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We are seeing the rise of a new phenomenon. It has gripped the tech world and is changing the way in which start ups raise capital, shifting away from initial public offerings (IPO), crowdfunding or seeking the influence and assistance of venture capitalists, with ICO now all the rage.
Close to $400 million has been invested through ICOs by the end of the 1st quarter, and companies are managing to raise millions of Dollars with just a white paper and a cryptocoin.
The ICO Gold Rush – The Future of Fundraising or Just another Crypto Scam?
A look at Initial Coin Offering (ICO) might be a good start if you are searching for the biggest trend in cryptocurrency today. The idea to presale coins of a token or cryptocurrency of a blockchain project has evolved in a super successful tool to raise funds for the development of a new application. This ultimate guide gives an overview on Initial Coin Offering (ICO). It also presents the hottest past, current, and future ICOs.
What is an ICO?
An Initial Coin Offering (ICO) is an investment that gives the investor a cryptocoin, more commonly known as a coin or a token in return for investment. Since 2013 ICOs are often used to fund the development of new cryptocurrencies and this model has helped a lot of successful companies and projects get the funding required to start their business.
When a cryptocurrency startup firm wants to raise money through an ICO, it usually creates a plan on a whitepaper that states what the project is about, how much money is needed to undertake the venture, what type of money is accepted, how much of the virtual tokens the pioneers of the project will keep for themselves, what need(s) the project will fulfil upon completion, and how long the ICO campaign will run for.
An Initial Coin Offering is an event in which everyone is allowed to buy newly issued tokens in exchange for established cryptocurrencies like Bitcoin or Ethereum. In an ICO, there can be a specific goal or limit for project funding. This means that every token will have a pre-designated price that will not change during the ICO period, which also means that the token supply is static.
It is also possible to have a static supply with a dynamic funding goal. Here the distribution of tokens will be made according to the funds received. This means that the more funds the project receives the higher the token price will be.
You can also have a dynamic token supply that will be determined by a number of funds that are received. This means that the price for each token is static (e.g. 1 ETH – 1 token). However, a new token is created every time one Ether is sent.
ICO has become an instrument that could revolutionize not only currency but the entire financial system, and ICO token could become the securities and shares of tomorrow.
It’s worth providing some detail on tokens, blockchains, and cryptocurrencies before getting into the details.
What are Tokens?
Tokens are coins that are offered during an Initial Coin Offering. They would be considered an equivalent to shares bought in an IPO and are also referred to as cryptocoins.
What is Blockchain?
A blockchain is an incorruptible digital ledger of economic transactions. It can be programmed to record, not only financial transactions, but anything of value. It’s essentially a digital spreadsheet which is duplicated across a network of computers, and the network is designed to update the spreadsheets regularly. It’s considered to be truly public and easily reconciled because the information is shared and regularly updated and not stored in a single location.
What are Cryptocurrencies?
Cryptocurrencies are a digital or virtual currency that is not issued by any central authority, such as a central bank. Thanks to this feature, cryptocurrency is taken out of the reach of governments that can interfere or manipulate. Cryptocurrencies use cryptography for security and the transactions are anonymous in nature.
Tokens issued from an ICO will have a value, with the ICO allocating equivalent to equity to the token. This gives the investor ownership with voting rights and, in some cases, qualifying for dividends.
This will be the closest format of an ICO to IPOs. However, the vast majority of ICOs issue tokens that are an asset giving investors access to the features of a particular project.
It’s ultimately the process of crowdfunding a new cryptocurrency project. It involves a token sale, with investors receiving an allocation of the project’s tokens in return, with the cryptocurrency project raising capital to fund operations.
ICOs tend to be open from between a couple of weeks to a month. However, some have been open for longer and fund raising for a particular ICO possibly taking place on multiple occasions, unlike an IPO which is a onetime event.
