An Initial Coin Offering (ICO) is a general term used to describe the sale of blockchain based tokens in exchange for funding for project. ICOs have quickly become an effective way for projects and companies to raise money. It’s also become a new avenue for investors to have access to investment opportunities that were previously only available to high net worth people.
An Initial Coin Offering is just one of many terms used in the industry to describe the same thing. Some people might also refer to an ICO as an Initial Token Offerings (ITO) or Token Presale. They all refer to the same general idea of using blockchain technology to help crowd fund a project. Initial Coin Offerings can be used to crowd fund any sort of projects, not just blockchain projects. In the past ICOs have been used to crowd fund movies and games. Any sort of project or business can be crowd funded using an ICO.
In order to invest in an ICO, you first need to know a couple key pieces of information. Most ICOs follow a similar structure. For most ICOs you can find the following on the ICO’s website.
The ICO Window
There is a certain set amount of time that the crowdfunding will be open for. During this period investors can purchase tokens in the project. Usually this window ranges from a few days to a few weeks. If there is a cap set on the maximum amount of funds to be raised by the ICO, the window can be much shorter. In the past some high demand ICOs have sold out within the first hour of it opening.
Token Exchange Rate
In order to receive tokens in the ICO, you first need to purchase them. Most ICOs don’t accept traditional fiat currencies. They only accept other crypto currencies and tokens. You need to know what crypto currencies or tokens the project accepts and the exchange rate for each. For example, the ICO may stipulate that they only accept Ethereum (ETH) and for every ETH you send, you’ll get 100 tokens from the ICO.
What is the ICO Address to send funds to?
In order to send funds to the ICO, the ICO needs to provide an ICO address. During the ICO window phase you send your funds to this address in exchange for the ICO token. In the world of Ethereum this is often called the contract address. Most ICOs will require you to create an ICO token wallet on their website. Once you’ve signed up/created a wallet, you’ll be able to see the ICO contract address.
If the ICO wallet allows, be sure to back up your private key for the wallet. Or if the wallet requires a login, make sure you take the necessary steps so that you don’t forget your login credentials.
Some Ethereum based ICOs may not require you to create a wallet. You simply send funds to the contract address and your ICO tokens are immediately credited to the Ethereum wallet that you sent funds from.
After the ICO window has ended
Once the ICO window has closed you won’t be able to purchase anymore tokens in the ICO. After some time, usually from a few hours to a few months, your ICO tokens will be available for you to move to a different wallet or sell them on an exchange. What you do with your ICO tokens and how you store them is up to you.
Before investing in an ICO, it’s very important that you do some due diligence. Currently there’s little regulation around the ICO market. If you get scammed, your options for recourse are few to none.
- Read the white paper – If the ICO has a white paper or other documentation available, read it. Go through it and use your own judgment to decide if you’d be comfortable investing in the project.
- Team – A project is only as good as it’s team. You want to research the team that’s involved with the project. Do they have experience? Do they have a questionable history? Is the team transparent with who they are? These are some of the questions you want to consider when evaluating the team behind an ICO.
- Founding team tokens –Most ICOs will allocate a certain percentage of tokens to the founders of the project. You want to make sure that there is a reasonable split between how much of the tokens will be kept by the founders and how much will be held by the public.
- Investor Protection – Make sure that the ICO provides adequate investor protection. Some examples of investor protection include a lock up period for the founder’s tokens. Generally, you don’t want the founding team to be able to withdraw their share of tokens right away. Also make sure there is a reasonable cap on the ICO amount to be raised. Setting an upper limit on the crowd fund helps to ensure that the project’s valuation doesn’t get too unrealistic.
- Community support – Connect with other potential investors in the ICO. You should be able to find dedicated communities on Reddit or on Slack. What are other people saying about the ICO? Are there people raising red flags regarding the project? Is there a lot of interest in the project? Is the ICO team responsive to questions and community dialogue? Often times the community behind the project will be your best indicator regarding the legitimacy of the ICO.
Initial Coin Offerings are quickly becoming an alternative way for projects and companies to raise money. Investing in ICOs can provide great returns on your investment, but the risks are also very high. Use your common sense when investing into an ICO and only invest what you can afford to lose.