What is an ICO, exactly?

Although ICOs are a relatively new phenomenon, they’ve quickly turned into an important topic of discussion. ICOs (short for Initial Coin Offerings) are a new method startups use to raise funds for their new cryptocurrency projects.

After releasing a white paper and/or roadmap to document their intention and plans for the future, startups issue their cryptocurrencies and encourage individuals to buy them with fiat or established cryptocurrencies (like Bitcoin and Ethereum). With the funds raised during ICOs, startups can pay for things like development and marketing.

ICOs operate very similarly to IPOs. With IPOs, new firms offer early shares to the public, giving investors the first chance of buying them and owning a portion of the company before they get listed on a stock exchange.

How are ICOs different from IPOs?

The most significant difference between IPOs and ICOs is that ICOs often occur before projects have any working product, while IPOs usually happen only after companies have reached a certain maturity.  

Another important difference involves understanding what shares of a company and units of cryptocurrencies are. During IPOs, company sell shares which actually represent ownership of the company. So if a company goes public and issues all their shares, and an investor buys 10% of those shares, that investor literally owns 10% of the company. Buying cryptocurrency does not give an investor any ownership of the entity that issues that cryptocurrency.

How are cryptocurrencies created?

Cryptocurrencies are developed from code programmed by developers. If a developer wishes to code an entirely new cryptocurrency, they’re free to do so. However, many cryptocurrencies are open-source, which means that any developer can download their code and use it to create their own new cryptocurrency. The code can be tweaked in a number of ways to change the total supply of coins or tokens, the mining algorithm, or the block size limit, to name a few examples.

The major challenge for a new cryptocurrency is attracting new users. No cryptocurrency (or any form of currency, for that matter) can have any real utility unless a large number of people adopt it and use it. This is where use cases and marketing come in.

Some new cryptocurrencies aim to give their users an entirely new ability. One example of this type of crypto is Golem, which hopes to allow users to buy and sell computing power. Other cryptocurrencies aim to improve on an already established function. For example, Litecoin is similar to Bitcoin in most ways, but its intention is to offer its users faster transactions.

What’s the difference between coins and tokens?

You should also understand that some projects create coins and others create tokens. Coins are cryptocurrencies that operate on their own blockchain. For example, Ether is the native cryptocurrency of Ethereum. Tokens on the other hand, are cryptocurrencies created using another project’s blockchain. For instance, many new cryptocurrencies are creating ERC20 tokens that use Ethereum’s blockchain. Some examples are OmiseGo and Binance Coin.

Are ICOs regulated?

The answer to this question depends on your location. ICOs, at the moment, are largely unregulated in most parts of the world like the United States, Europe, and Australia. This is because most cryptocurrencies issued are not regarded as a financial security. This makes them a straightforward way to crowdfund a project.

On the other hand, if governments categorize cryptos as financial securities, then they are subject to some form of regulation. They inherit many legal precedents which increase the obligations of their issuers and also provide protection for their buyers.

However, the governments of China, South Korea, and a few other countries in Asia have placed bans on ICOs. Furthermore, more governments are becoming aware of ICOs and are preparing some form of regulations for the future.  

Why ICOs?

What are the advantages of ICOs?

ICOs are popular for many reasons. Perhaps the most important one is that they are often win-win events that can help both the cryptocurrency projects that issue them and the people that invest in them. While investors of IPOs expect functioning products, ICOs are designed to sidestep traditional processes and raise even more money in a shorter period of time.

A traditional IPO could take up to half a year, due to legal and compliance processes. ICO regulations are usually less strict. Often, the team behind the ICO needs only to create a white paper, a roadmap, and a smart contract for the crowdsale before the process can begin.

Why do companies like ICOs?

ICOs are a fast and easy fundraising option. If an investor is interested, they send fiat or cryptos to a specific address, then they receive their coins or tokens. That’s all there is to it.

