You’ve heard about Initial Public Offerings (IPOs), which is when a company’s stock goes public. But today, we have something called ICOs – initial coin offerings. An ICO is where a cryptocurrency goes public for the first time. Today, we’re explaining everything you need to know about ICOs – and how they could make you rich.
What is an ICO?
An ICO, or initial coin offering, is a new phenomenon that has emerged from crowdfunding, cryptocurrency, and blockchain technologies. Also known as a “crowdsale”, an ICO is when a company releases its own cryptocurrency with the purpose of funding.
Typically, companies will release a pre-defined number of crypto-tokens (whatever their “unit” of currency may be), then sell those tokens to an intended audience.
During an ICO, companies usually exchange their cryptocurrency for Bitcoins. However, some ICOs involve the exchange of fiat money as well.
The end result of an ICO is similar to the end result of an IPO: the company gets capital it can use to continue growing its technology, while the public gets access to shares in the company. Now, both parties have an incentive to see the cryptocurrency grow.
History of ICOs: Have There Been Lots of Successful ICOs?
ICOs didn’t exist until the last several years. The first ICO is typically attributed to Mastercoin. Mastercoin’s ICO in 2013 raised over $5 million in Bitcoins through the sales of their own Mastercoin tokens.
After the success of Mastercoin, other cryptocurrency companies followed suit. Ethereum – which is one of the biggest altcoins in the world today – had its ICO in 2014, and Wave had its ICO in 2016. Ethereum raised $18 million from its ICO, while Wave raised $16 million.
Based on the success of these three ventures, ICOs are being increasingly seen as an efficient way to kickstart cryptocurrency projects. The public will back a cryptocurrency with a solid development team, strong technological foundation, and transparent corporate structure.
What’s the Difference Between an IPO and an ICO?
There are some obvious similarities between IPOs and ICOs – and some key differences:
You’re Not Buying a Share of Ownership During an ICO
During an IPO, a company sells shares that denote a share of ownership in that company. This isn’t always the case with the cryptocurrency industry: during an ICO, you’re buying a unit of currency for that project – which isn’t technically a share of ownership. It’s similar to a share because it’s tied to the value of the company, but it’s not an actual share of the company’s ownership. This is an important distinction. However, some crypto-tokens are used to transfer voting powers. When you buy a crypto-token, you get a vote in the company. The larger your share is, the more voting power you have.
Paperwork and Government Regulations
There’s an enormous difference in paperwork between IPOs and ICOs. In the corporate world, IPOs are heavily regulated by the government. It often takes months – even years – for companies to gather the necessary paperwork together for an IPO. By filing for an IPO, the company is accepting severe consequences in any cases of non-compliance. In the cryptocurrency world, government regulation is virtually non-existent. Any company can launch an ICO at any time with little preparation or paperwork.
The lack of paperwork and regulation gives the cryptocurrency world another unique advantage: only certain people can participate in an IPO. In the cryptocurrency world, however, virtually anyone from any country can participate in ICOs. The lack of regulation means cryptocurrency ICOs come with greater opportunities to raise money – but also more risks. Investors don’t always know if the company is legitimate, and companies don’t always know if their investors are legitimate.
What Else Can You Use ICO Crypto-Tokens For?
In most cases, ICO crypto-tokens are just a unit of currency. However, we’ve seen examples of companies taking this in other ways. Storjcoin is one good example. A company called Storj.io released crypto-tokens called Storjcoins during its ICO. Storj.io isn’t a cryptocurrency company: it’s a cloud storage startup. When the company releases its final storage platform, users who purchased tokens during the initial ICO will be able to spend those tokens on that product.
Ethereum is another easy example: Ethereum is a platform for building all types of decentralized apps. Users own tokens called Ethers that allow you to maintain the operation of apps built upon the platform.
Ultimately, ICOs are a relatively new thing. We’ve seen companies use their tokens to denote all different things – but the future use for the technology is virtually unlimited.
