Disclaimer: Please be aware that this article is not investment advice, and was written for educational purposes only. If you are reading this because you are thinking of investing in an ICO, try to be more serious about how you handle your earnings, for the internet is a cruel jungle.
A Guide to ICOs
To give you a quick start, a straightforward initial coin offering definition would be as follows: an online crowdfunding event that relies upon cryptocurrency-related technology and lasts from a week to a couple of months.
Because the environment of an ICO is not exactly what we are used to in real life, this article starts with a brief dictionary of terms that you might want to revise/learn/understand in order to grasp the idea of an ICO fully. The terms are presented in chronological order rather than alphabetical, to give you a brief overview of what the inhabitants of the crypto world are, how they cooperate, and what the role of an ICO is.
Additionally, definitions of words in bold are here to give you directions for further research, which is compulsory for a deeper understanding of the subject.
Moving forward, you will also come across links pointing to various branches of ICO knowledge.
In between the horizontal lines, you will encounter text containing information that is a step or two out of the article continuum.
Let us begin!
Bitcoin: The only word occurring in our heads when we hear the word ‘cryptocurrency.’ You can think of it as a decentralized network for sharing files, only the files have monetary value. Bitcoin could be defined as an electronic peer-to-peer cash system built using blockchain technology.
Blockchain: What Bitcoin relies upon. A digital ledger that uses cryptography to secure data. Hence, cryptocurrency. Blockchain use is not limited to Bitcoin. As a separate technology, it powers many platforms, allowing its decentralized and secure nature to be exploited.
Ethereum: Not just another cryptocurrency, but a general-purpose blockchain-based environment that allows developers to build all kinds of decentralized applications on its platform. To do anything on the Ethereum platform, you use Ether, the native cryptocurrency. If you built an app on the Ethereum platform, you would use a different currency, native to the app itself: a token.
Tokens can be of two types:
- Utility tokens are a cryptocurrency in their native environment.
- Work tokens give you rights similar to those of a shareholder.
A smart contract, a distinctive feature of Ethereum and the way things work on that platform, is a self-executing code. Literally, a smart contract can run an automatic exchange of anything of value once preset conditions have been satisfied.
Read more on smart contracts:
- HOW SMART CONTRACTS BLOCKCHAIN WORKS
- CREATE SMART CONTRACTS QUICKLY AND EASILY
- HOW SMART CONTRACTS SOLVE PROBLEMS: THROWING LIGHT ON USE CASES
Ethereum Request for Comments: ERC20, ERC223, and ERC777: Ethereum token standards listed chronologically and in terms of token-feature improvements. Attempting to regulate the cryptoworld, Ethereum has its own set of rules/functions for tokens.
Read more on ERC20 in ETHER TOKEN GUIDE: ERC20 TOKEN SMART CONTRACT AND ECONOMICS.
Read more on ERC20 token storage: ERC20 COMPATIBLE WALLETS AND THEIR FORMS
Alternative cryptocurrency coins, altcoins, and coins: All of these are used to speak about coins that were developed using the open-sourced protocol of the mother blockchain: Bitcoin, or coins that were created as a part of their own unique blockchain environment.
During an initial coin offering, you would be selling tokens that were pre-generated specifically for that project.
Suppose I have an idea to develop, for which I need funds I do not have. The idea is great, because the world needs great ideas. In 2018, my steps would look like this:
- To raise money, I would create a token and announce its planned sale in exchange for either crypto or fiat.
- I’d then explain my idea in as much detail as possible, and advertise it by all possible means so that it could reach everyone, planning the token sale in the meantime.
- I would then get you interested, and, thinking my idea was worth more than just something, you would be given a chance to participate by purchasing tokens.
- If enough people believed in my idea and the token sale went as planned, I would then continue working to make sure the holy tokens would increase in value, and that both parties (you and I) would benefit in the future.
Of course, the above is only the ideal picture visible to a regular user, while the behind the scenes, efforts of sometimes immense and unbelievable value take place.
Despite the fact that an ICO is an event where you could buy new cryptocurrency, it does not necessarily mean that you have to own cryptocurrency to be able to participate. Fiat would still work, though the choice is much, much wider if you have Bitcoins or Ethers.
Read more on fiat in the scope of ICOs: ACCEPTING FIAT DURING THE ICO
Initial Coin Offering vs. Initial Public Offering
We are going to compare IPOs and ICOs, for the two hold not only very similar names, but also the purpose of buying and selling (in parts) something that you can make good use of later.
An initial public offering is the process of a private company becoming public by letting you buy shares of that company. IPOs are backed up by investment banks that list the shares on the stock exchange, allowing you to trade further.
