What is an ICO (Initial Coin Offering)? How does ICO works?
SEC Chairman, Gary Gensler, used to state that “Every ICO is a security”. The keyword has been under the radar of the SEC for a while. Projects that launched ICOs are alleged to violate U.S securities laws. In this article, we will go through the definition of ICO and everything about this buzzword.
What is an ICO (Initial Coin Offering)?
ICO (Initial Coin Offering) is a fundraising method used by early-stage startups in the crypto market. In 2017, it created a peak mania in the community due to the token sales. The project startups spend the raised funds on building the ideas.
During the golden age of ICO, investors could multiply their initial investments by hundreds or even thousands of times. They fought ICO as a potential opportunity to make it in the crypto market fast. Without a doubt, ICO or similar fundraising methods can change investors’ portfolios.
The asymmetric ratio between return and loss is so big that it lures new entrants into the market. Thus, to understand its potential and avoid mistakes, we present this article to provide actionable insights into ICO.
History of ICOs
ICO has been around the crypto market since 2013, when it was first used by Mastercoin (later rebranded to Omni), a communication network built on top of Bitcoin. The network raised $600k to expand Bitcoin’s capabilities.
Later in 2017-2018, ICO became so popular that it turned into a buzzword among the crypto community. Thousands of ICOs were launched at that time. Crypto startups raised billions of dollars worth of Bitcoin, ETH, and other accepted cryptos.
However, the ICO hype inflated a bubble that ultimately went off. Countless startups ran away with funds. Some were not able to survive the harsh truth of the market.
2017-2018 was the time when top blockchain platforms were launched, including Ethereum, Cardano, Tezos, etc. Therefore, it would be subjective if we jump to conclusions about ICO.
Nowadays, startups prefer other new fundraising mechanisms (IEO and IDO) to ICO.
What are ICOs used for?
Early-stage startups use the ICO method mainly for fundraising activities. After an ICO, the project team receives capital to start executing their plans. As global investors roll in ICO investments, startups can raise an extraordinary amount of money that exceeds their expectations.
How does an ICO work?
To participate in an ICO, investors send their tokens to an existing blockchain address to earn fresh-new tokens issued by the projects. Remember, ICOs are conducted on blockchains that are already functioning.
In 2017, Ethereum dominated the smart contract market. There were no other blockchains like Ethereum at that time. As a result, the ICO mania was fired on Ethereum, which was also previously funded via an ICO.
When a crypto project announces to raise capital by using the ICO method, the team will release details about the upcoming ICO, including the date, the amount reserved for the token sale, where it is launched, etc. Especially, how to get whitelisted is a key factor.
To get allocated, investors have to meet the requirements given by the project, such as a specific amount of contribution, social media interaction, or luck.
If eligible for the ICO, investors will have to purchase the tokens by sending their cryptos (BTC, ETH, Stablecoin, etc) to the address given by the project. This is how you purchase the project tokens in an ICO.
However, as easy as it seems, investors should do their own research on projects before placing the investment. In the following sections, we will dive deeper into ICO.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
At the current stage of the blockchain space, we see many projections from traditional finances to decentralized finance (DeFi). IPO has been so popular among speculative investors for many decades. Akin to IPO, ICO is the more blockchain-enabled version but is yet to be final.
ICO is somewhat a small fork of IPO in traditional finance with some differences. As time went on, it exposed many drawbacks that needed to be modified to fit the new circumstances. Many variants came up, and new ideas were started. Despite this, ICO had its golden era.
Types of ICO
Private ICO
As its name suggests, a private ICO is for insiders who are selected by the team. They receive pre-issued tokens before the ICO is launched. This creates a strong advantage for them against other public investors.
Private investors will get access to the best price of the token.
Public ICO
As retail investors, we participate in a public ICO (ICO for short) permissionlessly. We purchase the tokens by sending cryptos to the wallet address specified by the project.
Pros and Cons of ICO
Opportunities always come with risks. ICO can be considered a high-risk investment. It can give investors massive return on investment if the ICO is successful. A notable example is Ethereum, a blockchain platform with smart contracts. At the time of writing, it is leading the crypto market, only behind “the digital gold”, Bitcoin.
On the flip side, there are risks of losing the funds since it is simply an investment. However, in every game, knowledge is your sword, and you should sharpen it. Understanding the pros and cons of ICO can help you avoid risks and find real opportunities.
In the following sections, we will go through the advantages and drawbacks of ICO.
Advantages of ICO
1. As fundraisers
- ICO can raise funds from investors around the world. The Internet is a borderless world and blockchain is running on top of it. By using cryptocurrencies, investors can participate in the fundraising rounds led by venture capitalists or startups regardless of geographical location.
