2017 was an explosive year for ICOs with around $4 billion being invested in budding blockchain projects, most of which did not even have a working product. In this segment we will examine what an ICO is, how it works, how to safely participate. We will also show examples of successful ICOs and investigate why they have become so popular.
What is an ICO?
An Initial Coin Offering, abbreviated to ICO, is a practise of fundraising for blockchain projects, wherein tokens or cryptocurrencies are offered to investors before they are listed on the wider marketplace, such as exchanges. Investors are particularly willing to participate in ICOs as they are seen by many people to be the best time to pick up tokens while they are at their cheapest.
ICOs are not necessarily always the best time to acquire a cryptocurrency as it is not guaranteed that a token will be valued above its ICO price once it becomes available for general trading. Several cryptocurrencies have traded below their ICO price after becoming available on exchanges.
In practice an ICO is very similar to an IPO (Initial Public Offering) wherein it is the first time investors and the general public can purchase stock in a private company. IPOs are often carried out by smaller, younger companies looking to raise capital, although have also been done by established names like VISA, General Motors and Facebook. Similarly for cryptocurrencies, the tendency for ICOs is to be carried out by startups in the space, although larger companies such as Kodak have also explored the idea of running an ICO.
As is the case with IPOs, many ICOs privately offer a portion of their tokens to professional and early investors before the wider ICO begins. This practise is known as a pre-sale. This is done to secure the support of influential investors, which can potentially be utilised by the company should they need further publicity. This practice is not necessarily popular with regular investors as many ICOs have tried to tempt early investors with unnecessarily large bonuses.
It is advised to be wary of ICOs that openly offer disproportionately large bonuses for early investors. Such coins can be prone to being sold on release and their value decreasing.
The products stemming from ICOs come in three different forms, with the value that they deliver and as a result the value of the token increasing the more developed they are.
- No product: This is the most common form of ICO. In this case a team has been assembled and they have an idea that they would like to execute but no tangible product. It is usually their first project as a group. In such situations, it is especially important to research the team in detail and decide whether it is capable of successfully delivering on its promises.
- Past products: In this case the ICO is being run to launch an application of blockchain technology by a company that already has a proven track record of successfully delivering such products.
- Functioning product: Very rarely the case, but some ICOs will already have a functioning product and are raising money to develop it further and market it.
An ICO can be regarded as completed once its soft cap is reached. The soft cap being a predetermined minimal amount required for the project to move forward. Most ICOs will also have a hard cap which is the maximum amount that they will accept in investment. Should an ICO fail to reach its soft cap all contributions are returned to investors.
As mentioned, most ICOs tend to simply be a team of people hoping to successfully execute an application of blockchain technology. The idea, as well as the process involved, will be detailed in a document known as the whitepaper. As a potential ICO investor it is extremely important to read the whitepaper and arrive at your own informed conclusion about whether the idea is feasible and will deliver value.
Ultimately, it will be these two factors that determine whether the token issued as part of the ICO is successful. It is equally important to be aware of the ability of the team to deliver on their promises. The majority of ICOs will have a team page providing links to each team members LinkedIn. This can be a good place to start in researching the team members in order to make a decision on whether they can deliver on their promises.
Finally, a distinct feature of an ICO is the roadmap wherein the company details how and when it will hit certain milestones in the development of its product. However, the roadmap should only be treated as a guideline because developing software tends to be an agile process, changing as some milestones are hit earlier or unexpected problems emerge.
ICOs are a form of fundraising for blockchain projects, allowing investors to buy into a cryptocurrency before that currency becomes widely available for trading. If cryptocurrencies are high-risk investments, ICOs can be seen as the highest risk way of investing. It is of utmost importance to carry out extensive research by reading the whitepaper, joining any social channels available, researching the team and examining the roadmap before deciding to invest.
The whitepaper is the core foundation of an ICO and it is not unusual for a company to present little else than a single document before initiating their ICO. In this segment we will examine whitepaper in detail, how to best analyze one to get as much information out of it as possible, and how to write one.Read more
Before participating in an ICO
Once a potential investor feels confident about an ICO, having read the whitepaper, carried out due diligence and joined the relevant social media channels, it can still be somewhat challenging process to participate. In this segment of Blockchain Business we will explain the required steps to carry out before participating in an ICO, some of which are mandatory.Read more
How To Participate in an ICO
After carrying out lengthy research, reading the whitepaper, being confirmed on the whitelist and completing any necessary KYC, an investor is ready to participate in the ICO. In this segment we will detail the steps required do so, as well as some of the risks associated and ways to prevent potential pitfalls.Read more
The Risks of Investing in ICOs
As is the case with any investments there is always a risk of capital being lost. However, the nature of ICOs and the space in which they operate also present a host of new dilemmas that investors must be aware of.Read more
How to Run an ICO
Despite the reputation ICOs have garnered, running one is a delicate and complex process and should be treated so. In this segment of the Academy we will detail general requirements and best practises to follow, as well as some tips based on the experiences of the Co-Founder and President of the Lisk Foundation, Max Kordek.Read more
The whitepaper is the core foundation of an ICO and it is not unusual for a company to present little else than a single document before initiating their ICO. In this segment we will examine whitepaper in detail, how to best analyze one to get as much information out of it as possible, and how to write one.