Have you ever heard of what an IPO is? Well, an ICO is actually quite similar, functioning as the cryptocurrency equivalent to an IPO in the investing world. Projects and businesses seeking to raise enough capital through crowdfunding may want to consider “ICO-ing” to gain support and — more importantly — capital. From the investor’s perspective, ICO’s may actually be somewhat daunting. Most ICO’s usually end up failing, which is why many experts advise beginners to stay away from them until they know enough about how to handle them in the future. Let’s go over everything you need to know about ICO’s.

This is not financial investment advice.

This article will touch upon key aspects of initial coin offerings.

In this article

ICO Terminology

Accredited Investor: According to the U.S. Securities and Exchange Commission, anyone with an “earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).”

Airdrop: A strategy to facilitate wide distribution and use of project tokens. Early-stage project creators send tokens randomly to wallet addresses on a public blockchain (such as Bitcoin or Ethereum) that meet certain criteria.

Crowdsale: The process of raising money in a public token sale, often used interchangeably with the terms “ICO,” “token sale,” or “token offering.”

ICO: Initial Coin Offering, or the process of raising money from a public token sale; the term was coined based on an Initial Public Offering, or IPO, which may be misleading as it suggests all ICOs are securities; often used interchangeably with terms token sale and crowdsale.

White Paper: An informational document used by people and entities to convey their business plans and ideas; it is often used as a way for investors to understand more detail about the project motivation and technical aspects of the platform, project, or token.

It’s important to familiarize yourself with the aforementioned terms in order to gain a better understanding of what is being discussed in the rest of the article.

What Is An ICO?

So, what exactly is an ICO? An initial coin offering is, like we said before, a different version of an IPO with a cryptocurrency twist. In the simplest terms, an ICO is a fundraising means in which a company attracts investors looking for the next big crypto score by releasing its own digital currency in exchange, typically, for Bitcoin. ICOs tap into that thirst for the “fast and easy” and attempt to raise money quickly by bypassing the regulated fundraising process typically required by banks or venture capitalists.

Unfortunately, ICO’s are not all that exciting and promising once you look at the statistics of successful projects. Research conducted by various reputable sources based on publicly available information and sources, claims that nearly 80 percent of the initial coin offerings (ICO) are scams, and only a meager 8 percent of the floated ICO’s manage to reach the trading stage on the various cryptocurrency exchanges. When you think about it from a number’s perspective, ICO’s are actually largely unsuccessful and can end in losses for many.

Actually investing in ICO’s is highly risky and speculative, especially for those who do not have much experience with cryptocurrency or investing. However, there are most certainly some ICOs which have been extremely successful and have earned its investors significantly high returns. Take Ethereum’s ICO back in 2014, when it raised $18 million in Bitcoin. Today, Ethereum is clearly one of the most popular coins on the market and must have earned its early investors extremely high returns.

As ICO’s continued to gain popularity and mainstream news coverage, certain laws and regulations had to be put in place so that all possible discrepancies could be addressed. Based on specific facts, ICO’s may be securities offerings, and fall under the SEC’s jurisdiction of enforcing federal securities laws. In fact, the SEC has even warned some investors of potential risks when it comes to investing in initial coin offerings. While some ICOs may be attempts at honest investment opportunities, many may be frauds, separating you from your hard-earned money with promises of guaranteed returns and future fortunes.

They may also present substantial risks for loss or manipulation, including through hacking, with little recourse for victims after-the-fact. Irrespective of how you may view ICO’s, it’s clear that they are quickly gaining legitimacy as one of the new ways to raise capital in a short time period.

An ICO is a fundraising means in which a company attracts investors looking for the next big crypto score by releasing its own digital currency in exchange, typically, for Bitcoin. 80 percent of ICO’s are scams, and only a meager 8 percent of the floated ICO’s manage to reach the trading stage on the various cryptocurrency exchanges.

How Do ICO’s Work?

All ICO’s have to start with an idea, similar to a company that is looking to IPO. A startup more often than not comes up with an idea for a blockchain-related project and proposes it to the community. If the startup finds traction and accumulates a genuine follower base, they go ahead and formally draft a white paper that provides all the details — from the team working behind the project to its technical aspects and future plans. Additionally, the number of tokens and other logistics are decided at this stage of the ICO development.

Next, marketing campaigns are launched to gain momentum and an ICO date is subsequently unveiled for when the token sale is scheduled to begin. There is usually a defined time period to raise the required funds, after which the sale closes. Investors then start receiving their tokens and plans are made for them to go live on exchanges for trading.

Obviously, this is a simplified summary and a lot of work goes behind the scenes, but the end result is a pool of early investors getting tokens from a promising startup with hopes of future profits.

A startup comes up with an idea for a blockchain-related project and proposes it to the community. If the startup finds traction, they go ahead and formally draft a white paper that provides all the details. Following subsequent marketing campaigns and logistics, Investors then start receiving their tokens and plans are made for the project to go live on exchanges for trading.

How To Assess ICO’s

Now that you have a solid understanding of what an ICO is and how they work, let’s go over a checklist of how to properly assess an ICO. As long as you follow these steps, you’ll have a good idea of whether or not an ICO is good or not:

Step 1: Read the white paper. Although it could be technical at times, each project’s white paper will give you the most direct and transparent analysis of whether or not they are legitimate.

Step 2: Look for any prominent partnerships announced by the company that the ICO company has partnered with as well. For example, if they have an IBM partnership, see if IBM or a prominent news service has announced it.

Step 3: Check out the team behind the project. Perform a Google reverse image search on team member photos, to make sure they aren’t all stock photos. Some of the “scammiest” ICO’s even end up making fake LinkedIn profiles as well. So be sure to check out the team and make sure they aren’t just fake profiles set up to make the company look good.

Step 4: Check out their Telegram channel to see how good their support is and how quickly they answer questions.

Step 5: Visit websites like ICOmarks.com to see how these ICO’s have been rated, although it is a commercial project. Remember to take their ratings with a grain of salt as well.

Step 6: ALWAYS DYOR (Do Your Own Research). You know it as one of our most important pieces of advice, but it’s actually essential to your own success.

Follow these steps to properly assess whether or not an ICO is legitimate or will be genuinely successful.

ICO Resources

In case you’re looking for more resources to learn about ICO’s, we’ve compiled a list of just a few of the publicly available resources online.

Conclusion

As you can see, ICO’s can get a bit complicated when looking at it from all angles. You have the investor’s perspective, the startup’s perspective, and the legal (SEC) perspective. Each of these sides views ICO’s in a slightly different light than the others, as everyone is looking to gain success in a varying way. As long as you, the potential investor, assess each ICO with the proper analysis and support, you’ll be able to make proper decisions when judging new crypto projects looking to be traded on exchanges. Remember to be highly cautious when dealing with ICO’s, given their significantly high failure rate. As always, happy investing and remember to DYOR!