Initial Coin Offering Definition
Initial coins offerings are mostly used in the cryptocurrency space. In an orthodox economy, businesses and firms usually look for ways to raise up funds, with one of the most successful method being the initial public offering or IPO for short. In the case of expansion and further injection into operations, these firms can take up loans, seek help from investors, or even decide to sell off some their low performing assets. All these methods helps them to raise up the amount they need for any additional expenses they’re willing to incur. Also, a firm can decide to start their operations in a small fashion, just like what we see with SMEs. This way they get to keep their small profits and make it pile up to sponsor expansions before deciding to go public. The fastest way as we stated earlier is via an IPO, and this would only be successful if done right. More often than not, firms can choose to ask for fundings from creditors if they have enough assets to serve as collateral.
However, cryptocurrencies don’t have all these options. They however have something that is quite similar to an Initial Public Offering, and that is the Initial Coin Offering (ICO). ICOs are used like fundraisers as any firm that is looking to produce a new app, coin, or service would eventually launch an ICO. This way, investors who show interests in such platforms or tokens would be required to buy-in to the offer, and this is mostly done by fiat currency. In some cases, investors can buy in using bitcoin, ether, or any strongly valued cryptocurrency or pre-existing digital token. The main reason behind investors willingness to purchase such a token is the hope that the performance in the coming years would be outstanding as this would greatly reward them with excess returns. ICO firms typically make use of the donations or the investments from these clients or individuals to further their work, commence their research, launch their platform, or launch their cryptocurrency, whichever is the case. In most cases, ICOs are used by startup firms to skip or get past the rigid investment contracts and stress in obtaining investments from banks and venture capitalists (VCs).
A Little More on What is an Initial Coin Offering (ICO)
We have simply stated the basic definition of Initial Coin Offerings (ICOs), but just like every other method of raising capital for a venture, there are different underlying risks, both known and unknown. ICOs are like the newest and most used method of securing funding in the cryptocurrency world, and this has raised a lot of questions on the part of concerned parties. Initial coin offerings have a number of risks, challenges, and unprecedented opportunities. Most investors see ICOs are a get-rich-quick scheme, and for those who don’t, they generally perceive it to be a get-rich scheme, without the “quick.” There has been quite a number of successful ICOs around the world, and it is only normal that this wide success would drive investors more into this area. However, it is important to note that many have made mistakes in this process. Since ICOs are not regulated or governed by any relevant authority, most fraudsters and scammers have turned it into a hub to con investors of their money. Usually, a large number of overzealous and misinformed investors happen to fall into this trap.
Given below are some of the details about Initial Coin Offerings in full coverage, first starting with an overview of the processes needed to undertake a successful ICO. After that, we’ll go on to define some of the most successful ICOs in 21st century history, and also preview places where investors can choose ICOs to invest in. Lastly, we’ll take a look at the potential risks which investors involve themselves in when they participate in Initial Coin Offering, as well as different criticisms of this process.
Initial Coin Offering: Detailed Overview
When a firm wants to launch a cryptocurrency, they typically come up with a lot of requirements or details which are documented on a white paper. These details might contain how the firm wishes to raise to successfully undertake the project, how much of the digital token would be retained by the creating firm, the project needs, the acceptable currency type (fiat currency or renowned digital tokens), and the duration of the ICO. Enthusiasts and supporters of the cryptocurrency being launched usually buy some units during the ICO using virtual currencies or fiat currency. The coins which are then delivered to them are known as tokens and they work in the same way that shares do during an IPO for investors. If all the launching requirements are met, the funds generated are then used to boost the cryptocurrency, or launch it (in a case where it is a pre-launch cryptocoin). Initial coin offerings are similar to crowdfunding and initial public offerings (IPO). Stakes in IPOs are to tokens in ICOs. However, in an IPO, shares are sold to investors who wish to hold part or possess rights in the company. However, in ICOs, the buyers are usually proponents and crypto-enthusiasts who are looking for something new to invest in. This makes ICOs quite more similar to crowdfunding. However, it differs from crowdfunding due to the fact that the supporters of the latter are willingly investing as donations, while investors in the former are doing it for profit. This has led to ICOs being called crowdsales.
ICOs are quite different from IPOs in their structures, and there are three main ways through which one can tell these differences. Firstly, Initial Coin Offerings are unregulated, thus they are not being supervised or controlled by any government authority. Also, they are decentralized, meaning that there is no single body accounting for any errors. Lastly, due to the two differences given above, ICOs are much more easier to conduct than IPOs since you needn’t sign any bulky paperwork with any regulating authority or union.
