Let’s ICO like it’s 1999.
* Important warning before we start: ICOs are a high-risk way of fundraising. Never invest anything you can’t completely afford to lose. Keep in mind that due to a lack of regulation, you will have difficulty getting back your lost money in case of any failures.
What is an ICO?
An ICO (Initial Coin Offering) is a fundraising method that trades future crypto coins for cryptocurrencies which have an immediate, liquid value. Much as an IPO is an Initial Public Offering when a private company decides to go public on an Exchange, an ICO is an Initial Coin Offering. ICOs or Initial Coin Offerings are basically crowd sales, the cryptocurrency version of crowdfunding.
The only difference is that in an ICO the startup sells tokens on a blockchain while IPO is selling shares. It usually takes place before the launch of a coin’s blockchain, and involves the public sale, or crowdsale, of a percentage of the coin’s initial supply. ICOs are sometimes referred to as ICPOs (Initial Public Coin Offerings) or ITOs (Initial Token Offerings) or even a ‘Crypto Crowdsale’. The startups themselves are called ‘Blockchain Startups’.
Many of the companies performing ICOs aren’t offering coins, but rather tokens. And tokens and coins are very different things. Coins, like Bitcoin, are a way of transferring monetary value. Tokens, on the other hand, can store complex and multifaceted data streams that can be used for endless functionality.
Many of the new companies that are holding ICOs are not currencies and are instead technology companies that will be built on the blockchain. So, they can’t be judged solely on their monetary value, but rather they need to be evaluated based on their business model and potential solution.
What is the so-called ‘white paper’ within an ICO?
Every ICO should have a white paper or manifesto. For example, the original Bitcoin white paper is at the back of this book (see appendices). This details how the technology is intended to work, how the tokens are designed within it, and how users could acquire and use the tokens. A white paper shows whether the founders have thought through the project, what problem it solves and how they mean to solve it. Crucially, it must also show how the tokens they are giving out will be used to solve the problem, since you will own some in exchange for investing.
How does an ICO work?
1. A startup advertises that it will be selling the initial coin supply of their new cryptocurrency.
2. Investors read the ‘white paper’ of the startup and on that basis exchange Bitcoin or Ether for these new coins.
3. The startup can then exchange your Bitcoin or Ether into normal fiat currency to spend on building out the technology, pay for costs etc.
4. If the project is a success, ie it launches and starts being adopted, then the value of the new currency rises and investors of the ICO make a profit.
Why do companies do them?
ICO provides them a simpler and quicker way to do fund-raising for new blockchain projects than a traditional method. It is also border-free that it can connect to every investor in the world.
Usually, a percentage of the tokens is sold to ICO participants and a percentage kept for the company’s needs (private investors, etc. Terms differ from one ICO to another).
Bancor raised $150 million in under 3 hours. BAT raised $34 million in literally under a minute. The ICOfor Status was in such a high demand that it jammed
the Ethereum network for an entire day. The highest value raised by an ICO is Tezos, which raised a record breaking $232 million in less than a month!
How do you make money in an ICO?
Most investors speculate that the startup will be successful enough to launch on an exchange, so that they can sell their tokens or coins as soon as possible, at profit. They don’t necessarily believe in the company itself, or they might believe in the idea, but are not willing to risk staying in for the long term if they can make 100-1000% in the short term.
What does the new token/coin represent?
The coin/token issued in an ICO has three roles, depending on the goals of the company:
It represents the company’s product – the coins can be used as a medium of exchange for a certain amount of product or services. It could also be used for trading in a project.
It represents the right of profit sharing – like normal shares, the coins could be thought of a certain percent of a company’s shares you own and profits could be shared if the company wishes to do so.
It represents corporate bonds – the coin is like a loan. The coin owner is able to receive interest based on the pre-set rate.
Those that believe in the company will hold on for the long term. If the startup is successful, fortunes will be made. Even if you invest just £500-5,000. This is unprecedented.
Are there drawbacks to investing in ICOs?
Yes, there are many.
The idea for the startup is written on a ‘white paper’ – often even without any proof of work – and people invest on the basis of what they read in the white paper. Since investors are pouring in their money in the hope of becoming rich through ICOs, some of these ICO startups are taking advantage of this situation. They collect the money but don’t actually get to the work of creating the product, yet alone actually turning the business into a profit-making enterprise. Then they just disappear into the ether.
Mycelium ICO was a particularly bad example of this. Its team members just disappeared after raising the money, and later it was reported they used the funds to pay for their own vacation.
This is why there is so much talk of regulation and self-regulation.
The ones that are legitimate and really do want to create a product may have the problem of insufficient technical knowledge or support. They may be underqualified and lack the experience of building up a blockchain business.
This is not the only way investors have lost money. $7 millions were stolen as CoinDash’s ICO started. Right before the start of the token sale, their website was hacked and the ICO wallet address was changed to the hacker’s address.