In addition to raising crucial funds for development, ICOs are also often excellent marketing opportunities for emerging projects. The cryptocurrency community is always excited about cheap cryptocurrencies with potentially bright futures, and ICOs give new projects an opportunity to introduce their technologies and goals to the world.

Why do investors like ICOs?

Investors have quickly become very interested in ICOs for one undeniable reason: cheap coins with the potential for tremendous returns. ICOs are usually the public’s first chance to buy the cryptocurrencies of emerging projects. Some ICOs have released tokens and coins that have achieved astronomical gains in a short period of time. A couple examples are Ethereum and NEO, both of which have coins that have risen over 100,000 percent in price since their ICO.

Are ICOs a good investment?

What are the benefits of investing in ICOs?

One of the most important benefits of investing in ICOs is that all investors have an equal opportunity to buy tokens at their first offering. And if the project is successful, investors can reap enormous returns.

Rather than having to wait for several years (like IPO investors often have to), ICO investors often see their investments appreciate much quicker. Moreover, if the token gets listed early on major exchanges, profits can be taken out with ease.

What are the drawbacks of investing in ICOs?

Even though ICOs provide compelling advantages for investors, there are also drawbacks that should be carefully considered.

The most important drawback is the increased volatility of ICOs, which largely exceeds the volatility of traditional investments like stocks. Every investor should understand that great rewards come with great risk. There is no guarantee you’ll be rewarded for investing in an ICO - and actually, there’s no guarantee you won’t lose your entire investment, either.

Another aspect worth mentioning is that ICO investors must be vigilant at all times to avoid becoming victims of cyber attacks or frauds. Phishing scams, where an attacker might impersonate a member of the ICO’s team in order to trick the investor to send him the funds, have occurred during several past ICOs.

Are ICOs right for me?

This is an important question and the answer is: it depends. In general, investing in cryptocurrencies is risky. And ICOs can be some of the riskiest investments of all.

If a project makes sense from a business perspective and you can foresee a long-term demand for its cryptocurrency, it might be a good idea to invest.

Since it is common for crypto companies to provide only a short white paper and a roadmap before starting their ICOs, we advise you to conduct thorough research before deciding to invest.

The last but perhaps the most important thing to mention here is that, as with all investments, it is inadvisable to invest more money than you can afford to lose.

Examples of some of the Best ICO returns

It is true that not all ICOs turned out to be tremendous successes, but there are several tokens and coins launched through ICOs that outperformed all expectations, as well.

NXT

NXT’s ICO was launched in September 2013 on the BitcoinTalk Forum. During the ICO, one coin was valued at $0.0000168 and, even although the event raised only $16,800, its return on investment currently exceeds 793,233%.

NXT’s success is largely due to its strong community of developers which makes it one of the most active projects.

IOTA

IOTA’s ICO was launched in November 2015 and the team managed to raise approximately $400,000. During the ICO, the coin was valuated at around $0,001, meaning that investors enjoyed a return on investment of around 260,510%.

Ethereum

Ethereum’s smart contracts gained a lot of attention because of their potential ability to streamline business processes in almost all industries. As a result, during the ICO that was held in 2014, the team managed to raise $16 million. At that time the price of Ether was of $0,311, which means that it achieved a 193,284% increase in value.

The role of regulations

As a result of the global nature of blockchain technology, cryptocurrencies find themselves in an area where traditional norms and laws can’t be easily applied. As we mentioned in our earlier chapter “What are ICOs?” - regulations vary significantly depending on the country the project is based in and, as an investor, the country you live in. However, the consensus in the crypto community is that regulations should be beneficial for both companies and investors, as long as they are not an unreasonably difficult to comply with.

On one hand, regulations help assure investors that their cryptocurrency investments are protected just like traditional investments, like stocks. Companies, on the other hand, could benefit from regulations by seeing an increased level of interest from many of the traditional investors like venture capitalists and hedge funds. Once involved, these investors would be expected to provide not only more money but also an increased level of legitimacy to the ICO space.