ICOs can be consulted in a number of ways. One way ICOs can be carried out is by setting predetermined prices and output during the funding process by the managing firm. Another way is by the static-dynamic model. Here, the total amount of available digital tokens is already predetermined, but they won’t be released once during the funding process. The price is dynamic and would increase with each additional unit bought by an investor. In these ICOs, the more investors purchase coins, the higher the price would be till they hit the set output target for the funding process. Lastly, another variation of the static-dynamic model is used, but this time in reverse. Instead of the price to remain dynamic and the output static, the output would be dynamic and the price static in this case. So there is a predetermined amount of tokens that can be released at a set price during the ICO process, and the only way the amount can be surpassed is by extending the length of the ICO past what was scheduled.
Benefits of ICOs to Investors
ICO investors do not seek benefits in the say way that IPO investors do, although both parties are in for the potential profit. In an IPO, investors are rewarded with shares that can increase at any point, thus adding value to their investments. The rate of increase depends on the performance of the company, so IPO investors are quite safe if the company is doing well. However, in ICOs, investors generally get their money in with the hope of a quick profit, or a slow excessively high profit, whichever is the case. Also, investors are rewarded by blockchains called tokens, and they’re required to obtain them by contributing in the funding process via bitcoin, ether, or fiat currencies. Each money value has a reward in numbers of token, and the higher an investor contributes, the greater the number of tokens he or she will receive.
However, most investors forget that technology has made it quite easier to build tokens, and this is what most firms or crypto-companies make use of when launching an ICO. Online services like Token Factory are used to generate tokens in a matter of seconds or minutes at most, and the company needn’t possess any real knowledge of blockchains before venturing into the crypto space. Using these tools, ICO managers create tokens according to the details contain in the ICO, get them from the creation tool like Token Factory, and then share them amongst investors who support the funding process. Investors in ICO processes usually purchase crypto-coins via funding processes with the hope that the value of the tokens received as rewards would increase in the near future. Most even hope that the cryptocurrency would be a major hit on its launch in the open market. If a situation like this happens (which isn’t uncommon most times), the investors would make excessively high returns, depending on the number of tokens they were rewarded with, and also if they’re willing to sell them off at that point.
Many small investors have been turned into millionaires by the help of ICOs. As at 2017, studies showed that a total of 435 ICOs that were conducted were regarded as successful, and the average amount that was raised during for these ICOs totaled $12.7 million, while the total amount raised was equivalent to $5.6 billion, with more than 25% of this amount coming from the top 10 ICOs in the list. It was also recorded that the tokens in these ICOs had an average return of 12.8 times their investment value. So for an investor who got a number of token for $10,000, his return including capital would be $128,000 on an average. As at the first quarter of 2018, ICOs brought in a total of $6.3 billion in funds, nearly surpassing the amount generated from fundings in the whole of 2017.
The Most Successful ICOs in History
Given the increase in the size of the ICO space, it is not uncommon to see many successful and historical launch in this sector. In determining the most successful ICOs, one must take a look at the money raised during the ICO process and the returns on investments gotten. In most cases, examining the ICOs with the most outstanding returns on investment would only lead to false assumptions. As of 2014, during Ethereum ICO, the total amount that was raised was $18 million and it took a total of 42 days to for the ICO to get this amount. Ethereum has been one of the most remarkable digital trek s due to its assistance with decentralized applications. When it first came out, it was sold for $0.30 in 2014. However, Ethereum sold for 1,600 times its initial amount in 2014 by 2018 at $474.62 on July 24th.
Another successful digital token was that of Antshare, which later took the name NEO. As of October 2015, the first phase of the ICO process was launched and the second phase continued all the way down to September 2016. At this point, NEO could only boast of a total funding of $4.5 million, which wouldn’t be regarded as a big amount amongst its peers. This digital token however provided a tremendously huge return for its early investors, as the price jumped from $0.03 per token at its debut to $50, which was over 150,000% of its original amount.
Currently, a digital token known as filecoin was able to raise up to $257 million in just one month during its ICO process which lasted from September to October in 2017.
