What is an ICO? – Your Guide to Cryptocurrency Initial Coin Offerings
If you’re looking to enhance your cryptocurrency investing or trading strategy, learning about initial coin offerings could help.
If you haven’t heard of ICOs before, don’t worry as you’re not alone. A cryptocurrency ICO is a method used to raise funds to develop coins before releasing them to a market. If you invest in an ICO, you receive an amount of the digital currency before it’s publicly available. ICOs have various stages but, whilst they may sound complicated, understanding how to benefit from them is easier than it seems.
With a bit of advice from our cryptocurrency experts, you’ll be able to spot both profitable and risky ICO investment opportunities. You’ll also gain a full understanding of:
- How cryptocurrency ICOs work
- The different stages of an ICO
- The pros and cons of investing in an ICO
- What makes for a good or bad ICO investment opportunity
- How ICOs affect cryptocurrency traders
What is an ICO?
An initial coin offering or ICO is a way for cryptocurrency developers to gain funds for new products without having to give up shares in the process. By raising capital directly from private investors, these companies can bring their concepts to the markets in exchange for a predetermined amount of their new digital currency.
An initial coin offering is not only beneficial for the developers but investors too. As an investor, you receive a supply of an unreleased cryptocurrency token before it listed publicly on the market. If the digital currency performs well after release, this will likely be the cheapest price in the coin’s lifecycle.
How do cryptocurrency ICOs work?
If a cryptocurrency developer wants to hold an ICO fundraiser, they must first provide potential investors with whitepapers. A white paper is a blueprint for the cryptocurrency. It should detail the function the coin is looking to fulfill, how much capital is required, how many coins will go into circulation, what forms of capital will be accepted to raise funds, and how long the ICO will exist for. It also usually includes information about the development company, including who’s behind the coin, what experience or knowledge they have, and how much funding they have already raised/spent.
Once the whitepaper has been published, investors are invited to purchase the cryptocurrency token before it is available to the public. Set at a predetermined price, purchases can be made with both digital currencies, such as bitcoin or Ethereum or through traditional payment methods.
The process is quite like an initial public offering (IPO), but there are some noticeable differences. The most notable is that when you invest in an IPO, you receive a percentage of shares in the company. In contrast, ICOs offer an early purchasing opportunity and so you can trade, sell, or use your coins when they come to market. An ICO acts more a crowdfunding scheme, where the reward is exclusive preliminary ownership of a project’s token.
Should an initial coin offering fail to reach its fundraising goals, the money may be returned to investors. On the other hand, if the benchmarks are met, the company will begin working towards the objectives specified in the project’s whitepapers.
The key stages of an ICO
Now that you have a general idea of how an ICO cryptocurrency fundraising event works, let’s take a deeper look at the different stages an initial coin offering will go through during its lifecycle.
- Seed funding – This is the beginning of an ICO. Seed funds come from company investors and are how most companies, not just crypto tokens, get their start. Capital usually derives from angel investors or personal finances.
- Private sales – This form of ICO fundraising has become popular in recent times. Before going to public crowdfunding campaigns, companies seek out private investors to reach their financing goals. This offering is usually presented to previous cryptocurrency whales or traditional investors looking to diversify their portfolios.
- Pre-sales – During the pre-sale stage, early investors can pre-purchase a token, meaning they have access to a new digital currency before it reaches the markets. The difference between presale ICOs and active ICOs is that, at this stage, marketing materials and research documentation may not have been developed. This can be a risky moment to invest in a coin, as later stages could influence the potential returns made.
- Whitelists – Whitelists are a stage of ICO funding that investors must pre-register to take part in. These are usually set up for promising products that are looking to avoid the public offering stage by creating enough interest from individuals. Should an aspiring token generate enough capital during this stage, they will skip the active crowdfunding process.
- Active – When an ICO is active, the general public can invest in the coin. During this stage, coin supplies are usually limited, but the developing company must reach its financial goals or risk failing to launch. This can be a good opportunity to acquire a budding new cryptocurrency before it is exposed to real markets.
- After markets – After markets serve as testing grounds between the funding stage and actual market release of a new token. While not officially available for public purchase, individuals will be able to buy and sell these tokens before they are released. After markets indicate how successful a new cryptocurrency will be before launch.
Should you invest in cryptocurrency ICOs?
Initial coin offerings are an interesting way to potentially earn money in the cryptocurrency market. They give you the chance to earn large returns, should the new cryptocurrency be successful yet risks losses should it fail.
As an investor, you must have a solid understanding of how cryptocurrency markets function before considering investing in ICOs. This includes having cryptocurrency investment experience, as this increases your chances of accurately predicting a new token’s potential performance. You should also know to never contribute more money than you are willing to lose. There are no guarantees that profit will be made, so researching the company and the token itself is essential.
The pros and cons of investing in ICOs
ICOs are a great way to diversify your cryptocurrency portfolio. While the potential to earn returns on a new digital currency exists, there are some risks associated with initial coin offerings that should be taken into consideration too. Our experts have outlined the pros and cons of ICOs below.
- Chance to invest in a new cryptocurrency before it hits public markets
- The price per token is low at this stage
- Potential to earn large returns should the coin be successful
- Increased experience and knowledge of investing by trying something new
- No guarantee the token will be successful after launch
- If fundraising goals are not met, the token may not be launched
- As fraudulent ICOs exist, you need to research the project extensively
How to find the best ICOs to invest in
With so many initial coin offerings available, how do you determine a good opportunity from a bad one? The first thing you should look at is the company’s whitepapers. When you do this, you should consider the following things:
- Developer credibility: An ICO should be created by a committed, transparent team of experts. This should apply to all levels of individuals involved in the project, from management to coders. A reliable ICO will make information about its staff readily available.
