What is an ICO (Initial Coin Offering) and How it Works?

ICO Definition

According to the ICO Definition, Initial Coin Offering (ICO) are a crowdsourcing funding mechanism that is used by start-ups. These are typically used by technology firms that wish to create a new app.

Many of these ICOs are linked to the development and use of cryptocurrency, for example the creation of exchanges and blockchain-based platforms. Other ICOs are also being used to develop new technologies.

An ICO’s main goal is to raise funds to fund a project or technology. The creators of an ICO usually advertise on the internet, either through advertisements or specialised websites, reaching a wide audience.

Cryptocurrencies have attracted new investors to the financial world. They are generating extraordinary returns for investors. The proliferation of ICO scams has been a result.

Since the creation of Bitcoin, thousands altcoins or alternative currencies have been created. Many of them are based upon an Initial Coin Offering.

This procedure has led to the development of innovative technologies, including Ethereum. It is also full of scams. They offer high returns and exploit their investors’ ignorance to sell them worthless products.

This article will teach you how to distinguish new cryptocurrency ICOs. Even though the creators of a crypto may be in good faith, but nobody can guarantee that an ICO will succeed.

How cryptocurrency ICOs work?

An Initial Public Offering (IPO), on the stock exchange, is similar to a ICO.

Companies create a marketing campaign to promote the new currency. The companies usually create a website where they describe the project and upload a document known as a “white paper”. These “whitepapers” explain the conditions, the technology, the business model, and the backing of the cryptocurrency. These “white papers” also include a road map of the entire creation.

Instead of shares, investors can purchase coins or tokens. Tokens are used to implement the project. However, they can also be used as voting rights or for a future share of income.

What is a cryptocurrency token?

Token is a financial term used to describe a unit of currency issued by a private company.

According to the definition of a token, it’s similar to Bitcoin because it is accepted and used by a community. Most tokens, however, are based on Ethereum’s blockchain (thanks in part to smart contracts).

The value of the token is determined by the project with which it’s associated and the confidence that the market has in the token.

The security of a token is highly dependent on the project behind it, the protocol that’s been developed and the team. Many tokens are scams. This article will help you to distinguish between scams and real projects.

Once the ICO reaches its funding goal, it will stop. At this point, the ICO promoters usually have enough funding to continue the project. The company will then inform its investors, or the buyers of the ICO, of the progress of the project.

In most cases, the responsible company will also negotiate with exchanges to list on these platforms. You can then sell your cryptocurrency if you don’t like the direction your investment has taken.

Since their ICO, some cryptocurrencies have seen a significant increase in value. Some have crashed. All depends on the value of the project in the market and the management style.

Types of ICOs

ICOs are classified based on the way that they distribute their tokens. This is explained in the white paper.

  • Price and supply of tokens fixed

    The ICO (Initial Coin Offering) determines a set number of tokens that will be sold at a certain price. Prices remain constant during the entire process.
  • Price and quantity of tokens are variable

    The number of tokens to be used is fixed. The price of the tokens increases with the amount collected. To attract more investors, lower prices are offered at first to encourage them to invest and reach the minimum goal.
  • Fixed price and variable token supply

    This type of ICO has no fundraising limit. The price is fixed and the coins will be produced in an amount equal to what was purchased. This was the way that the Ethereum project has been funded.

How to invest in a cryptocurrency ICO?

The acquisition of tokens in ICOs is generally similar, despite the fact that each ICO is unique. It is essential to carefully read the terms and conditions of an ICO before buying tokens.

After you have read the white paper carefully, keep in mind these points:

  1. Be aware of deadlines. Some ICOs achieve their goals in a matter of hours, or even minutes. Some ICOs have a roadmap that spans several weeks or even months.
  2. Discover which coins you require. There are ICOs today that let you buy using FIAT currency. For most, you’ll need either bitcoin or ethereum. Purchase the required cryptocurrency in advance.
  3. Prepare a wallet compatible with your token. ICOs will usually list the wallets that are compatible with their tokens in their white papers. Ensure that your coins are deposited into one of these wallets.

Check here our guide on how to store your cryptocurrencies safely.

To avoid scams it is still important to find out information about the ICO. The market’s confidence in the project will determine the success of an ICO.

It is vital to pay attention at certain details to avoid scams. Initial Coin Offerings should comply with the following issues:

  • A serious white paper with details and clear ideas should be published. Avoid ICOs with a vague white paper. It is important to note that without a detailed white paper you should not even consider buying.
  • It is important to check if the token is based on Ethereum. If so, they should have made their smart contract available in a repository like Github or etherscan. If they haven’t done this, be wary.
  • Avoid ICOs with no limit on their profits. This is a sign of greed from those in control.
  • You need a team that is competent behind you. Do your research on each person who appears in the team. Check their Linkedin profile and their experience with similar work. Pay special attention. Many ICOs use fake Linkedin profiles to promote the ICO. Sometimes they used profiles for people who had no real connection to the project. Be suspicious if you even have the slightest suspicion.
  • Check that they are answering your questions. You can check if they have an email address or a Telegram group to answer community questions.

Risks of investing in an ICO

ICOs are not regulated and there is a high risk of fraud. There is no legislation in most countries to address the potential conflicts that could arise as a result of these initiatives. Investors should therefore be aware that participating in any ICO will involve a significant amount of speculation.

These ICOs are not regulated and are therefore vulnerable to fraud: Some ICOs may be used to commit fraud or engage in illicit activities. Financial regulation may not offer investors the protection they need.

Risk of losing the entire capital invested is high: A large majority of ICOs have been launched by businesses that are in a very early development stage. These businesses are at high risk of failing. Many of the tokens or coins that are being offered have no intrinsic worth other than the fact that they may be used to gain access to a service or product developed by the issuer. It is not guaranteed that the product or service in question will be developed successfully. Even if the project is a success, the profit could be very low compared to the initial investment.

Lack of options for repayment and extreme volatility in price of coins or tokens: Investors might not be able trade their coins or tokens, or exchange them into traditional currencies such as USD or EUR. When coins or tokens, like cryptocurrencies, are exchanged for virtual currencies, the price of those coins and tokens can be volatile. These trading transactions can be highly volatile and are susceptible to price manipulation and fraudulent activities. Investors could be left with limited options for redeeming their investment or may not be able to redeem their tokens or coins within a certain time frame. Over a long period of time, you can accumulate coins or tokens.

Information is not adequate: The information that is made available to investors (such as white papers) is often unaudited and incomplete. It is also biased or even misleading. The focus is usually on the benefits and not the risks. It is also very technical and hard to understand. Investors might not be aware of the risks and may make a bad investment based on their risk profile and needs.

Successful Cases

ICOs do not represent the devil, even though we put a lot of emphasis on avoiding them. Some projects have achieved real success. Here are the best cryptocurrency ICOs.

The Ethereum ICO

Ethereum is one of the most popular ICOs. At its launch, in mid-2014, it raised 31,531 Bitcoins ($15 Million at the time). The white paper said that investors didn’t receive their ether for a full year. It is currently the second-largest bitcoin in terms of market capitalisation.

The ZCash ICO

The Z-Cash Project promised a cryptocurrency that was 100% anonymous. More than 30 investors supported the project. It raised $3 million to fund its development. This is a deflationary coin, and like Bitcoin will circulate 21 million ZEC. Investors and developers own 10%.

This article is over. You may have noticed that choosing a successful ICO (Initial Coin Offering) can be a real challenge. It is essential to spend time analyzing its characteristics in order to distinguish it from a fraud. You will lose money if you believe the ads you see online that promise big returns.