How do I go about investing in an ICO?
1. Research, research, research
Unlike an IPO where the company is normally successful and profitable, an ICO is a startup and needs the funds to get from the white paper theory to develop the actual product or service. So you must do your research by trawling the Internet and asking all your questions on ICO, cryptocurrencies and Bitcoin forums. Remember, you could lose 100% of your investment.
1. Can the team deliver based on its experience?
Read their white paper and go straight to the founding members and the team. Look at their profiles on LinkedIn. See how much history they have in the space – we are looking for people who can deliver on their promise. If not, don’t even bother continuing. Find out if the team has any crypto experience and – more importantly – which projects, or ICOs, they were involved with and the impact they had. If you are satisfied that they can deliver, continue your research.
Take a short cut and go to BitcoinTalk.org, because you can see what the experienced investors are saying.
Watch out for the words like ‘scam’ and how the community responds. Give more weight to the answers of experienced investors. Investor’s concerns will be answered (or may be unanswered) in this thread.
Also, it is a bad sign when the developers avoid answering certain questions or aren’t collaborating. Sending them a personal message to see how responsive they are is also a good idea.
2. Does the idea solve a problem/is the idea needed?
Is there any validity in their idea? Is it solving a problem? Is there a potential hungry market for this? Does it have a chance of succeeding? What does your gut instinct and experience tell you? After reading it, you should be able to answer a simple question – what kind of value does this project bring to our world?
Next, is it a totally new concept or are they developing something that someone else already has developed. Don’t get duped into a new Amazon for this new market or an Uber of that new market. It can’t just be a ‘me-too’ product – don’t invest unless you believe that this company can do it much better.
3. What is the Token for?
ICOs mean the creation of a new dedicated token for the project. One of the most important questions each project needs to answer is what is the token for? Why isn’t Bitcoin or Ethereum enough to serve as the project’s token?
4. How much money is being collected?
Some of the earlier ICOs were unlimited. An open cap allows investors to send unlimited funding to the project’s ICO wallet. The more coins are circulating, the less unique your tokens become for trading afterwards – through less demand.
5. What are they using the money for?
Next, what are they using the money for? What percentage will go to the development budget, the marketing budget, and other essential allocations. In the past, many ICOs have not given this level of transparency but in the end don’t you want to know where your money is going to be allocated to and if this makes sense to you?
6. Token value
Next, look at the Token value – is the current value worth it? Do you think it has a chance of growing in value to make you enough profits? Do they have too many tokens on offer which will saturate the market? Are there really any incentives to use their tokens – because in the end, even if it is a great idea, you will only make money if the tokens you have will increase in value over time? Etc.
If you can answer these questions as best you can, then you have done the work required to lower the risk of investing. Remember that your risk is 100% and with several of them, this is likely to happen.
7. Token distribution – when and how
Greed can be defined by a high token distribution to the team members, let’s say, more than 50% of the tokens is suspicious. A good project will link its token distribution to the roadmap,because each phase or milestone of the project requires a certain amount of funding.
Watch for the token distribution stage. Some projects just release their tokens hours after the ICO has ended. Some projects need to develop a beta version before sending out the tokens. This is good to know but doesn’t necessarily have to impact your investment decision
2. Exchange your fiat money for cryptocurrency
You will need cryptocurrency, usually Bitcoin or Ethereum, to participate in an ICO. Remember the startup will then exchange your investment money for fiat money to pay for its development, costs etc.
3. Invest in ICO
Simply send the cryptocurrency the startup asks for to the address they ask you to send it to. Please note that most startups won’t accept Bitcoin or Ether from an exchange. Several exchanges won’t send Bitcoin or Ether to an ICO startup. Normally it is sent from an online wallet e.g. www.myetherwallet.com
4. Follow the development of the startup
Many people just leave their money in the startup and pray it all works out. I am not one of those people. I try to get involved and see if I can help. After all, this is my money I have invested and I want to ensure that it works for me. I even spent six months in a startup manning the phones. Tell everyone about it, be a walking, talking advertisement for them. You just never know the impact this could have.
Remember, investment in cryptocurrency isn’t something to be taken lightly. It’s extremely risky, extremely speculative, and extremely early stage still at this point in time.
I have now invested in over 30 ICOs. I am spreading my risk because I don’t know which of them will be successful, if any. This is pure speculation. But I also swore that I would not miss out on what so far looks like a once in a generation opportunity.
I attend as many conferences as I can so I can talk to the team. I read the whitepaper. I might send them an email to see how they react.
I have even managed to get in on a pre-sale where it is possible to get discounts. They were asking for a minimum of 100 ETH but when I reminded them that we had met at the conference and of the conversation we had, they came down to 50 and then finally 25 ETH.
Morale of the story?
If you don’t ask you don’t get.
And attend conferences to meet the team. There’s only so much you can glean from a Whitepaper.