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What are ICOs and token sales?

by | Dec 14, 2017

The first time I heard about ICOs was way back in 2017.  My mom, a huge fan of the show Shark Tank, mentioned that Mark Cuban was heavily invested in crypto and ICOs.  Of course, I really didn’t pay attention to her — this is the same person who reads each and every sleazy email newsletter she receives likes it’s a handwritten note from a trusted friend.  Very gullible. So I didn’t bother to learn what an ICO was, why they had become so popular and how they worked.

Fast forward six months and ICOs caught my attention.  As I started learning more about crypto, I couldn’t help but catch the “get-rich-quick” ICO bug that had infected every Facebook group I regularly perused.  By the end of 2017, the ICO market had grown 100X since the first quarter. ICOs had raised over $5 billion dollars for projects around the world.  Time to take a closer a look said my inner crypto-millionaire.

What is an ICO?

An Initial Coin Offering (ICO), or token sale, is a fundraising mechanism for cryptocurrency projects that closely resembles an Initial Public Offering (IPO) in traditional stock markets. In the case of ICOs, tokens represent a function in a blockchain-related project and are sold to investors through the token sale before being released on exchanges for open trading. This method of crowdfunding is designed to allow open access to investment in blockchain projects regardless of investment level or geography.

Tokens issued from an ICO have a base value, usually priced in ETH (for example, 1,000 tokens/ETH), and there may be discounts or bonuses offered during the ICO period. Most projects will set a soft cap, or minimum amount of investment needed to fund the project. If the soft cap is not reached, the project usually halts and investors are refunded their money.

Many ICOs will also have a hard cap, which is the maximum amount needed for the project to move forward. Highly anticipated ICOs sell out (or reach their hard cap) within a few minutes of the sale beginning, while other projects do not sell all of the available tokens until the end — or not at all. We will dedicate another article to how to participate in an ICO.

Utility v Security Tokens

The tokens offered in an ICO usually come in one of two forms: utility or security. Utility tokens serve a purpose on a platform, while security tokens give investors voting rights and, in some cases, pay dividends like a traditional stock. Some ICOs are also experimenting with tokenizing assets. In these cases, they link assets like stocks, real estate, or investment funds to their token, and by doing so assign a real-world value to that token. This method, however, is still in the early stages of development.

Why Have ICOs Become So Popular?

Lots so reasons. The main one being the ability to raise money from individuals investors like you and me, thereby circumventing greedy bankers and venture capitalists who have controlled the system and benefitted from huge returns for decades.  Time for the little guy to make a profit! (And to take on the inherent risk of start-up investing.) Shouldn’t we have a shot at huge profit potential, too? ICOs represent the democratization of traditional capital investing. And who doesn’t love democracy?

How to Participate in ICOs

Now, before investing in an ICO, there’s a ton of fine print.  Of course, you’re familiar with the balance between risk and reward, right?  The higher the potential reward the higher the risk. So make sure you know what you’re doing and what you’re getting yourself into before participating in an ICO.  Unlike traditional investing, there is very little — if any — government oversight with this process. You can’t rely on the securities regulation or consumer protection laws to bail you out should the project go south.

Oh, and did I mention ICOs are very popular with scammers?  Anyone remember Confido?  That was a doozy; the founders scammed investors and disappeared with $375,000 raised through their ICO, about $1000 of which were mine.  That sucked… I probably should have watched this video first to learn how to identify scammers.

Lastly, unlike investing with fiat, investing with cryptocurrency could result in an irreversible loss of your tokens if you don’t follow the project’s protocol as stated.  So be sure what learn about the investing process before you choose to dive in with the sharks. There are no refunds. And um, another thing — over half of ICOs have failed. Did I mention that? This is not for the faint of heart. To the brave, capable and/or foolish, read on.

Before Participating

First thing’s first — read the whitepaper.  If you can’t take at least one hour to read and understand the project’s white paper, then you have no business in investing your funds.  Got it? So don’t be lazy — take time to read the dang thing. Figure out if the project has an actual product or whether you’re investing in a “whitepaper” ICO — a project that’s just on paper with no product or service to speak of.  Where are they in the development process? Are you only investing in an idea or something more legitimate?