Here are some key characteristics of an ICO:
- Owning tokens do not always give the investor a right to vote on the direction of a project or Decentralized Autonomous Organization (DAO), with the rights of the investor embedded within the structure of the ICO. However, usually the investor will have input throughout a project lifespan.
- Token ICOs sell a right of ownership or royalties to a project or DAO, while coin ICOs generally sell participation in an economy.
- Participation in a project, DAO or an economy.
- Creators of the economy, project or DAO usually establish the ICO prices.
- The majority of ICOs involve the creation of a defined number of tokens or coins before the sale.
- ICOs conclude once the tokens or coins are tradable in the open market.
- ICOs may have multiple rounds of fund raising, with tokens or coins on offer, increasing in value until the release date. Early investors are likely to have larger rewards embedded within their tokens as an incentive.
Short History of ICOs
Ripple was the first cryptocurrency distributed by an ICO. In early 2013 Ripple Labs started to develop the Ripple payment system. The company created about 100 billion XRP token, and it sold these token to fund the development of the Ripple platform.
Later in 2013, Mastercoin raised about $600,000 for a project to create a layer on top of Bitcoin to execute smart contracts and tokenize Bitcoin transactions. Several other cryptocurrencies have been funded with ICO. Lisk was one of them and in early 2016, and it sold its coins for about $5 million. However, Ethereum is the most prominent cryptocurrency. The Ethereum Foundation sold ETH against 0.0005 Bitcoin each in mid-2014, and with this, they receive nearly $20 million. This has become one of the largest crowdfunding ever and serves as the capital base for the development of Ethereum.
Since the Mastercoin’s ICO, it was estimated that ICOs raised a lowly $25 million in 2014, falling to $10 million in 2015 following Bitcoin’s price collapse of 2014, but the trend reversed in 2016, with ICOs raising an estimated $225 million.
Based on numbers from Smith + Crown, 2017 looks to be another stellar year, with ICOs raising in excess of $150 million by mid-May of this year.
Concepts are getting more and more innovative, and As Ethereum itself unleashed the power of smart contracts, it opened the door for a new generation of ICO. Also, the speed with which capital is raised is getting faster by the day.
Ethereum – The Initial Coin Offering? ICO Crowdfunding Machine
Creating a simple token that can be transacted on the Ethereum blockchain instead of Ether is one of the easiest applications of Ethereum’s smart contract system. This kind of contract was standardized with ERC#20, and it made Ethereum host of such a wide scope of ICO that you can safely say that Ethereum found its Killer App as a distributed platform for fundraising and crowdfunding.
The DAO (Decentralized Autonomous Organization) is the most prominent demonstration of the potential of Ethereum’s smart contracts. The distributed investment company was fuelled with Ether worth $100 million, and the investors received in exchange for Ether Dao Token that had their own market price. This enabled the holder to participate in the governance of the DAO. However, the DAO failed after it was hacked.
It is important to note that the concept of funding projects with a token on Ethereum became the blueprint for a new and extremely successful generation of crowdfunding projects. Investing in token on top of Ethereum is incredibly simple – You transfer ETH, paste the contract in your wallet, the token appears in your account and you are free to transfer them as you want.
Here are some examples for successful Initial coin offering on Ethereum:
- Golem
- Augur
- ICONOMI
- Melonport
- Digix DAO
- First Blood
- Singular DTV
There are dozens of ICO every month. They explore creative and new ways to connect the application with the token and also to leverage smart contracts to add more features to these tokens.
The potential of this trend is enormous. ICO enables every company and every individual to easily raise funds by releasing freely tradable tokens. It decentralized not just money, but stock creation and trade, and it could be used to completely reconstruct the financial system of shares, securities etc.
You should not only look at the market cap of Ether itself but also on the value of the token if you want to assess Ethereum’s market capitalization. This adds about $300 million to Ethereum’s $4 billion market cap.
How Does ICO Work and How to Use It
Start ups kick start the ICO process by establishing the blockchain and set up of protocols and rules.
