency provides investors some units (referred as tokens) in exchange for native assets such as Ethereum or Bitcoin.
Stating from 2013, ICOs have become the biggest source of funds for new cryptocurrencies. The startups create tokens that are sold and traded through cryptocurrency exchange the same way it happens in IPOs (initial public offering). However, IPOs trade shares and not crypto tokens.
The ability to raise huge sums of money has created a new way to fund potential startups and catapult them into the public limelight. ICOs are thought to have huge potential and, could easily become the biggest securities or shares of tomorrow.
How does an ICO works?
Creating a white paper to explain the project
When a cryptocurrency startup project designer decides to raise funds through ICO, the first step is creating a complete plan referred as a white paper. This is the talking point that opens the lid to the project so that public can evaluate and decide to invest the money. The white paper covers the following things;
- What is the startup about?
- The amount of money required for the venture?
- How much of the virtual tokens are pioneers going to keep?
- The type of money accepted for ICO.
- The period it will take to raise funds for the ICO.
Running the ICO
Just like the way IPOs operate through capital markets, ICOs are processed through cryptocurrency exchanges. The exchanges are markets that help people to buy and sell various cryptocurrency native assets such as Dash and Bitcoin.
In some cases, the ICO can be structured to allow investors pre-purchase the tokens. In many cases, the purchase of ICO tokens is done through fiat currencies. However, there are ICOs that can be specific to cryptocurrencies. You should always rush to pick the available opportunity when a genuine ICO is called.
Closing the ICO
The ICO is closed once the target is hit depending on the white paper. However, the raised cash is returned to the owners if the ICO does not raise the anticipated cash. The motivation of the ICO investors is that the project launches immediately and grows rapidly to deliver a high return on investment (ROI).
One of the most successful ICOs was the Smart Contracts under Ethereum cryptocurrency. The ICO raised $18 million worth of Bitcoin. The investors are reaping handsomely because the value of Ether (Ethereum native asset) has grown from less than $10/ether to about $300/ether by the third quarter of 2017.
Legality of ICO
Like cryptocurrencies, ICOs are unregulated. This means the law does not protect them. In reality, the tokens that go on sale in any ICO are not considered financial assets. Rather, they are seen as digital goods which make them referred as crowd sales. Because they are not regulated, running them is relatively easy and paperless.
Notably, the great popularity associated with ICOs has made some jurisdictions take them with great suspicions. In China, the government saw ICOs as huge disruptions because of the large amounts that were changing hands and no taxes was flowing to the government. Their explosion of ICOs is seen to create a new ridge that could deny banks, conventional organizations, and governments of essential revenue.
In September of 2017, The Chinese Government banned ICOs. The government indicated that ICOs were disruptive and cautioned investors that tokens could not be used as currency. The impact of this ban was a sudden tumble of Ethereum and Bitcoin prices globally. The ban went ahead and imposed heavy penalties on the previously completed ICOs.
The Chinese government also cited the risk of fraud that comes with ICOs. Because anyone can issue an ICO, the Chinese administration was perhaps right. Most of the ICOs in the market today are Ponzi schemes. Note that once you have bought the tokens and the ICO turns out to be a scam, there is no way to return the funds.
How to choose the right ICO to invest in?
The whole idea of cryptocurrencies has taken most governments by surprise. Many of them were caught unaware and are now forced to play catch-up. Because there are no regulations, the risk of falling into scammers is very high. But even in such cases, you do not have protection because there is nowhere to run to. The secret at this point is only investing the amount you are ready to lose. Therefore, how do you choose the right ICO to invest in?
- Carefully review the startup team composition. When an ICO is announced, dig as much info as possible about the development team and their experience. Visit their profiles and make a decision based on whether they have innate desire to take the project to the next level.
- Follow the BitcoinTalk.Org community. This is one of the largest cryptocurrency communities that can help you separate great and bad ICOs. Most of its members have been in the crypto world for long and can easily note scams from miles ahead.
- Check carefully to establish the state of the project. Establish whether the startup has a white paper. Does the project have products with limited functionalities? Projects with some reliable operational codes are preferable. However, there are some projects that work equally well without the codes.
- The project community and media. You can only develop ample trust in a startup if there is a highly enthusiastic community. From Twitter to Reddit and Facebook groups, the startup must have a reliable community to provide info to new investors.
- Why does the startup require the token for? Today, a lot of cryptocurrencies are available on in the crypto world. Therefore, does the startup require a separate blockchain? When you ask these questions, you will start getting the underlying motives before deciding to invest or not.
- Customer support. This is the greatest pillar you must test and retest to understand the startup and the ICO. Make sure to ask for clarifications. Remember that it is your money going into the project. Therefore, all the concerns must be addressed. If you note unwillingness to address investors’ issues or inconsistencies, take to your heels.
ICOs are going to become the commonest method of raising funds for companies, startups, and new cryptos. Though they are still mysterious to many, things are likely to change fast in the coming days. Therefore, the target is ensuring you understand the cryptocurrencies, blockchain technology, digital currencies operations, ICOs, and join a critical crypto-community such as BitcoinTalk.org. Despite all the precautions, there is no doubt that investors should only use what they are ready to lose.