An ICO is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for other forms of currency, such as the blockchain coin (that the project is building on) or legal tender (FIAT). ICOs are somewhat similar to an Initial Public Offering (IPO), in which investors purchase company shares within the cryptocurrency industry.
Tokens are like shares in a company, but they represent a right to future services rather than ownership of the company itself.
Cryptocurrency ICO – What does it Stand for?
ICO stands for Initial Coin Offering. However, it is worth noting that, although it stands for Initial Coin Offering, the same terminology is used for initial token offerings.
What are Initial Coin Offerings (ICOs) for?
Initial Coin Offerings (ICOs)are similar to IPOs and crowdfunding – they are a way to raise funds for a new cryptocurrency venture, such as a new business, product, or project.
Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)
An IPO (Initial Public Offering) is a way for an already established private corporation to raise funds and transition from a privately owned to a publicly owned business by selling shares to the public. Shares often have no utility (not to be confused with utility stocks and shares) but can be sold in the future.
An ICO (Initial Coin Offering) is similar to crowdfunding, a way for a new or relatively unknown cryptocurrency project to raise money to launch its product or service by selling digital assets to early investors within the crypto community. Those digital assets (tokens or coins) will often have a utility in the future.
How does a Crypto ICO Work?
In an ICO campaign, a percentage of the newly issued cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies (often stable coins or the primary coin of the blockchain the project is built on).
Set a Goal and Method of Achieving it
The project owners set the percentage of tokens sold through an ICO with one of three primary methods in place:
- Set supply and price. – A set supply and price allows for a specific goal within a certain number of tokens sold. For example, 2,000,000 tokens at $0.10 each raises $200,000. The ICO continues until all tokens are sold.
- Set supply, variable price. – A set supply will ensure all tokens are sold, while a variable price will adjust the token price by funding. For example, 2,000,000 tokens will sell. However, if the project only receives $100,000, the price per token becomes $0.20.
- Variable supply set price. – A fixed price allows the project owners to set a price per token, and total funding in a set time will determine the supply. For example, if, during the ICO phase, a project raises $150,000 at $0.15 per token, the ICO supply becomes 1,000,000 tokens.
Another variable that ties into the methods set above is the cap:
- A hard cap sets the maximum amount of funds the project will accept.
- A soft cap sets a minimum amount of funds that the project will accept.
- No cap leaves no limit to the amount of funds that they can raise.
Each of the methods has advantages and disadvantages. For example, a set supply – variable price ICO could raise more or less money than expected. However, a set supply and fixed price will never go above a set amount of token sales.
Raise Capital Via Early Investors
One of the most complicated steps to completing an ICO (for the business) is to raise capital by selling their digital asset to future token holders. For that step to work well, you need to have enough potential investors to buy your token and convince them that it will have a bright future.
To raise funds from early investors, the project will put together a marketing campaign and create a website that outlines all the essential information about their project (such as the team, technology, roadmap, etc.), as well as the token sale.
A lot of the information you need to provide to retail investors will be presented in a white paper that goes into more detail about the project and tokenomics to generate interest and hopefully convince them to participate in the ICO.
After the marketing campaign and website is live, and you have enough interest, it’s time to sell the token.
Pros and Cons of a Crypto Initial Coin Offering (ICO)
Cryptocurrency ICOs are a great way to raise money for a blockchain startup. However, as with everything, investors and builders have to face pros and cons.
Pros of Cryptocurrency ICOs
- Easy way to raise money. – Cryptocurrency ICOs are a quick and easy way to raise money for a startup.
- Reach a global audience. – Because cryptocurrency is global, an ICO can reach a global audience quickly and easily with the right help or existing backing.
- Get early adopters of your product/service. – One of the benefits of an ICO is that you get early adopters of your product or service who are interested in helping the project succeed.
- Exposure to blockchain technology. – Participating in an ICO exposes you to blockchain technology and its workings.
Cons of Cryptocurrency ICOs:
- Risky investment. – Investing in an ICO is risky because there is no guarantee that the project will be successful.