For the creator, the next step is to begin mining for coins that will be sold during the ICO. Creators also use a marketing medium such as social media sites, Reddit and a rising number of cryptocurrency related website to attract investors ahead of the ICO data. They also want to draw in as much interest as possible to not only raise the required funding, but also to push demand and prices post ICO.
In the background, to ensure its smooth sailing by the time of the ICO, the creators will make their final checks and adjustments.
The cryptocurrency creators will need to join an exchange, which is similar to that of a stock exchange during an IPO. Also, investors need to have an account with the exchange to be able to purchase the new cryptocurrency with fiat money or other cryptocurrencies.
Active and up and coming ICOs can be found through various sites. The purchase of cryptocurrencies is made through the selected exchange. The investors are also able to purchase cryptocurrencies directly through the creator’s official website.
Exchanges that are widely recommended for the purchase of new coins include Bitlish, SpaceBTC, Livecoin, Poloniex, Kraken, Bittrex, and many others.
Companies typically release tokens on blockchain in two ways:
- They collect the specific capital, outlined within the offer. After that, they divide and distribute the tokens to the investors based on initial investment made.
- Alternatively, tokens are sold on cryptocurrency exchanges. This means that the tokens need to be released on a number of exchanges in advance for trading.
The company commences on its obligations once the sale has ended.
For the investor, it’s a case of exploring the different exchanges or social media sites that publish active and upcoming ICOs. After that, they need to open an account, acquire the tokens, having completed the necessary due diligence on the company or project in question.
The Legaility of ICO
Cryptocurrencies have seen advancements in the regulatory landscape with countries such as Russia and Japan recognizing cryptocurrencies as legal tender. However, the legality of ICO is still grey and mostly undefined and ICOs have yet to fall under the cloak of regulators. Ideally, the token is sold not as a financial asset but as a digital good like many other things, which is why ICO is often called “crowd sale”. In this case, the funding with an ICO is not regulated in the most jurisdictions. This makes it extremely easy and paperless, given a lawyer experienced with the problem is on board.
However, some jurisdictions seem to be aware of ICO. They tend to regulate them similar to the sale of securities and shares. The outstanding implosion of the DAO did a nice job in kindle regulators attention. Currently, ICO mostly happen in a gray area. However, in the future they most likely will be regulated, which could bear some legal and financial risks for investors, and also, the effort and cost to comply with regulation could decrease the advantages of ICO compared with traditional means of funding.
The SEC has publicly announced that ICOs need to protect the investor.
Profit and Loss
It is important to note that the ICO market is currently still completely unregulated, and everybody should be aware that this does imply not only huge profits for investors, but also great losses.
Many ICO has been a great choice for investors. ETH, for example, was sold at 0.0005 Bitcoin and today is worth 0.05 BTC, which makes it a profit of 10.000%. Also, Augur tokens (REP) are now traded at 0.01 BTC, but they were sold for around 0,005 BTC each. For successful ICO, the gain in value of 100% to 500% in Bitcoin is common.
Unfortunately, many ICOs end with losses. Cryptocurrencies like Omni, IOTA-token or Lisk did not hold the value in Bitcoin. Often ICO is even used by scammers and semi-scammers – They build a glossy website, write some blocks of bullshit bingo, and promise the greatest project/cryptocurrency ever. In the end, you would be happy if you receive only 50 or 100 Bitcoin. Besides the big and successful ICO, like Iconomi, Augur or Melonpost, there are also many small and shady ICO that collected funds and delivered nothing at all.
The Hottest ICO of Yesterday, Today and Tomorrow
Let’s have a look what’s going on in the ICO market. There have been a couple of wildly successful ICO in the past years.