For interested investors and cryptocurrency enthusiasts, finding an ICO can be a tough task. However, we’ve provided a guide on how to fid ICOs to invest in. In most cases, investors are require to purchase tokens from the ICO manager using pre-existing currencies. Simply put, investors are already required to hold a digital wallet (coinbase and the rest) and also have an amount that can be transferred inside this wallet. Given below is a detailed guide on how to invest in an ICO. This process was gotten from an existing cryptocurrency known as KIN. The steps may be different, but there are some familiarities and the differences are not hard to sort. Here they are:
- Create an account with a digital wallet manager like Coinbase or Binance amongst others. You can choose any other wallet that you’re familiar with, or one which pique your interest. There are thousands of wallets which you can choose from.
- Fill up your wallet with the cryptocurrency you’re required to used in investing in your desired ICO. In most cases, the currency will be either bitcoin, ethereum, litecoin or even monero. Make sure you make enquiries from the ICO manager.
- Transfer your stored currency to the digital wallet which supports them. Some wallets might not hold monero but hold bitcoin, while others might hold both of them. It is crucial that you pick a wallet that can hold the same currency needed by the ICO.
- Read the white paper of the ICO. Also, go through the terms and conditions, as well as any other easily available information that you might want to see. After this hit the “I Accept” button, or any other variant of this phrase. It is essential that you’re on the right page of the ICO.
- Register for the ICO. Follow the instructions given on the platform
- On the day of the launch, stick to the guidelines and the requirements of the ICO. If you’re asked to transfer your investment from your wallet to the official address of the ICO, then do this. Your reward token would be sent back to you. You should however keep some reserves of your original token to cover up the fees associated with digital transfers.
- VII. The ICO will transfer your reward token to your wallet. You might need to configure your wallet to allow sending and receiving of tokens depending on the wallet you’re using.
- VIII. You can hold the token or transfer it to fiat currency. In some cases, the ICO company can provide a service that allows you transfer your token to fiat currencies. If that is not the case, you’ll need to wait for your token to be listed on exchange markets, where you’ll have the opportunity to transfer it to another digital currency that can be traded for fiat currencies.
How do you find an ICO to participate in? We’ve highlighted the steps needed to fund your investment in an ICO, but without having knowledge of any ICO, it’d be impossible to invest. There is holy grail in finding the latest ICOs. However, the Internet is there to solve our curiosity, and you can easily get any information you need online. Due to the funding process, most ICO managers make shoutouts, so it shouldn’t be hard to find ICOs that are trending. There are looking for you more than you’re looking for them. You can also log in to online communities like Reddit, as they tend to provide discussions on blockchains. If you’re tech savvy, then Github is a place you might still find useful. However, for persons who can’t do deep research, sites like ICO Watchlist are dedicated specially to latest and upcoming ICOs. They not only inform investors on the next or upcoming ICOs, but also provide information on other offers they can try out, as well as how an ICO compares to another.
Risks of ICOs and Thoughts From Skeptics
Although there are a high number of successful ICOs, there is a chance that an ICO might be used to carry out fraudulent activities. Even with the importance of ICOs in the digital era, there are no governing or regulating bodies, so investors are warned to be wary of offers as lost funds are rarely recovered. ICO in 2017 caused most government bodies to take action and in September 2017, the People’s Bank of China banned ICOs, stating that it was disruptive to the economy of the nation as well as the financial stability of the nation. The bank also stated that these digital tokens cannot be used by banks and and they can’t be accepted in the market for exchange of goods and services. This caused a fall in the price of Bitcoin and Ethereum, and led many to believe that cryptocurrencies would soon be regulated. This ban also indicted all offerings that were already completed. Facebook, Twitter, and Google all banned ICO advertisements in 2018. When investing in ICOs, try to follow these steps, as they reduce your risk of getting scammed:
- Always make sure that each digital token has a purpose, and that narratives from one team in the company syncs with that of another team in the company. Also, analyze their purpose and determine if it can yield a positive goal.
- Always research the developers. You shouldn’t invest in an ICO that doesn’t say who its team members are, their location, and its business purpose.
- Examine the legal terms and conditions of the ICO. Since ICOs are not regulated, investors are the only ones responsible for picking their package. It is your choice to buy into a legit ICO.
- Always make sure that ICO funds are stored in an escrow wallet. Also ensure that your wallet is secure at all times. Probably choose one that requires a series of access keys.
While it is not possible to guarantee that your safety in an ICO, you can use the steps above to protect yourself more. Most ICOs are outright scams, so you need to note this risk before jumping into any investment. However, if an ICO is successful, there is a potential for huge returns. Investor are therefore advised to learn more about ICOs before investing so as to avoid taking irrational actions and uneducated ones as well.