ICO stands for Initial Coin Offering. It represents the very first token sale offered to the public by a new crypto venture. It is a new way of raising funds for various types of blockchain projects, done by selling their native cryptocurrency.
Initial Coin Offerings (ICOs) have raised a total of $22.5 billion since 2014. In 2019, a total of over 3.7k ICOs opened. March 2019 alone had a record of 528 new ICOs but the total ICO funds raised grew only 13% on a year-over-year (YoY) calculation.
Typically, leading cryptocurrencies like Bitcoin, Ethereum, and NEO are used to invest and purchase tokens offered during an ICO event. In a stock market setting, it resembles how shares of a company are being sold through an Initial Public Offering (IPO).
Both are indeed public offerings but differences between IPO and ICO can be observed. For one, ICOs are mostly unregulated and grant little to none rights and assurance of ROI to investors.
History of Token Sales
In 2013, Mastercoin held the first-ever token sale. In a peer-to-peer (P2P) manner, it raised around $500,000 worth of Bitcoin. On the other hand, Ethereum raised 3,700 BTC in its first 12 hours with a token sale conducted in 2014.
In May 2017, ICO for the new Brave browser generated over $35 million in 30 seconds. By November 2017, there were around 50 offerings a month. By the end of the year, ICOs raised funds almost 40 times compared to 2016.
As of January 2018, the most noteworthy ICO event done by Filecoin successfully raised $257 million. Notably, Ethereum remained to be the leading blockchain platform for ICOs with over 80% market share reported in February 2018. Developers usually deploy tokens based on the ERC-20 standard.
Crowdfunding and syndication lawyer Amy Wan described the token in an ICO as “a symbol of ownership interest in an enterprise — a digital stock certificate,” expressing that these are subject to regulation as securities in the US.
How do Initial Coin Offerings (ICOs) work?
An Initial Coin Offering (ICO) normally involves selling a new digital currency or “token” at a discounted price as a way for a company to raise money. Even though there are currently no definite regulations and rules on how to prepare ICOs, the majority will follow a sequential approach in five stages:
Project Creation Stage
The first stage will be idea creation and whitepaper report creation.
The company that will launch the Initial Coin Offering (ICO) will present the idea in the market to assess the interest of investors in the project. Upon creating an effective whitepaper, it must contain complete data about the business model, underlying tech and features, proposed expenditure of funds, etc.
The presale stage will be the second stage. It is important to promote and advertise the Initial Coin Offering (ICO) on relevant channels.
A user-friendly ICO launch website is deemed necessary. Moreover, marketing the website through social media channels like Telegram, LinkedIn, YouTube, etc. increases the exposure and awareness of the project’s launch and development process.
Technical Development Stage
The third stage will be the technical development stage.
For Initial Coin Offering (ICO) launch and development, any decentralized application (DApp) will require the development of smart contracts to implement complex business logic for ICO tokens. Through smart contracts, developers deploy tokens in the blockchain, ensuring reliability and transparency.
Digital marketing and PR will play a vital role in successfully launching an Initial Coin Offering (ICO).
Hired specialized agencies to present the project’s purpose at various roadshows, conferences, etc. At the end of the marketing campaign stage, the process of selling and buying tokens will begin.
Token Sale Stage
In this stage, the Initial Coin Offering (ICO) releases the respective tokens of the projects.
Early investors may instantly receive the tokens. They trade these tokens once listed on crypto exchanges. Otherwise, the token release may happen once the platform launches, in order to bring a return on investment (ROI) for ICO participants.
Initial Coin Offering (ICO) Tokens
The core aspect of Initial Coin Offerings (ICOs) are the tokens. These tokens are a fascinating topic, with new innovations coming out every day. It represents value within the growing decentralized economy.
An ICO token is generally a symbol of contract where the value will not depend on any dynamic market criteria. This contract is a type of smart contract.
In simple definition, a smart contract is a computer code that automates the execution of agreements and eliminates the need for a middleman.
The token contract will contain a map of account addresses and their balances. The balance represents a value defined by the contract creator. In this case, the unit of the balance is called a token.
The token contract can use the balances in order to represent the physical objects, monetary value, and the holder’s reputation. The full contract cycle is as follows:
a. Token creation
The company writes the basic rules concerning the token amount, token value, and other special conditions. Once created, the platform serves as a smart notary for all the transactions in the future.
b. Token acquisition
The process of buying the token is similar to buying a Pepsi in a vending machine. Usually, people will approach the machine and drop a coin before pushing the Pepsi button to dispense the beverage. Once the machine verifies whether the product is in stock and the coin dropped is sufficient, only then will the machine release the drink.