- Web3 startups can raise a massive amount of capital in cryptos, likely making them in overvaluation. Imagine that global investors are now able to gather in one place and throw their money. New technology creates cults with strong convictions, especially those who believe in blockchain.
- Raised capital is delivered directly to the startup team. Fast and instant deployment can accelerate the growth of startups. They can go on a hiring spree to get more crypto natives on board. Furthermore, the team with sufficient capital can keep pace in executing ideas in the long term.
- In the 2017 - 2018 crypto circle, ICO had its peak, and billions of dollars were raised. At that time, crypto startups only made promises and showed commitments. As a result, the information was sometimes illicit for investors in the ICO. This created a moat for startups, but it caused skeptics among the community.
2. As investors
- What caught your attention in the first place to know about ICO might be the high ROIs (Return On Investments). It is understandable that we all go into the crypto market with the aim to make profits. New entrants embraced every possible opportunity of being early investors in ICO.
- Furthermore, ICO investments can generate a massive amount of profits if the startup is able to deliver the vision. ICO is deemed for long-term investors, not pump and dump schemes.
- Investors are anonymous, and the on-chain data is transparent. In the blockchain world, it is extremely difficult to find someone’s identity because of the cryptography algorithm. Otherwise, raised capital in crypto is trackable on the blockchain, helping them follow the fund deployment.
Risks of ICO and how to avoid
It will be useless not to mention the risks of ICO. At present, the drawbacks of ICO might outnumber its benefits. As a result, ICO is barely used for fundraising in crypto nowadays. The greed from looking at big numbers can blind you from being aware of the must-know risks.
In the past, ICOs kickstarted by crypto startups were not regulated by the government. They bloomed fast and caused irreparable damage to investors. Many fraudulent schemes were made, leading to billions of dollars lost. Today the SEC stepped in to protect investors.
Investors and startups should understand current regulations where they live. They will have no protection from the authorities if the regulatory policies are yet to be finished. In addition, startup founders might face allegations for organizing ICOs.
The crypto market has no obligations or signed commitments. Startup founders can rug-pull the fund on a beautiful day after the ICO when nobody in the team wants to continue building the project. They drain out the fund and run away.
This often happens in anonymous teams since investors do not know who they are. As a result, do research and find teams you can trust.
Price manipulation by big whales is popular since the crypto market is comparatively small to other traditional markets such as stocks and gold. Crypto veterans hold a large number of tokens after the ICOs. They maneuver the price in order to make small investors capitulate.
In fact, ICO is useful for projects that come to fundraising. The one who uses this tool will decide which path to take. As a result, a deep assessment of the team is a must for investors.
How to launch an ICO
Who can launch an Initial Coin Offering?
ICO is permissionless, and everyone can launch it. However, it is not as easy as it sounds.
Anyone can kickstart an ICO to raise funds from the global community. To launch a successful ICO, the team should take every step into account. Nowadays, ICO is considered illegal by U.S. authorities. But how do some projects make it and have no charge? Here are a few steps:
Step 1: Build up the team, the technology, the solutions, the products, etc.
Step 2: Get to know the laws and regulations of the country where the ICO is launched.
Step 3: Design a formal whitepaper that shows the community the technology, tokenomics, and everything essential.
Step 4: Set an avenue where the ICO is launched and broadcast the details to the community.
Step 5: Receive the invested funds and distribute the token to investors.
To make a big hit in crypto, the time to launch an ICO also plays a key driver. No matter how well architected a project is, investors in a strong bull run are emotionally driven to throw their money. As a result, ICO and some other fundraising methods (IDO and IEO) are likely to be kickstarted in the running phase of the market.
How to invest in an ICO
Where to find upcoming ICOs
In 2017, most ICOs were conducted on the Ethereum network. On the other hand, new smart contract platforms have emerged, such as BNB Chain, where ICOs take place.
To look for upcoming ICOs, we’ll introduce some websites that track data and the latest news:
However, as investors, we should be cautious of the ICO list since the site owner can mix the goodies with baddies. Launching an ICO is a piece of cake, but having a successful one is extremely challenging. It needs a down-to-detail preparation from the team.
How to join ICO
Every project launches ICO with a detailed how-to guide for investors to follow. It depends on how the team is planning the ICO, then they modify it to fit their needs.
The following step-by-step guide can help you not only with ICO but also with other fundraising mechanisms such as IDO and IEO.
Step 1: Register an account or connect a crypto wallet.
Step 2: Deposit funds into the account or the connected wallet.
Step 3: When the ICO starts, use funds to purchase tokens.
