Initial Coin Offerings (ICOs)

Digitization. A thrilling concept to some, intimidating to others. The digital era has transformed every walk of life: from your phone to your shopping, to how you find and consume media, and even to how businesses work and operate.

Digital technology allows you to compress enormous amounts of information onto tiny storage devices that can be easily preserved and transported. It has also quickened data transmission speeds, and in doing so has revolutionized how the world communicates, learns, and works.

So let’s talk cryptocurrency. When digitization came for money, Satoshi Nakamoto was there to answer the call with emerging technologies — enter Bitcoin. And then, when enthusiasm had grown around digital money, what came next was a form of digital stocks.

An Initial Coin Offering (ICO) is in many ways similar to the well-established Initial Public Offering (IPO). Both are used to raise early capital for a future product or service, but there are three major differences in the ICO:

1. ICOs do not sell a share in their future company;
2. ICOs utilize blockchain technology;
3. ICOs fund the development of new cryptocurrencies or tokens.

The ICO is a relatively novel concept, so the more traditional IPO route still appeals to some startup companies as the safer option. However, the procedure to go from initial funding to IPO can be time-consuming and also resource-heavy.

Traditional IPO issuance is dependent on companies meeting a long list of requirements, and this involves hiring lawyers and cooperating with banks to adhere to all legal and compliance processes. IPOs have minimum earning thresholds, and they also need to maintain a good track record.

Comparatively, if you look at the process for ICOs, there are a number of major benefits that draw startup companies to choose this route:

1. Less regulations and legal protocol (for now) means less time to progress from the initial funding to the ICO;
2. Companies can draw from a global pool of investors; and they can raise money immediately and anytime, from anybody, from any country;
3. Startups do not share their companies with investors, but rather sell a future product or service; this means that companies retain control of their business.

ICOs are built on an idea connected to the blockchain. After a team has an idea, they design a white paper, develop a marketing campaign, and then invite people to buy digital tokens.

Again, these tokens do not represent shares in a company. Rather they represent a future product or service the ICO will provide. People buy the tokens to support the startup’s development, and/or to speculate on a project’s growth potential.

It’s like a game: you buy and sell digital tokens, which exist only on a blockchain, and hope they rise in value over time. The tokens represent your investment in the ICO.

If the ICO does well, you can sell your tokens for more than their original value. If it doesn’t, you can obviously lose money. Ultimately, you’re betting on potential future growth.

And there’s one final important element to ICO tokens, the smart contract. You may not have a share in the future company, but a smart contract can guarantee you some future additional value to your tokens.

Without diving too deep into technical details, a smart contract is a program designed to automate an agreement between a token issuer and a token holder. It’s a code written to ensure that if a certain condition is met, there will be a specific outcome that follows.

This agreement might be something like future company revenue or an extra value or service promised to early token holders. Smart contacts allow token issuers to automatically fulfill the terms of an agreement without intermediaries, in both a transparent and conflict-free manner.

The smart contract is developed and then executed with a specific rule set on a blockchain, and once executed will run according to its program. Its programming might be used to automatically validate a condition, determine whether an asset should go to one person or back to another, or whether it should be immediately refunded to the sender. Or a combination of all of the above.

There is an increasing number of major players investing in cryptocurrencies and blockchain technologies nowadays. But why? Let’s look at some of the more obvious reasons:

1. A token's price can rise quickly: meaning you can make money buying and selling if timed correctly, very much like on the traditional stock exchange.
2. It’s like investing in an emerging tech asset class: it comes with both excitement and risk, with everybody looking to get in early on “the next Apple, Amazon, or eBay.”
3. It’s also easy for everyday people to access. Nearly anybody can register on a crypto exchange and start investing almost immediately, without needing to go through a broker or any type of accredited investor licensing procedure.

All you need to do is find a token listed on an exchange and buy into the market. It’s also possible to buy pre-ICO tokens, although this is typically done as a pre-sale open only to private investors.

Sometimes you can buy tokens before an ICO even begins. Pre-ICOs may do this to raise initial funding for the ICO itself, like for example advertising or marketing campaigns leading up to the launch of their project.

Pre-sale token prices are usually much lower than the ICO tokens, but are also often very limited in quantity and can run out quickly. The only way to get in on the pre-sale is by monitoring upcoming events and following up on any announcements.

Now this is a good question. You definitely want to be cautious of fraudulent ICOs and questionable coins and tokens, but this can be a difficult task.

With blockchain and cryptocurrency technology developing at such a rapid pace, even experienced investors can find it challenging to stay up to date with the latest terminology. And while there are no guaranteed methods to determine if a cryptocurrency or blockchain-related startup will be legitimate or successful, there are some general rules to help you when it comes to ICO and fundamental analysis:

1. Familiarize yourself with the developers and administrative team: It’s increasingly common for scammers to invent fake founders and biographies to market their projects. Thoroughly research each individual team member, make sure firstly they are real people and secondly that their qualifications match up to what they claim. If something looks out of place, or if the team is anonymous, your best bet is to play it safe and avoid buying into the project altogether.
2. Thoroughly analyze the white paper: A white paper should tell investors what makes this project different than others, how the project aims to be successful, and how it plans to achieve its goals. The white paper should also have complimentary resources that provide financial models, legal concerns, SWOT analysis, and the team’s roadmap. If the company does not have a white paper, avoid it.
3. Watch the token sale over time: Legitimate companies and token-sales will make it easy for potential investors to view and chart the progress of the ICO. Look to find how much has been raised and how much time remains in the sale. If you can’t easily find the information, this should be a major warning sign.

Beyond these general rules, the key is to exercise caution when looking for investment opportunities in the ICO and cryptocurrency space.

While there is money to be made for investors who do their homework, there are also many pitfalls that can lead to losing money through scams or by investing in poorly designed projects that are unlikely to succeed.