- Market appetite: The ICO should give a solution to a common problem. This could mean it’s related to a growing or thriving sector or presents the potential for growth in a developing one. The coin should be innovative and have an advantage over the existing competition.
- Economic viability: Much like traditional forms of investing, an ICO’s economics should make sense. If the project’s goals are too ambitious or not scalable, returns may not be realized. You should review the figures and data collected for an ICO carefully before investing.
- Code quality: This is the core of any blockchain technology’s value. Code quality determines how well the token will execute its intended function. Things to consider here include whether a developer is using original code, or if they are copying an existing coin. Original code can provide higher long-term value, although development time may take longer. If there is code to review for an ICO, it is worth investigating.
How to avoid scam ICOs
With initial coin offerings becoming a popular investment choice, scam ICOs are also on the rise. The good news is that there are several easy steps you can take to avoid fraudulent operations.
The key to avoiding scam projects is to do your research properly. This involves not only investigating the whitepapers but also doing a reputation check on the company itself. Cryptocurrency communities are a valuable resource for this type of research, as you can speak to experienced investors. Talking to programming experts is also a great way to check if the proposed code is viable.
Investigating the executives and employees involved in an ICO is another good way to avoid fraud offerings. An ICO’s CEO can often be linked to other projects, so having a good history of involvement with legitimate operations is a good indication of a token’s reliability. If a company is unwilling to release detailed information on its staff, it’s best to be avoided.
Are ICOs legal?
The legality of Initial coin offerings varies depending on which country you are looking to invest from. Some countries such as Australia, France, and New Zealand have regulations in place that fully allow for ICOs to be offered. Locations such as Switzerland and the United States allow for most ICOs to operate, but each must be thoroughly investigated before release.
Countries such as Canada are still developing the legal framework for regulating ICOs. In these jurisdictions, you can still take part in an ICO, but the legal atmosphere may change in the future. Other countries such as South Korea and China have banned ICOs.
If you are thinking of investing in an ICO, you should always check out the legal situation in your country. While some jurisdictions may not currently allow for initial coin offerings, this could change in the future.
What you will need to invest in an ICO
Signing up for an initial coin offering can seem like a complicated process for new investors. While there are several steps involved, the process itself is easy. Simply follow our step-by-step guide below.
- Find an ICO – The initial step is choosing which ICO to invest in. You can check out initial coin offering lists to find upcoming events. You then need to research the coin and read the white paper.
- Register through the project’s website – Every legitimate ICO will have its own website. Here you can find the whitepaper and preregister for the event. Depending on the ICO, you may have to submit ‘know your customer’ (KYC) documentation to register. KYC requirements include supplying proof of identification and proof of address and are usually expected in countries with stricter regulations.
- Collect your cryptocurrency for investing – Many ICOs will only accept deposits through existing cryptocurrencies such as bitcoin, Ethereum, or NEO. If this is the case, you’ll need to buy the correct cryptocurrency to invest with.
- Move your crypto to a wallet – Once you have bought cryptocurrency, you’ll need to move it to a wallet you control. If the ICO allows for purchases through traditional avenues, you’ll still need a wallet to store the tokens you are looking to buy.
- Buy ICO tokens – To invest in the ICO, you’ll need to send your funds to the company’s cryptocurrency wallet. When doing this you should always check the wallet address multiple times, to make sure your money doesn’t go to the wrong place.
- Receive your tokens – You will receive your tokens to the wallet address you registered with. Whilst usually you will receive your tokens quickly, don’t panic if it takes a bit longer than normal. During a busy ICO, networks can get congested and things can be delayed. In some cases, it will take months to receive your tokens. If this is the case, however, it should have been outlined within the whitepaper or on the project’s website.
The future of cryptocurrency ICOs
While initial coin offerings have come a long way since they were first introduced, how they are being conducted is quickly evolving. With countries increasing regulations and competition increasing, many companies are now utilizing different tactics to raise funds for their new tokens. This is beneficial for you too, as it means the future should provide more stable and secure investment options.
IEOs or initial exchange offerings are a new method of fundraising. The major difference between ICOs and IEOs is that, instead of using crowdfunding campaigns, a new token will be offered directly on an existing exchange platform. This tactic gives you an additional level of security, as you have a reputable exchange behind their purchases.
Although the ICO market is rapidly changing to meet new challenges, there are still risks to consider. Much the dot-com bubble, the ICO market boomed and is now slowing down. Whilst this means that gains are now not as large as they once were, choosing the right ICO can still lead to extremely successful returns.
Cryptocurrency trading and ICOs
As a cryptocurrency trader, as opposed to an investor, you may wonder if you even need to be concerned about ICOs at all. After all, most brokers only make popular cryptocurrencies available for trading.
If you’re only interested in trading, you don’t need to pay so much attention to initial coin offerings. However, we’d still recommend you do keep an eye on major ICOs that must be bought with a specific existing cryptocurrency, as this could lead to a surge in the markets.
Trading cryptocurrencies with a licensed broker is substantially safer than investing in ICOs. For beginner crypto enthusiasts, we’d strongly recommend that you try out crypto trading before considering getting involved in an ICO. You can find our recommended crypto forex brokers below.
Frequently asked questions (FAQs)