If you invested $1 in Bitcoin in January 2011, you would have made $14,332 in profit by now.
Great. I may have missed the opportunity of becoming a millionaire or at least paying off my student loan. Awesome.
But that doesn’t mean there aren’t more opportunities like Bitcoin elsewhere.
If you want to invest in cryptocurrency, then you must have heard about the ICO and asked yourself more than once what is Initial Coin Offering (ICO)?
In the most simple manner, this trendy phrase describes any crowdfunding or fundraising that involves:
- Cryptocurrency tokens
- Blockchain technology
But this definition is for dummies, so if you want to understand what the ICO hype is about, keep reading.
ICO Meaning and Basics
This hot trend stands for the Initial Coin Offering and it’s a newly emerged concept of crowdfunding projects in the cryptocurrency and blockchain-based industries.
A company can release their own cryptocurrency (usually in a limited amount) and sells to the audience who wants to invest in a particular project. The cryptocurrency is released in a form of tokens, which later can be exchanged for other cryptocoins of fiat money.
As a result, the company acquires the capital to fund the project and it can invest in a further product development. In return, whoever has decided to invest, get the crypto tokens’ share, and they become the complete owners of these tokens.
ICOs are often used to fund the development of new cryptocurrencies or projects that will work with the blockchain technology as a backbone. Though, it doesn’t mean ICOs cannot be used for anything else – the owner of a project can exchange gathered tokens for fiat money and invest in something tangible.
ICOs’ tokens can be either purchased directly from the crowdfunding platform or from an exchange. Most tokens are available for sale on exchanges and can be traded just like Bitcoin.
One of the most accurate definitions of ICO was written by The Economist:
‘ICO “coins” are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins Bitcoin, a crypto-currency. That means they can easily be traded, although unlike shares they do not confer ownership rights. […] Investors hope that successful projects will cause tokens’ value to rise.’
There’s one crucial thing to understand about the appeal of ICOs. They are investments made with a hope of a quick financial return.
It’s also critical to understand that even though the investors have the full ownership of the purchased tokens, and can trade them, they don’t have an ownership over the project or a product. This is precisely what makes ICOs different to IPOs.
The Difference Between ICO and IPO
During an Initial Public Offering (IPO), a company releases shares that can be purchased by the members of the public. The shares are not only an investment, but also signify an ownership in the respective company. Meaning, the shareholders are also the decision makers within that company.
ICOs, on the other hand, don’t give you an ownership. Most of the time, they’re just tokens – units of cryptocurrency – that can be traded and exchanged for other cryptocurrencies. Sometimes, they also give a voting power – the more one owns, the more power one has on the network.
Another crucial difference is the decentralised nature of ICOs. Because they’re not regulated by the government, there’s no need for legislation and compliance. A crowdfunding for a project can start anytime and anyone can participate in it.
IPO, however, involves a large amount of paperwork to be prepared in advance and it has to comply with the local regulations. In a way, it’s a more traditional and conservative environment for a company to raise funds.
Hence, ICOs are more popular in a startup environment and within companies which are delving into new, experimental, areas and wouldn’t be able to bypass the legislation.
The Legality of ICOs
By now, you must be wondering about the legality of ICO. If they don’t have to comply with the law, then are they even legal?
The truth is… The legal state of ICOs is very blurry. Ideally, the token is not sold as a financial asset but as a digital good. Hence, you’ve heard so much about crowdfunding or crowd sale – they relate to raising funds.
In most jurisdictions, the funding with ICO is not regulated, making the process easy and paperless. This gives an ICO a huge advantage over traditional methods of funding.
While most ICOs happen in a gray area, it’s not going to last forever. Crowdfunding still involves an investment of fiat money into the project, and at some point, the cryptocurrency can be withdrawn as a fiat.
So in the future, ICOs will most likely have to face the same or similar regulation to the traditional means of funding.
The Most Successful ICOs
There are no limitations or rules in terms of what tokens can be used for. From programming smart contracts to Bitcoin competition. Below you will find a few examples of the most successful and famous ICOs:
Ripple was one of the first and most successful ICOs. Ripple has it’s native token – XRP – which can be used for fast money transfers. Once you invest in XRP, you can use them for money transactions, that will be as quick as 4s and without high exchange fees. Ripple Labs created 100 billion XRP tokens which value is currently around $0.20.
Without any surprise, the largest and most successful ICO has been Ethereum so far. Ethereum token – Ether – can be used for a smart contracting programming. When the crowdfunding started in 2014, the price of one token was sold for $0.03. Currently, one Ether is worth over $300.
This new cryptocurrency is one of latest ICO successes. Interestingly, it’s one of the first cryptocurrencies that doesn’t use blockchain technology. Instead, it’s built on ‘Tangle’, which enables transactions to verify themselves. Like Bitcoin, it can be used for payments and is designed to be used for the Internet of Things (IoT).
Putting aside the dexterous technology behind IOTA, even before it’s fully launched, it’s already worth almost 67 BTC (almost $300,000) from crowdfunding itself.