Step 4: Hold the tokens in the wallet or trade if they get listed.
To check if you’ve successfully participated in the ICO, you should look at the balance changes and whether you have purchased the tokens with your funds. If you come across any issues, please get support from the team or the place where the ICO was conducted.
How to evaluate an ICO project
Before any investments in crypto, we should do research on what we will invest in. The success of an investment depends on numerous factors, which is a game of probability.
Even if all possible factors account for the investment, it will not give you a sure win. But knowing that the project is not going to rug-pull and the team can go on in the long term is a powerful edge for investors.
In the ocean of ICOs, there are criteria that may help you increase the odds.
- The team must be capable of executing and is unlikely to run off.
- A whitepaper is a way for the team to describe the ideas.
- Tokenomics can greatly affect the token price.
- Roadmap lets investors follow the development progress.
- Supporters come from the community. How big is it?
- Market sentiment gives us the right time to place our investment.
- Where the ICO takes place tells us a lot.
- …
Building a thesis will help you have a strong conviction to go with the market in the long term.
“Rome wasn't built in a day”
ICO investment strategies
Every investor has a completely different view of the market. We are different in many ways, including nationality, race, status, wealth, age, education, etc. As a result, find the investment thesis that fits you the most and master it until it pays off.
Strategy 1: Purchase the token from an ICO and hold it until the project is over the moon
This investment thesis requires a strong conviction of a project and sometimes luck. There are thousands of projects launching ICOs, and not every project makes it through the market selloffs.
Strategy 2: Sell the token when having profits after the ICO
This strategy will need investors to take action faster and sense the time in the market. They are able to hop in and out of the trade to make profits since newly issued tokens often receive over-hyped traction.
Strategy 3: The combination of Strategy 1 and 2
This means you will send the number of tokens equal to your initial investment in the ICO when you are above the water (have profits). The rest create a no-loss position, then you can hold until the project skyrockets.
The strategy leads to the common act of risk management. Only invest with funds you’re able to endure. The crypto market is an ascent industry, and it has extremely high volatility. Furthermore, ICO is considered risky as your ICO investment can go to zero.
Keep in mind that risk management is an extremely important factor. Without risk management, unfortunate events (scam, hack, market turbulence, etc.) will create irreparable damage to your funds as well as your mentality.
The future of Initial Coin Offering
As time goes on, ICO is being outnumbered by IDO and IEO since both new mechanisms contain fewer regulatory risks. Not many high-quality projects use ICO to raise funds nowadays. In 2019 - 2021, they used IDO and IEO instead.
High-return opportunities always attract investors to join. Especially, the crypto market is a fast-moving land where everything shifts fast. ICO must evolve to adapt to the new crypto wartime.
On the other hand, the popular buzzword, ICO, is often pegged with negativity. People got FOMOed, and billions of dollars were lost due to crooked ICOs. Nowadays, investors are only curious about what an ICO is, and the interest is faint.
ICO FAQs
Is ICO legal?
ICO used to be unregulated, but it is now under the radar of the SEC. The commission strictly aims to regulate all projects that launched ICO to raise funds. From the SEC's perspective, ICO is securities. It will protect U.S citizens from potential fraud.
Do I need to do KYC to participate in ICO?
It depends on how the project conducts the ICO. Since blockchain is anonymous, a KYC requirement will reduce the number of ICO registrations. On the other hand, it eliminates bots and potential attackers.
Can I launch my own ICO?
As mentioned in the previous sections, ICO is permissionless. Everyone can start an ICO. This creates thousands of poor-quality ICOs that now cease to exist. Only a few dedicated projects survive and thrive.
How much does it cost to launch an ICO?
A skilled programmer can create an ICO for a token sale. However, the cost of building a team, products, and marketing strategy… is substantially big.
How to find advisors for ICO
Anyone with experience can become an advisor for ICOs. However, selecting one who suits the position is challenging. Experts with strong domain knowledge coming from not only blockchain but also other industries will be helpful to startups in crypto.
Here are some notable criteria to evaluate an advisor:
- Expertise.
- Network.
- Reputation.
How to register ICO with SEC
The Securities Laws in some big countries like the U.S. will affect your ICO. The SEC has released a regulatory framework for ICOs. Startups planning to launch ICOs must register with the SEC. ICO issuers can file their documentation to the SEC to get approval.
Conclusion
That is everything you should know about IEO and its pros and cons. The goal of ICO and other similar mechanisms is to raise funds for startups. It is not compulsory to join, and investors should be responsible for investment decisions. Do your own research and manage the risks.
If you want to discuss more on the topic of ICO, please leave a comment below.