What is an ICO? The Simple Explanation!
If you’re new to the crypto world, a term you might see come up often is ICO, which stands for initial coin offering. ICOs have both crashed and burned but for those who have been successful in the world of ICO investing, they have seen tremendous financial gains. For instance, seeing your investment go up 100x (10,000%) in the course of a few months is unheard of!
So what is an ICO? Simply put, it’s a way for an individual or company to raise money for a project by selling crypto tokens to investors. This is similar in some ways to an IPO, or an initial public offering, where a company sells shares (stocks) to the investing public in order to raise money for their business.
The same way stock investors hope that the value of their stocks goes up and/or that they receive income from their stocks, ICO investors hope that the value of their tokens goes up. Some tokens also offer other ways for investors to make money, such as passive crypto income through NEO staking.
Want to know more about ICOs? Read on for a deeper dive into this exciting new way of fundraising!
What is an ICO Token?
While IPOs deal with stocks, ICOs deal with tokens. So what’s an ICO token compared to a cryptocurrency?
As mentioned in our cryptocurrency terms article, a cryptocurrency is a crypto asset that has its own blockchain. Popular examples include Bitcoin and Ethereum.
On the other hand, a token uses another asset’s blockchain instead of its own. Ethereum is a good example here, as it hosts many ERC20 tokens, which are used for ICOs.
In fact, in the example of Tron above, TRX originally started out as an ERC20 token before migrating to its own native Tron blockchain. Many projects will start as an ERC20 or other non-native blockchain token before moving to their own blockchain. This is because an ERC20 token takes less time and money to create and allows teams to test their ideas in the market before committing more resources toward developing their own blockchain.
Why Do Companies Do ICOs?
You might be wondering - why do companies do ICOs instead of traditional fundraising methods like seeking out venture capitalist (VC) investors?
One of the big reasons is that when you do an ICO, you don’t have to give up ownership of your company, which is the case with VCs, who usually take a percentage of your company’s ownership in return for funding.
Another reason is that there is way less paperwork, middlemen (e.g. investment bankers who help with fundraising and charge a fee for their services), and other types of friction that are associated with traditional methods of fundraising.
Also, although increasing regulation has made projects less willing to do ICOs, in the past, all you needed for an ICO was a whitepaper, which outlines how your project will work, a website, and a request for people to send you money in the form of BTC, ETH, or even government currency like the US dollar.
Can Anyone Launch an ICO?
So if doing an ICO can give founders more control over their company as well as less bureaucratic red tape (though this has changed and is changing), can anyone launch an ICO?
During the ICO boom of 2017, this was definitely the case, as many ICOs sold millions of dollars worth of tokens by simply coming up with a website and a whitepaper.
However, this is no longer the case as regulation has increased as mentioned, which means founders will likely have to seek out professional legal advice to make sure they aren’t violating any securities laws with their ICO.
In addition, investors have become much more wary of ICOs, as 80% are scams and only 8% get listed on an exchange - in other words, only 8% can actually be sold for potential profit. In most cases, it’s no longer as easy as whipping up a website and whitepaper to get millions of dollars of funding. Investors now expect more, such as a minimum viable product, before investing their hard-earned money.
Are ICOs Dead?
While the ICO market is nothing like it was during 2017 and parts of 2018, the ICO market isn’t dead completely, as seen in the below chart.
While ICO funding decreased by 97% from early 2018 to early 2019, another thing to keep in mind is that interest in the crypto market overall decreased significantly as well in the same time period due to a general crash in prices.
How to Start Your Own ICO
Unfazed by a smaller ICO market and looking to launch your own ICO? Our article on how to create a cryptocurrency will give you a basic outline of how to create your own ERC20 token!
How to Spot a Good ICO
Looking to invest in ICOs but don’t know how to separate the good ones from the bad ones? While there’s no ICO crystal ball that will tell you which ones are guaranteed to have a high chance at success, here are some things you could look out for:
- Token use case - is there a use for the token beyond funding an ICO?
- Working product - is there a working product? Anyone can come up with a cool idea; implementation is another story
- Team members - does the team have a track record of success?
- Community - does the ICO have a vibrant community that will likely spread awareness of the ICO?
- The funding limit (usually called a “hard cap”) - if the hard cap on an ICO is too high, there might not be much room for the token’s value to grow, as opposed to an ICO with a low hard cap and more room to grow
- Token distribution - does the ICO team have too many of the tokens? Is there no lockup or vesting of the token that prevents the team from selling their tokens right away? If the distribution is skewed and undelayed, there might be strong negative selling pressure on the token’s price
- Token release date - when do you get your tokens after investing? You might not want to wait a year for your tokens if that means missing out on other opportunities
- Exchange listings - are there any plans to list on exchanges? After all, you want to be able to sell your tokens for a profit somewhere
- Individual contribution limits - are there limits to how much any one person can invest? If there aren’t, “whales” (people with a lot of crypto) can have a disproportionate amount of tokens and effect on the price (e.g. they sell a lot and the price tanks)
- Presale and private sale - is there a presale and/or private sale? Often early investors get discounts, which can give them an incentive to immediately sell their tokens for guaranteed profit
- Inflation rate - is there inflation built into the token? If so, is the inflation rate too high (token devaluation would occur)?
While ICOs are a relatively new concept, they’ve gained a lot of popularity among both companies and investors, since companies can raise funds more easily and investors can sometimes see fast and significant returns on their investment. Although ICOs have died down as of late, it’s possible that they see a resurgence if and when the regulatory environment clears up and when investors regain their interest in crypto.
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