That will be the same scenario when buying the token. Once people register for an ICO and have their funds available and ready, they need to send their cryptocurrency to the campaign’s address. After which, the people will get their corresponding ICO tokens.
c. Token transaction
Tokens can be transferred using a wallet supported by the same platform that issued the token. The token transfer will not take place during the lock-up period. If a startup creates a cryptocurrency and launches it through an Initial Coin Offering (ICO), it may define a lock-up period that can last for up to two years. The lock-up period is a window of time when owners or investors are not allowed to sell or redeem their tokens.
Initial Coin Offering (ICO) token became a tool for fundraising for many aspiring entrepreneurs.
There are four main token types:
a. Utility tokens
Network financing utilizes utility tokens to provide buyers with a guarantee of being able to consume some of the network’s products.
Imagine the park is going to open, lots of tokens can be bought before the park officially opens. If the park becomes popular, the value of the token will increase as more people opt to use it.
b. Equity tokens
An equity token is a security token that functions as a traditional share and takes its value from the company’s success or failure.
Previously, when startups do not utilize crypto for funding, stocks are issued. On this occasion, the equity token holder will be getting the commission and will be able to take part in the decision of the company.
c. Credit tokens
Holders of credit tokens provide loans to startups so they can raise money. This can also be explained as investing some amount with some extra profit. For example, investing X amount and getting X + Y percent profit.
d. Combo tokens
Combo tokens generally represent a token that is more than one type.
For example, tokens Digix and Sia are both tokens and stocks, while Steemit has three types of tokens namely Steem and Steem Dollars (SBD) which are tradeable in exchanges, and Steem Power (SP), a symbolic token that signifies how much power you have in the platform.
Once the ICO event closes, investors proceed to trade the purchased tokens on their listed exchanges. Usually, ICO tokens are sold at a much lower price which is beneficial to early investors as the token price can increase in the future.
How do people make money from Initial Coin Offering (ICO)?
Initial Coin Offerings (ICOs) allow blockchain-based startups to raise capital quicker and with less formality, letting them begin building their projects more rapidly. Here are some ways on how people make money from holding an ICO:
Long term holding and investment on different ICOs
People will get the tokens on their wallets immediately but those can’t be traded until it becomes listed on an exchange. Normally, half of the people dump the coin looking to make a quick buck.
It will be easy to make money when you are closely watching the trends. Some coins will trend up as soon as they hit the market. Other people tend to hold on to a token in a belief that its value will increase further in a later time.
Doubling the product price
The company must be able to price the product at more than double the actual cost, or else the venture will fail. For example, the cost of making a widget is $1, then the retail price should be at least $2.
If the startup cannot price it for $2 or higher thinking that people will not pay that amount or competitors produce products cheaper than the startup, an ICO may not be successful.
Reserving more than half of the token
Initial Coin Offering (ICO) firms should reserve more than half of the tokens for the market stage. If it sold more than 50% of the tokens in the fundraising stage, the startup will have given away more revenue sharing rights than what was needed.
High-quality marketing plan
Campaign marketing will usually be the key to an ICO’s success. The value of the token somehow depends on the value perceived by the social media community.
As observed, communities can take time to build. The popular communities to attract the audience for token sales include Reddit, Facebook, and BitcoinTalk.
Fulfill promises to investors
Initial Coin Offering (ICO) firms should have the ability to meet the expectations outlined in the whitepaper. The higher the company’s revenues, the more profits are received by the investors and the token holders. Eventually, the price of the token itself would grow.
Preparing for failure
Recognize that Initial Coin Offerings (ICOs) are still an unregulated territory. While seeing startups raise millions through ICOs, the bubble could burst. If the ICO doesn’t perform well, it will be good to have a backup plan like a small business loan in place.
Key success factors for Initial Coin Offering (ICO)
In order to have a successful ICO, the company initiators should take the following key considerations into account:
Unlocking business potential
While a business promotes its Initial Coin Offering (ICO), the product has to be directly linked to blockchain and cannot be replaced by a non-blockchain system. A primary problem for an ICO token released is that as soon as it hits the markets it will come under massive speculative pressure.
The only thing which can counteract that is an equivalent demand for it, produced by real utility.
Building an amazing team
One of the most important factors in any crypto project will be the team.
If an Initial Coin Offering (ICO) project is backed up by people who are well known and respected in the field of blockchain or in the specific niche of the ICO company’s business, this will help build credibility to the users and investors.