- No regulations yet. – There are no regulations yet for cryptocurrency ICOs, which means there is no protection for investors if something goes wrong with the project.
- Fraudulent projects. – There have been many fraudulent cryptocurrency projects in the past, so it is essential to do your research before investing in an ICO.
Considerations Before Participating in a Crypto ICO
There are many considerations that you must take into account before purchasing crypto ICO tokens. However, they are all covered in our article, How to Avoid Crypto Project Scams. Ensure you read the whole article and understand how to stay safe!
ICO Red Flags – Things to Watch out for
While you need to stay safe, as the article linked above explains, there are also some other red flags or things to watch out for when considering an ICO investment.
- A reputable company does not back the project.
- The team is anonymous or has fake LinkedIn profiles.
- The project does not have a working product.
- The website is full of grammatical errors.
- The project is not transparent about its roadmap or financial information.
- The project promises guaranteed returns.
- There is no mention of a token sale on the website.
- The project’s social media accounts are inactive or have very few followers.
- You cannot find any information about the project online.
- The project is asking for too much personal information.
Take the time to DYOR, so you do not lose out.
How to Participate in ICO
Participating in an ICO is relatively straightforward. However, there are some things that you need to do before you can. As BHero operates on the Elrond network, we will go through the process for the Elrond blockchain. However, looking at any other ICO on a different blockchain, you may need to adjust the steps slightly.
1. Register with an Exchange. – Note that you will not participate directly in an ICO within the exchange – if you were, it would be an IEO (Initial Exchange Offering). However, you still need crypto exchanges to obtain cryptocurrency. Therefore, once registered on a reputable exchange such as Binance, you can continue to the next step.
2. Purchase the Correct Cryptocurrency. – Businesses raising capital will consist of selling their new tokens via a digital currency native to their blockchain. For example, participating in an ICO on Elrond will require eGLD, an ICO on Ethereum will require ETH, etc. Some things you need to remember:
- Buy the correct currency.
- Know how many coins you need to participate.
If this is your first ICO, a recommendation would be to buy only enough coins to participate in one. It can become confusing if you try to invest in too many crypto projects at once.
3. Transfer Funds to a Non-Custodial Wallet. – Initial Coin Offerings require your funds to be in a non-custodial wallet (a wallet that you have control of your private key) such as the Maiar App, Maiar DeFi Wallet, or Ledger.
4. Participate in the ICO. – Each ICO will have a slightly different approach for its token sale. However, many (if not all now) will offer step-by-step guides to instruct you on their specific process. For example, if you want to see how the BHero launchpad carries out token sales for blockchain startups, click here.
Where to Find ICOs
There are several ways to find upcoming, ongoing, and past ICOs. The most popular method is to use an ICO calendar which will show all the vital information in one place to make an informed decision on which projects to research more.
Another method would be to go on crypto forums such as Bitcoin Talk or Telegram and look for channels dedicated to ICO discussion. However, this approach requires a bit more work as you need to sift through a lot of information that may not be relevant.
Best Practices for Investing in a Cryptocurrency ICO
Here are some best practices that you should always follow when researching and investing in an ICO:
- Do Your Own Research (DYOR) – We cannot stress this enough. With the rise of social media, it is easier than ever to get caught up in FOMO (fear of missing out). Remember that if something sounds too good to be true, it probably is.
- Do Not Invest More Than You Can Afford to Lose – Crypto is a volatile market, and prices can go up or down very quickly. Therefore, only invest in what you are comfortable losing.
- Store Your Coins in a Non-Custodial Wallet – As your private key will be stored on your device, you will have complete control over your funds. That reduces the risk of losing your coins due to exchange hacks or other security breaches.
- Diversify Your Investments – Do not put all your eggs in one basket. By investing in a variety of ICOs, you can minimize your losses if one project fails.
- Use a Reputable Exchange – Not all exchanges are created equal. When choosing an exchange to buy cryptocurrency, pick a well-established and reputable platform such as Binance.