Next thing — do some of your own due diligence.  Learn as much as you can about the project and the team by doing your own online research.  Go on every social media account the project has. Popular community hangouts are Slack and Telegram.  Join those groups and to learn what’s being discussed and to get a feel for how responsive and engaged the team is with their investors.  (Be on the lookout for fake channels.) Read the LinkedIn bio for every team member you can find. Ask relevant questions in Telegram. Do your homework!

Also, figure out some of the basics the project has identified for investing.  Does the ICO have a maximum or minimum amount each investor can contribute? Do they have a soft or hard cap for the total ICO investment from all investors?  Do they have KYC — or Know Your Customer — provisions which prevent you from participating. If you live in the United States, the answer to the last question is probably “yes,” which means you may get a message like the one below and be prohibited from investing.

Create a Blockchain Wallet

Ok, now that you have your big boy pants on and know what’s up, you’re ready to start the process.  You will first need a wallet that you control. This distinct from a wallet that sits on an exchange — it needs to be one for which you have access to the private key.  This is important because this is the address to which the tokens you purchase will be sent.

If you know how to use MyEtherWallet than you’re in good shape.  If you don’t, then watch this video on how to create a new wallet in MyEtherWallet.

Fund Your Wallet

Make sure you have moolah in your wallet in the amount of your investment.  You’ll likely be asked to send either Ether or Bitcoin as your funding source so be sure you have at least that amount handy. Where do you get Ether or Bitcoin?  From your exchange. If you don’t know how to buy coins from an exchange, watch this video.

Transfer Your Coins

The next step is to transfer your coins to the project using the “target address” or “public address” the project has provided.  Be sure to double and triple check that you have the correct information and that you got this information from the company itself —  not someone trying to run a SCAM. This is very important! The address may appear on the company’s website, in a pdf they provide or in a pinned post on messaging channels such as Slack or Telegram.  Again, be sure the information comes from the proper source.

Receive Your Coins or Tokens

The last step is for you to receive your coins (or tokens). Depending on the project this can occur: 1) instantly after investing; 2) after a certain amount of investment has been achieved; or 3) after a lock-up period.  Be sure to keep up with the project to make sure you receive your coins.

Move Coins to Cold Storage

If you want to further safeguard your investment, move your coins to cold storage — such as a hardware wallet — after you receive them.

Continuous Monitoring

Once the ICO has ended, you need to continue following the project.  You’ll want to check and see if and when your coin get listed on an exchange.  You’ll want to know when a major project milestone is achieved, such as the launch of the mainnet.  And you’ll want to stay abreast of any changes that require you to take action like being required to swap your coins. Since you’re in this for a profit, stay aware of all developments so that you can take profit at an appropriate time, invest more or just re-evaluate the project over time.  Crypto is a very dynamic space so it’s important to stay current with your investments.

Congratulations!  You are now an ICO investor.  May the odds forever be in your favor.  And be sure to return the favor. If you have a friend or relative interested in learning about ICO investing, share this article and what you’ve learned with them.

Regulations and State of The Market

After 2017 which was a year of hyper speculation in ICO’s and many investors that chose the right projects were able to make substantial gains and of course the bull trend of the overall market helped fueling the exuberance. However more and more governments and regulators (specifically in the US as well) became concerned about ICO investing and basically a lot of those regulators (including the US SEC) concluded that the vast majority of ICO’s are in fact security offerings and should therefore be registered with the SEC and follow security regulations and also, in the US, only accredited investors would be allowed to invest. More bans and stricter regulations across many countries came about and this put a heavy pressure on ICO investing and participating. Most ICO’s exclude US citizens from participation and usually Chinese and many others as well. On top of that 2018 became the year of a severe and prolonged bear trend and even though the amount of funds raised in the first half of 2018 topped that of the whole of 2017, the vast majority of exchange listings for these projects turned out into (at least for now) significant losses for investors, mainly due to the downward pressure of the bear market and a lot of uncertainty around upcoming regulations. The opportunities for cryptocurrency investors that would like to participate in solid ICO projects could very change drastically depending on how the overall crypto and ICO market and regulations develop, which could result in much lower profits but still with a lot of risks to consider. We generally don’t recommend ICO investing in any shape or form until someone has developed enough skills and knowledge in the crypto space to fully understand all risk factors and use the right decision metrics.

Disclaimer:

This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.

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