Hot Past Cryptocurrency ICOs
Ethereum
The biggest ICO by now was made by Ethereum. The Ethereum Foundation had a presale of about 60mio ETH and raised about 31,500 Bitcoin. The investors of the ETH-presale profited massively, and this event has become one of the largest crowdfunding ever and the start of a wildly successful cryptocurrency.
Next
Next was made in 2013 and it was a new gen cryptocurrency. For a start, the 1 billion token were sold to early investors, but the developers only got a double digits amount of Bitcoins with the ICO. However, today Next has become a relatively successful and stable cryptocurrency, and the NXT tokens are worth much more.
Ripple
Ripple Labs created 100 billion XRP-tokens. These tokens serve as an anti-spam mechanism in the payment network Ripple, because your network fees have to be paid in XRP. The XRP are sold by Ripple Labs. Their value doesn’t move in a clear direction, while the trend is more downwards. It started with about 5,000 Satoshi, and then fell below 1,000 Satoshi. It again raised above 7,000 Satoshi and fell again to a new low of 600 Satoshi. It finally raised on 3,000 Satoshi.
Lisk
Lisk is a JavaScript written Blockchain based on BitShares. It enables smart contracts on sidechains. Lisk sold the coins for Bitcoins for about $5 million.
Mastercoin
Mastercoin announced to build a layer on top of Bitcoin in 2013. The company sold the Mastercoin-token to investors. The developers received about 10,000 Bitcoin. These have been worth $1 million at this time. Some investors made huge profits because Mastercoin token gained value some month later. Mastercoin merged with Omni and Counterparty later on.
Hot Past Ethereum Token ICOs
In the past, most ICO has been restricted to building a new cryptocurrency. However, the smart contracts of Ethereum enable startups also to use ICOs to fund development. Most of them are working with Ethereum itself and somehow in the process, they trick their presold token. Here are some examples:
Golem
The aim of the Golem project is to create a decentralized supercomputer, to which participants can contribute with their own computer and sell its power to earn money. Golem uses the Ethereum blockchain for smart contracts. Also, the GNT token is needed to pay for the services. The ICO was restricted on 820,000,000 tokens. For these tokens, the developers received more than 10,000 BTC. Today it has a market capitalization of beyond 50,000 BTC.
Augur
To decide on the outcome of events, the decentralized prediction market uses so-called REP-token. 80% of these tokens have been sold to fund the development. The team got more than $5 million for these tokens. Today these tokens are worth more than $100 million.
FirstBlood
FirstBlood is the platform esports has been waiting for. FirstBlood can, itself, verify the winner and send payouts accordingly using blockchain smart contracts and oracle machines. The Asian platform for decentralized Sportsbet finished the ICO of its token in few seconds, and most of them have been purchased by a Chinese exchange.
ICONOMI
The ICONOMI Digital Assets Management Platform is a platform for the management of virtual assets. It provides the simplest way to invest into the decentralised economy. The ICN token is the profit-sharing token, and it is something like shares on the platform and should receive parts of the profits. The developers sold 85,000,000 token. They received more than 17,000 BTC for these tokens. Today the market share is nearly 40,000 BTC.
SingularDTV (S-DTV)
SingularDTV is a content production and distribution platform built upon Ethereum, and it wants to merge smart contracts, Ethereum and the production and stream of videos. The platform raised more than 12,000 BTC with the ICO, and today the whole tokens are worth about 40,000 BTC.
The token of above ICO can be traded and purchased on exchanges. Some additional ICO has just finished some time ago. They prepare to release the newly created token on the Ethereum Blockchain. The following projects include:
BlockPay
BlockPay is a startup building a payment processor for several cryptocurrencies, and with “only” around 1,000 Bitcoin, the BlockPay is one of the smaller ICOs.
Melonport
The aim of the Melonport is to develop a platform for the management of blockchain assets built on Ethereum. The developers sold more than 2,000 BTC a couple of months ago. The MLN token that the developers sold will be needed to use the platform.