ICOs, because they developed in the world of cryptocurrency and blockchain, perpetuate the idea of more transparent data transactions, offer no middlemen, and let you buy tokens directly from the seller.
Does Buying Tokens Mean Buying Securities?
Sometimes, it could; but this is more an example than a rule. While the process of obtaining tokens is, in a way, similar to purchasing securities, it does not necessarily mean that these two work on the same terms.
Mind the fact that ICOs are still barely regulated by the real world, and therefore, people could do all kinds of things during a magic ICO.
THE BEST COUNTRIES FOR AN ICO LAUNCH will give you an overview of ICO regulation on the level of governments/countries.
Additionally, according to ICObench, ICO country statistics are as follows:
A quick tip: in 2018, the best ICO crypto-climate is Switzerland. Because life is not only about statistics.
Easy ICO: What Is Traded?
Anything! Especially given the very little presence of regulatory oversight. Because Bitcoin, the origin of cryptocurrency, blockchain, and decentralized systems, has been such a success, developing the idea further and integrating it into a greater number of spheres is exactly what is happening now.
The rule seems to be working; the number of coins is constantly growing. In 2018, it is more than 1000 coins, meaning that there already exists an ecosystem with its own rules, problems, requirements, and needs.
To better understand the vastness of what is being discussed, below is the market value of all cryptocurrency as of 4/2/2018:
Tokens In ICO
In the scenario of an ICO, a token is what you get for your investment, and what you can use as an access ticket to a certain environment/product/service. A token can represent anything that is tradable: coins, awards, land, drugs, tables and chairs.
Generally, tokens can be split into 3 main categories:
- Currency tokens
They are linked to another existing currency, and act as money.
- Commodity tokens
This type of token can be compared to a voucher, future, or receipt for services. Such tokens are issued by the platform providing the services, and can be traded just like any goods.
- Equity tokens
These offer the right of ownership of a system, and can be further divided into:
ownership tokens: tokenized shares
revenue tokens: the right to receive dividends
governance tokens: the right to decision-making
To read more on top ICOs in different spheres:
- TOP ICOs in the Field of Artificial Intelligence
- Blockchain-Based Opportunities for Education: Top 3 EdTech ICOs
- Blockchain and Cryptocurrency Projects in Finance
In 2017, according to Coinschedule, the sums raised during ICOs were beyond astronomical.
By this point, you must be wondering why you haven’t participated in an ICO yet. Please make sure to extend your ICO knowledge beyond ‘ICO For Dummies.’
Alternatively, read more on conducting an ICO of your own in:
- HOW TO FIND THE BEST ICO TEAM BEFORE LAUNCHING AN INITIAL COIN OFFERING
- HOW MUCH DOES IT COST TO DO AN ICO?
Below, just a couple of important questions are answered.
If Tokens Are So Versatile, How Do I Know What Exactly a Particular Token Is?
Depending on the project, and ecosystem needs and problems, a token could serve many different purposes. To be able to know what exactly is being offered, one needs to study the company’s white paper, a document in which the project should be explained in vast detail (I use “should” because no one has canceled scammers, and you should always rely on your own wit.)
The ICO White Paper
A white paper is a document in which the theory behind a technology/project is provided in depth.
In the white paper, you would typically encounter a thorough explanation of:
- the problem the project is attempting to solve
- a supernaturally good description of the solution offered
- technical details
- the use of tokens/token economics (very, very important; almost the most important)
- use cases and their descriptions
- project development timeline/roadmap
- the team behind the creation
You can find more information on the importance of the white paper in the article HOW TO WRITE A GOOD WHITE PAPER FOR YOUR ICO IN 10 STEPS
ICO Whitelist & KYC
If by now, in your mind, you are an ICO investor, keep in mind that some ICOs require registration prior to that very event. This will be on what is called a whitelist. The KYC mark stands for the need to verify your identity, and could sometimes require a document scan upload.
A Good Closure
Remember, in 2018, the phenomenon of ICOs has existed for roughly five years, and whatever is out there are merely examples of use (very important sentence). What we can do from where we are now is analyze and roughly predict, eliminating the option of knowing for sure because of the lack of regulation on the level of government.
Nevertheless, now, in April 2018, ICO fundraising statistics speak louder than anything:
Nowadays, an ICO is a presto-easy and effective way to fundraise. It is a secure, fast, flexible, and transparent process that gives everyone the possibility to invest. However, due to the rapidly-increasing market, it’s not as easy to gain trust from the community as it was a year ago. Only projects with tangible ideas that could really solve current problems across different industries have a chance for a ticket to the “big game.”