There may be money to be made in ICOs, but only if you know what you’re doing. Like anything in the cryptoverse, it’s a good idea to research the facts before throwing your hat—and money—into the ring!
Here’s a basic explainer of how ICOs work.
How is an ICO different to an IPO?
An initial coin offering (ICO) is used to raise money to launch a new cryptocurrency or blockchain-related project.
Most ICOs offer their investors crypto tokens which can be sold and exchanged for mainline cryptocurrencies like Bitcoin and Ethereum. Assets can often be traded at significantly higher prices.
In some ways, the ICO is similar to a conventional IPO (initial public offering). However, an IPO relates to an established company or asset, while ICOs refer to a speculative project in very early-stage development.
The key advantage of ICOs? They remove the intermediary, or middleman, from the capital-raising process—offering a direct connection between investors and the company they choose to fund.
On the flip side, the investor accepts the experimental nature of the deal. This means they could make a large sum of money, if the project goes well, or lose their investment if it turns out to be a damp squib.
Is an ICO public or private?
This fund-raising activity can be private, presale or public.
- Private ICOs are extended to only a select number of investors. These tend to be limited to accredited investors from financial institutions and high net-worth individuals.
- Presale ICOs focus on the phase before the public ICO. They offer a form of early-bird discounts and bonuses, designed to attract attention before the full crowdsale starts. However, they may require a higher initial investment than a crowdsale.
- Public ICOs, or crowdsales, are open for all to participate. Broadly advertised and promoted, they are a more democratic form of investment and truer to the everyone-welcome nature of the blockchain. While generally being lower risk than private ICOs, they may also offer lower returns.
The stages of an ICO
There are four key steps when creating an ICO.
- Target identification
Founders identify their fund-raising goals.
- Token creation
Tokens are created, using specified blockchain platforms, to give buyers a stake in the project.
- Campaign promotion
Founders advertise the ICO campaign to attract investors, using a range of online platforms.
- Initial offering
Tokens are offered to investors, often structured over several rounds. Proceeds are then used to fund the project. Token holders are free to hold, exchange or sell.
Should I read the ICO white paper?
Yes! The white paper contains important information about ICO funding requirements, along with your rights and responsibilities.
It’s a tricky area, though. Some white papers are overly technical and hard to understand. Claims and estimates can also be inflated to win funding. It’s a good idea to ask for professional help interpreting the white paper.
While ICO regulations vary around the world, authorities are working to tighten up security around this relatively new phenomenon. As with everything blockchain-related, things are changing fast.