Dfinity
Dfinity is similar to Golem. It wants to build a decentralized platform for cloud computing. Dfinity raised more than 3,000 Bitcoin in its ICO.
Chrono Bank
The “uber of recruitment” wants to build a platform with its own currency for freelance projects, and they sold 710,000 tokens and got them more than 4,000 Bitcoin for it.
Qtum
Qtum intends to build a platform for the easy creation and use of blockchain based smart contracts, and it raised more than 14,000 Bitcoin in an ICO for this mission.
These are only couple of examples and there are hundreds of more or less successful ICO.
Hot ICOs of Today
Here are some of the ICOs that you can invest in:
- DOVU
- Decent.BET
- Cryptopay
It is important to note that not every ICO is worth your money. Some just throw a few keywords in the air, something with blockchains, smart contracts, distributed platforms, etc. They don’t have the skills nor a real business plan to realize the project.
On the other hand, some ICOs are really interesting and they have presented their business plans months ahead. The investment community looks forward to participating in these ICOs.
ICO or Not?
Investors will be wowed by the returns and the surge in market cap of cryptocurrencies over the last year. There are certainly some enormous opportunities and sound investment opportunities to be had. However, before entering the blockchain world, there are also some risks that need to be considered.
So there are pros and cons for the investor to consider, as is always the case with any investment and never more so than those that can give investors returns in excess of 100% in a matter of months.
Here are the pros:
- Unlike investing in traditional start ups, where investor money can be tied in for years, in ICO the tokens are considered liquid. This is probably the greatest feature of an ICO. ICO investors can cash in and out at any time, converting ICO tokens into Bitcoin or other cryptocurrencies with ease.
- The high ROI (Return on Investment) story certainly provides an opportunity for the yield hungry. However, there is a higher level of risk associated with investing where returns are on the higher side.
- There have been a large number of companies that have become unbelievably successful, having raised capital through ICOs, despite the number of ICOs hitting the market, as many as a 100 every couple of weeks.
- There are also no fees similar to those that investors face with IPOs. There are also VCs, who like to run the show and make unnecessary demands, which could devalue the investment on occasion, and companies could lose their identity in search of the Dollar.
There are also some negatives to consider. Some of the more negative elements to investing in an ICO include:
- The upside can be sizeable. However, this is not something to bet your shirt on. Also, any investment lost as a result of frauds and scams are unlikely to be recovered.
- A lack of governance can lead investors down the garden path. Also, a lack of appropriate due diligence can leave investors open to Ponzi schemes and more.
- ICOs are well-known, with many projects failing to reach expected levels or with too many projects being alike, driving the value of initial coins to zero.
With the lack of regulatory oversight, investors do need to do a decent amount of due diligence. Due diligence is expensive and when it comes to cryptocurrency economies and ICOs, the market is beginning to see the presence of rating agencies. They conduct the due diligence and carry out the necessary analysis of the information at hand.
ICORating is one of the agencies. It undertakes the task of providing some cover for investors. The analysis will certainly be a starting point to drive the ICO market to the next level. However, it is important to note that even rating agencies have been known to get it wrong from time to time.
Investors can also look out for ICOs that include independent escrow agents. This is done in order for the capital raised does not reach the company entering an ICO, but a 3rd party, and an example of such an escrow agent is Multi-Sig.
Resources That Can Help You
It’s impossible to list every ICO in this article, and it’s also impossible to assess every described ICO. You need to make your own mind to make investment decisions. If you want to find many information about past, current and future ICO, the following resources can help you:
Summary
One can say ICO is tied to high risk and high reward, similar to the bitcoin hyips. A Bitcoin high yield investment will always make some returns. However, in some cases it will not always make full returns. A crypto ICO on another hand can skyrocket and more than double your investment in a matter of minutes, but it can also happen that you don’t even get a single Satoshi out of it. Remember to research the technology and team behind the project and not to invest more than what you can afford to lose.
Good luck!
