We are starting a new mini series on WalletInvestor Magazine with the aim of sharing some information and knowledge regarding ICOs, their history, regulatory status and the risks involved. In the first part we are going to go through the absolute basics to give the reader some understanding on the underlying idea that these new phenomenons represent.

ICO

ICO or Initial Coin Offering is a new and less strictly regulated alternative form of an IPO or Initial Public Offering. These are crowdfunding methods that startups can utilize to gather the funds needed for their (hopefully) decentralized and revolutionary product. Even though ICOs have gained heavy ground in the last 2 years, this is not an entirely new phenomenon.

Three currently very popular projects have done crowdfunding via forums like Bitcointalk: MasterCoin, NXT, Ethereum, IOTA. All of these have done an ICO via accepting Bitcoin. Ethereum is currently 2nd and IOTA is 9th by market cap so you could say they are pretty successful projects. The main difference between these projects and most of the currently running ICOs is that these have been individual blockchains or networks from the very beginning.

Token

Most of the current crowdfunds are being run on top of another blockchain that is capable of running some form of (smart) contracts for running an ICO or issuing so called tokens for issuing temporary (or in some cases final) ownership. These tokens are found on the top of the chains and inherit the properties of the main chain.

For example if you are owning a token that is issued on the Ethereum blockchain and want to transfer it to someone else, you will notice that you need to pay ETH/GAS for the transactions in order to send your token and you will also notice that the same block times apply.

Several chains are currently capable of running ICOs and issuing tokens (the list isn’t complete): Ethereum, Ethereum Classic, BTS, NEO, Stratis, Waves, etc.

How can you participate in ICOs?

Participating in token sales is always risky, there is no guarantee that a project will achieve profit for the investor. In case you are still interested in joining an ICO you can look for projects on various project listing sites like TokenMarket, ICOalert, ICOdrops. After deciding which project is worth a shot you need to do background research to find out of the project is legit and is not trying to scam you out of your hard earned money. If the idea is final it is important to realize what blockchain or network the ICO is utilizing as in most cases these crowdfunding only accepts the currency of the chain. You have to buy the given currency via an exchange for either fiat or Bitcoin.

Now comes the easy part as the investing is usually very straight forward and the projects prepare a guide in most cases (in worst case you can just google it, here is an example guide). Lastly a short warning: most ICOs don’t allow investing via exchanges since when the crowdfunding is done and the token gets sent to your adress, the exchanges wont credit it since they won’t have the token added on their back-end.

In the next parts we will follow up with topics like: Will ICOs replace IPOs? Why are ICOs needed? What do ICOs offer? How does an ICO whitelist work? Are ICOs legal? What is a KYC in regard to ICOs?