In the space of cryptocurrencies, some people view Initial Coin Offerings (ICOs) and Pre-ICO launches as the same thing – but they aren’t. ICOs and Pre-ICOs are different, and it’s actually quite easy to determine the difference between the two; a Pre-ICO token sale is what happens before the main crowdfunding event that is the ICO. But then why do companies have both a pre-sale and a main token event?
It’s a relatively new practice for companies to go through in order to raise funds for the typical crowdfunding event. Think of it like an Angel round of Enterprise funding in which companies allow a select few of people to invest in the project before the IPO launch. The goal of these projects is to then get angel investors who provide initial capital to provide money for operations and other costs. This then raises the question of what is an ICO?
To put it simply, an ICO is an official cryptocurrency sale campaign before it goes live. An ICO is comparable to an Initial Public Offering that companies launch when they intend to become publicly traded.
Typically, cryptocurrency companies launch an ICO to raise money for the development of a project through selling tokens early and en mass to build a community. There is typically a certain amount of money needed for the project, called a hard cap.
An Initial Coin Offering Presale also goes by the name of a Pre-ICO, as it is a token sale event that gets issued before the ICO. Like an ICO it is intended to raise funds for the entire ICO campaign and product. Both the ICO and the presale event has a target for how much revenue it intends to raise, yet Pre-ICOs usually have lower targets compared to an ICO. Also, a pre-ICO happens 1 month or 2 before the Initial Coin Offering but can take place only weeks or days before.
The capital raised in a pre-ICO is not included in the total of the amount of capital raised in the Initial Coin Offering. This can lead to confusion as to how much money was raised and how many tokens will be circulation. These events have both a minimum and maximum amount of raised money. Pre-ICO events are typically shorter than ICOs. If the hard cap is reached, these caps can be stopped early.
Tokens are also sold cheaper in a Pre-ICO with bonuses and have an extended smart contract. This bonus is usually disclosed by the project members to avoid a mix of Pre-ICO funds along with the primary ICO. This is what allows for proper accounting and audit. Some of these companies run presales to raise capital to cover the expenses of the ICO and the token sale itself.
Launching an ICO is expensive, with most of the expenses going towards marketing and advertising. Some costs may include paid advertisements, strategic partners, and meetup costs to enhance the visibility of the venture.
Other companies plan and launch a private presale. A private sale is usually launched and pitched to venture capitalists and angel investors who have an interest in initial coin offerings. Large amounts of money are traded this way, which is then used to funnel resources into the main ICO campaign.
Some of these projects set aside a percentage of the tokens for private investors from the initial round. It’s not usual that angel investors in the Pre-ICO stage will constitute a tiny percentage of the theoretical hard cap but they still provide the amount of required funding for the project to go ahead.
The amount of money raised goes towards expenses such as marketing campaigns. Not everyone can join in for these events as Pre-ICOs have varying membership requirements. Although most Pre-ICOs require people to be part of a larger pool of investors and will not allow angel investments from a singular person. The only exception is if a person makes a large investment in the company.
Different ICOs come with different rules, so there is no hard and fast standard for these events across the board. Most of the time, the only supported currency is Ethereum, for the reason being that 90% of all ICOs are based on Ethereum. But this doesn’t mean that companies only accept Ethereum; you can also invest Bitcoin and real-world currencies.
Advantages and Disadvantages of Investing in an ICO
A Pre-ICO can often be a viable investment opportunity to make some quick profits or as a long-term investment in the project. This lets people distribute the capital easily amongst all participants and builds a following and finds new investors. People who invest in the Pre-ICO typically get less expensive coins that can increase their profits overall. In other words, the first people to the market get the lowest price possible.
Early adopters are also eligible for a bonus on top of what they purchased. This bonus is commonly in the form of tokens, which can be as much as 50%. Some of the newer cryptocurrency projects give other perks and services such as merchandise to the Angel backers for their support of the project.
However, there are also some risks involved. Investors risk to lose their investments or invest in a project that does not succeed. To put it another way, ICOs are a high risk, high reward venture.
A bad trend of ICO presales is that the earliest investors typically sell all of their tokens as soon as they become ready for the exchanges. Those who purchased the tokens at a cheaper price in a Pre-ICO often sell off their tokens with profits. So, if you are one of those people you can make a quick buck this way, but the token itself would take a significant hit to its value.
A snowball effect can be put into action in which the price continues to fall. But things can go differently too if the price goes up. Those who invested in the first Angel round are able to get rich fast. Yet nothing is guaranteed, and investors should always be on the lookout for scams and big projects that don’t have a real future in the market.