Sending the right message
For communicating the project goals, it is imperative to have a whitepaper and a roadmap prepared before an Initial Coin Offering (ICO) launch.
Additionally, frequent communication with the audience is important both before and throughout the campaign. This will bring more people on board to support the project as well as provide feedback that can be applied by the team at their own discretion.
Securing investors’ interests
At the beginning of an ICO event, investors use early-bird discounts to get incentives. All contributions are collected in a multi-signature wallet, with the names of all key holders. This provides a guarantee for investors’ funds’ safety.
Utilizing an Initial Coin Offering (ICO) platform
Special platforms are available whose entire purpose is to ease both the process of launching an Initial Coin Offering (ICO) and investing. These platforms aggregate various crowdfunding projects and make it easy for contributors to find the ones they want to invest in.
Abiding by the law
Upon launching an ICO, a country’s legal aspect must be considered. While some countries have laid out generic guidelines for ICOs, others can extend from detailed stipulations to no guidelines.
Pros of Initial Coin Offering (ICO)
There are a lot of reasons why ICOs have been growing in popularity. At the very least, these advantages encourage more contributors to choose ICOs over other options to invest their money.
Easy to access
Normally, investors will have their own budgets. Companies that use crypto as investment will provide more access to different investors from all economic levels.
By having token sales, startup companies who may not have the necessary funds to start their project can benefit by selling tokens that can raise their value potential over time.
Investors buy and sell high liquid assets easily in the market, without heavily affecting its value. Considering that cryptos are safe and effective, it will not require a physical form to be exchanged. These are relatively more liquid compared with other assets.
Some of the most successful Initial Coin Offerings (ICOs) of all time started from a relatively low value and steadily increased their market value. The success of this kind of ICO is that they were able to provide something new, exciting, and functional to investors that other ICOs were not able to provide.
Traditional assets usually depend on various regulatory filings that can take up time and energy. Initial Coin Offerings (ICOs) usually rely on blockchain technology to keep a ledger on its various transactions. This allows less paperwork as everything is digital and data are updated within seconds.
There are no blocks or intermediaries that exist between the buyers and sellers. Once a project’s crypto launches, the public may purchase it immediately without the role of any middleman.
Cons of Initial Coin Offering (ICO)
Although Initial Coin Offerings (ICOs) do come with real benefits, they also have their consequences. There are downsides to these public fundraisers that investors should be aware of.
Perhaps, ICOs deal with stolen funds as their largest issue. Well-marketed ICOs usually draw in many investors. One example of a missing fund is an ICO in Vietnam which has raised over $660 million. This is known to be the largest ICO exit scam in history.
Promoted by two massive celebrities, the Centra ICO project raised more than $32 million. This came to an end when the US Securities and Exchange Commission labeled the project as fraudulent and arrested one of the co-founders.
To avoid more scams, ICO Mission Control thoroughly check its hosted projects to ensure their legitimacy and genuine partnerships.
Joining Initial Coin Offerings (ICOs) entail providing necessary information to the company. Decentralized Architect for a Democratic Internet (DADI) ICO proven this major security risk as it funded its decentralized web hosting platform.
Due to this, data leaks have become a constant threat during ICOs, affecting the number of investors participating in these events.
Are Initial Coin Offerings (ICOs) legal?
The short answer will be it depends on the place where a person is. Depending on the project’s nature, some ICOs breach existing regulations or banned altogether in some jurisdictions. Let’s look at some major markets.
The People’s Bank of China declared ICOs as illegal, warning people of the risks involved in investing. In South Korea, they banned people from raising money through digital currencies. In the US, there are no specific regulations for ICOs, but depending on digital coin classes, it may fall under the jurisdiction of the Securities and Exchange Commission (SEC).
The SEC said,
As with any other type of potential investment, if a promoter guarantees returns, if an opportunity sounds too good to be true, or if you are pressured to act quickly, please exercise extreme caution and be aware of the risk that your investment may be lost.
In Europe, the European Securities and Markets Authority (ESMA) released guidance on Initial Coin Offerings (ICOs). The regulator said that ICOs that qualify as financial instruments could fall under the relevant laws to do with anti-money laundering (AML) or investment legislations.
Some countries are attempting to actually create new rules in order to bring ICOs into the regulatory fold. In Abu Dhabi, the regulator has published guidelines on launching ICOs. Under the guidelines, companies wishing to execute an ICO must approach the Financial Services Regulatory Authority to see whether it will fall under the body’s regulation.
Many countries are looking into how to regulate ICOs but there’s clearly a disparity around the world. The factor behind major scams is the lack of regulations which is one of the biggest issues right now with ICOs.