Initial coin offerings (ICOs) are gaining in popularity as Bitcoin alternatives. Learn what an ICO is and how to evaluate an investment opportunity.
You might already be HODLing some Bitcoin—but how do you know if an initial coin offering (ICO) is worth taking a chance on?
We’ll cover everything you need to know about ICOs in this post including what they are, how to evaluate whether it’s a promising investment, and how to invest if you choose to.
What is an ICO?
The first thing to know is what ICO stands for Initial Coin Offering. What that actually means is that someone offers an investor tokens of a new cryptocurrency in exchange against established cryptocurrencies (think Ethereum or Bitcoin).
ICOs have been used since roughly 2013 to fund all kinds of new cryptocurrencies. Think of them as a crypto-version of an initial public offering where investors purchase shares of a company, minus all the regulatory issues (at least for now). The big difference between an ICO and an IPO, however, is that token holders don’t own any equity in the cryptocurrency company—so the company retains full ownership, and has no real obligations to the contributors. The tokens rise and fall in value based on how the companies attached to them do. But, similarly to the stock market, tokens can be traded or liquidated on digital asset exchanges.
An ICO is a specific event that lasts for a short period where investors are able to purchase the new units. There can be a specific limit or goal for funding making the supply static, a dynamic funding goal (meaning that the more funds the project receives the higher the token price will be), or even a dynamic token supply determined by funds (in other words, the price for each unit would be static but a new unit is created every time its funded).
Why? Well, with Bitcoin exploding in popularity (and in value) in the past year, everyone is looking for the next big cryptocurrency. With crypto going mainstream, we’re now in the midst of a gold rush for the cryptocurrency. That means there’s been massive growth in the crypto market. There are now upwards of 800 different cryptocurrencies out in the world today, and that’s possible thanks to lots (and lots) of ICOs.
ICOs are sometimes viewed as an alternative form of crowdfunding, completely separate from the traditional financial system. Think of it as a kind of Kickstarter that lets new startups skip the venture capital process. As with any kind of investment, there’s risk involved. Many consider ICOs to be too unstable to completely build a business on. But there are undeniable advantages to this new kind of investment: it allows new projects to get opportunities they otherwise wouldn’t have, it helps creators build a community of supportive investors, and gives supporters the chance to get early access to new tokens that could be the next hottest thing in crypto.
Success Story: Ethereum
The average consumer has probably only heard of Bitcoin in relation to cryptocurrency, but those in the space are likely to also be familiar with Ethereum. Ethereum is a decentralized platform built on a custom blockchain that runs smart contracts. For 42 days between July and September of 2014, the Ethereum ICO raised a staggering $18 million in Bitcoin with each Ether (Ethereum’s currency unit) valued at about 40 cents. Today, Ethereum is now trading above $200.
Is it a Good Investment?
The current lack of regulation regarding ICOs is a double-edged sword. On one hand, contributors don’t have to jump through regulatory hoops or deal with mountains of paperwork. The barriers to entry are very low, making funding feasible for many startups that wouldn’t necessarily survive a venture capital round. Of course, that also means there are plenty of opportunities for bad actors to scam unwitting investors with fraudulent ICOs. If you’re looking to invest in an ICO, you shouldn’t take it on faith that everything is aboveboard. Doing your homework on any ICO is absolutely essential to understanding if it’s a good investment.
One of the first things you should do is check if the people behind the ICO are real and accountable. With some basic research, you should be able to figure out if they have previous relevant experience with cryptocurrencies and blockchain and see if you can verify the background of anyone involved. These people should be able to answer any detailed question you throw at them about their ICO on the spot. Folks behind legitimate ICOs should be ready and eager to answer any inquiries — remember, they want to attract investors like you!
Each ICO should also have a white paper, which is a document that explains what the currency has to offer. Why is it better at executing an established idea than any other company out there, or what is it doing that no one’s done before? In short, why should people invest? The more detailed and transparent the white paper is, the better. Use your best judgment: Are you engaged by the company? Do you understand what they are trying to accomplish, and the specific steps it will take for them to get there? Is it jargon-laden, or could it hypothetically be understood by someone with absolutely no idea of how these systems work? Take a look at Ethereum’s white paper if you want an example of what a successful white paper should do and what questions it should answer.
If the folks behind the ICO seem legit and the white paper passes muster, that’s good news. But you shouldn’t stop the research there. See if the programmers and leads are making themselves easy to contact with questions — a legitimate ICO should be trying to find as many investors as possible, so if they aren’t easy to reach, it could be a red flag. Anyone thinking of backing a new cryptocurrency should take a look at these to see how other experts in the crypto-community are feeling about a particular company. Sites like Investopedia and Coinschedule keep lists of ICOs that are vetted and attractive. Don’t rely entirely on these databases — thorough research of your own is necessary — but these are good places to start.
After that, it’s up to you to use your best judgment. With high potential reward also comes high potential risk. Do your due diligence before committing. This cannot be emphasized enough.
How to Invest in an ICO?
You have an ICO that you’re interested in, you’ve done the background research, and you’re ready to take a leap of faith. The next thing you need to do is to convert your money into crypto. Bitcoin is accepted just about anywhere (since it’s still the most well-known cryptocurrency), but Ethereum is actually the first choice for many ICO investors because it offers a stable and convenient Blockchain for developers.
Whichever one you choose, you’ll need to move your newly converted cryptocurrency to a wallet that you own, rather than one that’s provided by an exchange. Just be sure that it supports the ERC20 token standard (the official standard for the Ethereum network). After you have the funds secured in the wallet of your choice, you’ll send the funds to the campaign’s address. Any ICO should have detailed instructions on their website regarding where and how to send your currency to them. Though developers will try to make the process as frictionless as possible, you’ll want to double and triple check that you are sending your funds. Scammers will try to trick potential ICO investors by putting nearly identical fake ICO websites in Google results, for example. Be absolutely positive you are on the right site before sending any currency.
Also, be extra cautious about verifying the project’s wallet address. Scammers will post fake addresses online, so be absolutely positive you’re sending your money to the right place before you do. If you’re using Ethereum, you will be asked to include a transaction fee (or “gas”) to enable the transaction. Once you submit the funds, you’ll likely have to wait a while to see what the status of your transaction is — thousands of people may be sending funds at the same time, so be patient.
Once the transaction goes through, you’ll receive your ICO tokens in your wallet. This can happen instantly, or it could take weeks or even months. You also may not be able to trade them right away, depending on the rules of the ICO.
If the ICO is successful, the token will be listed on an exchange, where you can trade it (usually against Bitcoin and ether). You can also hold it; there are companies that emerge from the ICO stage with highly valued tokens.
It’s not a difficult process, especially if you already have some basic knowledge of cryptocurrencies. The biggest thing is to keep in mind is the research, research, and research — in the quickly evolving world of crypto, knowledge is power.