These tokens have been released by Storj.io during the crowdfunding campaign. It’s a cloud storage startup, and once the main product is released, the users can spend Storjcoin tokens on the storage space or trade them on an exchange.
The Problems with ICOs
Since there are little or no regulations around the ICOs from governments, they’re exposed to similar issues as cryptocurrency in general. But there are two major areas in which ICOs can be affected: scams and theft.
Given cryptocurrencies’ long relationship with the less respectful aspect of our society, ICOs aren’t any different. There have been a number of scams over the past few years.
If you were investing in a company or IPO, you would ask a ton of questions and do a thorough research to avoid a fraud. Think the same strategy for ICOs and avoid below:
#1 Anonymous Developer – whoever is launching a product or a project should have a reputation. Or at least be transparent with his/her background. If the developer is unknown in the community and is afraid of risking the reputation, you shouldn’t feel safe while trusting them.
#2 Lack of Transparency – the majority of developers release their product to the public with an already established code or beta version. Those who don’t want to reveal any information, or refuse to show the work-in-progress, are automatically less trustworthy. How would you know if they have anything to show at all?
#3 No Escrow Wallet – the owners of the project should never be collecting money to their own hands. If the contributors’ keys are all stored in the developer’s’ hands, nothing can stop them from running away with them.
#4 Unrealistic Goals – you’ve heard plenty of stories about a business that promised tremendous ROI and quick success. How many of them turned out to be a reality? Probably none. When a project doesn’t have a clearly specified plan or has an unrealistic goal, it means whoever is behind it, doesn’t know what they’re doing. Or they might not be doing anything.
The Lack of Regulation
Since there’s no official regulation around ICO and cryptocurrency, there’s also little to no guarantees enforced by the government. Therefore, a vast majority of ICO campaigns and developers imposed their own regulations.
At the beginning, ICOs were mostly improvised, but the community has quickly realised that without establishing the community trust, it’s impossible to do a successful crowdfunding.
Thus, most of them introduced an escrow wallet or established the legality of the ICO, with terms and conditions.
If you want to make sure that the campaign won’t go busted and the owner won’t run away with your money, check what they’ve done to make the crowd sale more legitimate.
In most cases, the campaign starts with releasing a Whitepaper which clearly shows the roadmap of the project, from the initial idea to the completion.
Where To Find the ICO
The most exciting part of investing in ICO is finding the one that will bring you the most profits. Of course, you should believe in a product as well, but you definitely don’t want to sacrifice the profit.
So how do people find out about ICO? Research, read and follow. Nobody knows how big or successful the next ICO will be. So it’s in your best interest to follow dedicated platforms and making the process of finding and ICO as easy as possible.
A lot of ICO developers are active on Reddit. So if you’ve never made use of the lesser-known for some platform, sign up. You’ll be one of the first ones to find out about a hot project and will be able to discuss it with the rest of the community.
Additionally, you can follow these platforms which gather new ICOs together:
- State of Dapps (Ethereum based)
- Blockchain Capital – it’s a venture capital company that invests in blockchain related companies. It is headquartered in San Francisco, California.
- Brave NewCoin – BNC delivers blockchain and digital-asset markets news, data, analysis, industry resources and a wide range of data solutions.
- Smith + Crown – leading source of original research, reporting and analysis for crypto financial markets, Bitcoin, blockchain technology, and digital currencies.
- ICORating – it’s a rating agency that provides independent analytical research.
- TokenMarket – trade and research tokens and cryptocurrencies, organize crowd sales and ICOs.
Is It Worth to Invest in ICO
Asking whether is worth to invest in ICO is like asking if it’s profitable to invest in cryptocurrency itself. And the answer is the same – it’s not for everyone.
Investing in cryptocurrency, especially the lesser-known altcoins, is always a big question mark. You might be lucky and make a profit in the span of few years, but this doesn’t happen often.
ICOs are equally risky, like other high-return investment. It’s always wise to never put more money than you can afford to lose. That said, here are few things you should consider before investing in ICO:
- Does the project make sense as a business?
- What’s unique about that idea? Is there a demand for it?
- What’s the owner’s’ background and motivation? Are they known within the community?
- Is there an available research for the project? What’s the progress so far?
- Finally, how much are you willing to risk?
Also, bear in mind that ICO is different to traditional stock exchange and shares – once you invest, it doesn’t mean you have rights for the project. Most often, you acquire crypto tokens and get to observe the progress of the campaign.
It’s definitely worth investing in ICOs if you truly believe in a product, you’ve done your research and you’re prepared to wait for a success. A lot of investors are more motivated by the prospective triumph of the crypto token, rather than the business itself. And that’s fine.
However, if your main motive is to find a project that will repeat Bitcoin’s success, then you should probably give up.
Investing in ICOs means a long waiting game and believing in something that may not even exist yet. And when it does, it won’t necessarily be tangible.
So rather than asking yourself if it is worth to invest in the ICO, you should ask yourself whether you’re ready?
Has this answered the buzzing question of what is Initial Coin Offering (ICO)? Or are you even more confused? Let us know in the comments below so we can answer any questions you may have!