- Know the Risks Involved – Be aware of the risks involved in ICO investing, such as scams, fraud, and regulatory changes.
- Follow the News – Keep up-to-date with the latest news and updates from the ICO team. That will give you insights into their progress and whether they are meeting their milestones.
- Check the Tokenomics – A project’s tokenomics will give you an idea of its potential future value. Read the whitepaper or other documentation to understand the project better.
- Read the Fine Print – Always read the terms and conditions before investing in an ICO to ensure that hidden fees or clauses do not catch you off guard.
- Join Their Community – One of the best ways to learn about an ICO is to join their community and participate in discussions to allow you to ask questions directly to the team.
What are ICO Bounty Programs?
An ICO bounty program is a system that awards tokens to participants who complete specific tasks. These tasks can include anything from social media promotion to bug testing.
Bounty programs are a great way to earn free tokens and get involved in a project early. They also provide valuable services to the team, such as marketing and feedback.
Who can Launch a Cryptocurrency ICO?
Almost anyone can launch a cryptocurrency ICO. However, there are specific criteria that you must meet before starting.
- The team should have a solid understanding of blockchain technology and how to develop a project on it.
- They should also have a clear vision for their product and a roadmap to achieve their goals.
- It is also essential to have a strong marketing strategy in place. That will ensure that people know the ICO and what it is trying to achieve.
- Finally, the team should have a realistic funding goal. If the goal is too high, it may be challenging to reach. On the other hand, it may not be enough to develop the project properly if it is too low.
If you meet all these criteria, you are ready to take your project to the next level. However, when launching an ICO, there are a few things that you will need:
- A whitepaper – This document outlines the problem your project is trying to solve and how you plan on doing it. It should also include information about your team and your tokenomics.
- A website – This is where people will go to learn more about your project. Make sure to include a clear call to action so that people know what they need to do.
- A social media presence – This is how you will reach potential investors and build hype for your ICO. Create accounts on all the major platforms, such as Twitter, Facebook, and Telegram.
- A Telegram group – This is a great way to keep people updated on your progress and answer any questions they may have.
- An email list – This can send updates about your ICO to interested investors.
- Bounty programs (optional) – These are a great way to get early adopters involved in your project.
When your ICO is launched, all you need to do is wait for people to invest. Then, once the fundraising period is over, you will have the funds you need to develop your project!
Although ICOs are a great way to raise money for a blockchain startup, there are other red flags or things to watch out for. So before you invest in an ICO, be sure to do your research and understand the risks involved. And if you’re thinking of launching your own ICO, make sure you know the legal implications and take all the necessary precautions.
Here at BHero, we specialize in helping businesses transition from web2 to web3 with blockchain technology. If you would like to find out more, contact us on Telegram.
ICO Frequently Asked Questions
Here are some of the most frequently asked questions surrounding crypto ICOs.
What is Reverse ICO?
A reverse ICO is the process of a company that already has a product or service (usually a publicly traded company) and sells its assets or stocks to the public to fund a new cryptocurrency venture. The company then launches a new token or coin that is used to power its product or service.
Reverse ICOs are very similar to IPOs (Initial Public Offerings), except the primary goal of a reverse ICO is for a Web2 business to transition into Web3 (blockchain).
Crypto ICO vs. IDO
An ICO is an Initial Coin Offering, while an IDO is an Initial DEX Offering. An ICO is a fundraising event where a company sells tokens to investors for funding.
An IDO is a fundraising event where a company sells tokens on a decentralized exchange (DEX) to raise funds.
The main difference between the two is that an ICO is centralized, while an IDO is decentralized. Another difference is that ICOs are often open to anyone who wants to invest, while IDOs are usually only open to accredited investors or those with invitation codes.
What Happens if I Missed an ICO?
If you missed an ICO, you could still buy the tokens on secondary markets such as exchanges. However, the price of the tokens may be higher than the ICO price, so you would need to factor that in when making your decision.