What Are the Benefits of an ICO for Individual Users?
Should you take part in an ICO? Why would individual users gamble on an unknown company online?
The main benefit of an ICO is that you are helping a company launch its product in exchange for expected future value. You’re buying into something today in the hopes that it will be worth more in the future. You can exchange the company’s tokens in the future after the value of the tokens rises, for example.
Think of an ICO like Kickstarter. Everyone has their individual reasons for funding a project. Some people want to buy a cool product for a lower price than its final MSRP, for example, while others have a genuine interest in seeing a company succeed.
Here’s the biggest benefit of an ICO, however: in 2014, Ethereum sold coins through its ICO at a price ranging from $0.30 to $0.40 per token. The company released its final platform in July 2015. By that point, the price of each token had risen significantly – up to $19.42 at one point. If you bought tokens during the Ethereum ICO, you earned a return of over 6000%.
Obviously, Ethereum is an exception – not the rule. ICO campaigns could fail. You could spend $100 on a company’s tokens during an ICO, only to watch the company fizzle and die before they release a real product. Just like with any investment, diligent research is important.
How Do I Participate in an ICO?
In the early days, ICOs had a common problem: it was hard to spread the word about an ICO to the public. You had to draw visitors to your private website, then convince them about the merits of your ICO.
Fortunately, a better solution has emerged. ICOs have been growing in popularity in recent years. Today, a number of websites have sprung up to address the demand. The main platforms include:
These platforms give companies an easy way to advertise their ICOs – just like how Kickstarter and Indiegogo give startups an easy way to advertise their crowdfunding projects. Today, you can visit any of the sites listed above to learn about ICOs taking place – or to participate in an ICO yourself.
What Prevents the Company from Running Away with All of the Money?
One of the nice parts about IPOs is that companies need to file paperwork and regulatory documents before their IPO. This protects individual investors.
In the world of ICO projects, however, there are little to no guarantees that your money won’t disappear. You’re giving money to a company over the internet – and in many cases, those companies are new startups with limited transparency.
Fortunately, ICO project leaders are well-aware of these perceived security problems. They understand investors may be hesitant. That’s why reputable ICO projects will impose restrictions on themselves to provide better trust and transparency to contributors.
Some popular restrictions and regulations in the ICO world include:
Storing the contributions of members in an escrow wallet; in order to access the funds stored in the escrow wallet, the owners need private keys. One of those private keys is owned by a trusted third party with no involvement in the project development. In other words, the funds of investors are protected by a neutral third party.
Companies may establish a legal framework between themselves and contributors, including a set of terms and conditions for the ICO.
Companies will provide a great deal of transparency, in terms of their location, members, founders, executives, business plan, roadmap, etc.
Ultimately, ICOs vary widely in terms of their trustworthiness, reputability, and future success. It’s up to individual investors to spot ICO scams and protect their investments.
How Do You Spot an ICO Scam?
Like any industry, there’s the potential for scams in the world of ICOs. There’s no foolproof way to detect scams 100% of the time. However, there are certain red flags you can watch for, including:
Anonymous Developers: Honest companies are transparent about their executives and employees.
Lack of an Escrow Wallet: Is the money from the ICO going directly to the developers? What prevents them from running away with the money after it’s all raised? An escrow wallet gives investors an additional level of protection.
Unclear or Unrealistic Goals: “We want to be the next Bitcoin” is not an unrealistic business plan or strategy. “By April 2018 we plan to publicly launch our blockchain platform” is better. Make sure your chosen ICO is backed by realistic, clear goals.
Lack of Transparency: Is there contact information attached to the ICO? Do you know the address of the company? Is there any signs of work in progress? Is there a working blockchain build? Has the company released snippets of their code? Is there any evidence of real work taking place behind the scenes? the more transparency there is, the better off you’ll be.
By following the above rules, you can avoid ICO scams while still contributing to ICOs that have the best possible chance of success.