With so many Dollars, Euros, and Yen invested into Initial Coin Offerings, let’s take a close look at what is an ICO?

The words Cryptocurrency and Blockchain maybe 2 of the most popular buzzwords on today’s search engines. However, one term may trump both of them combined. ICO, the acronym for Initial Coin Offering, is what everyone is talking about and investing in.

What is an ICO?

ICO stands for Initial Coin Offering. Also referred to as a Token Sale or an Initial Token Offering. An ICO is a fundraising tool used by companies to raise capital in order to develop a product.

The idea behind the concept is, a company has an idea for a cryptocurrency but requires funding. The company will start an ICO which allows early investors to buy their currency, the currency is in the form of a coin or token. For more information on the difference between Coins and Tokens, check out this article. The ICO allows investors to buy-in at a discounted rate before the coin or token is available for purchase on a Public Exchange.

A Win-Win Situation

The company will then use the money raised during the ICO to develop their product. If the product succeeds, this will also increase the value of the currency.

This can be viewed as a win-win situation. The company benefits because they need the funding to develop their product. The ICO investors benefit from investing early and seeing the value of the cryptocurrency increase.

It Takes Money to Make Money

ICOs are similar in principle to the crowdfunding technique, like launching a Kick Starter Campaign. This technique has the potential to work out well for all parties involved. In 2014, Bitcoin was basically the only notable cryptocurrency out there. Along came a 21-year-old Russian-Canadian programmer, with the idea for a Smart Contract platform, and only needing the funding to bring it to reality.

The Ethereum ICO

That programmer is named Vitalik Buterin, the creator of Ethereum. He launched the Ethereum ICO, selling 1 Ether for $0.30. The ICO raised millions of dollars, allowing Vitalik to launch Ethereum on July 30, 2015. In January 2018, the price of 1 Ether was $1,400. If you were to invest in the Ethereum ICO, and sell at the peak in January 2018, you would have seen more than a 4,000% return on your investment in less than 4 years.

ICOs vs. IPOs

The idea for ICOs is not a new one, in the stock market IPOs have existed for many years. Companies looking to raise capital will launch an IPO, or Initial Public Offering, and sell partial ownership of their company in the form of shares. IPOs involve strict legal and regulatory compliance, these hurdles make it very restrictive and exclusive.

At the time of publishing this article, ICOs are yet to establish a regulatory framework that has been widely accepted. This allows anyone with a good idea to expand and develop their vision. This is great for innovating new products, however, ICOs have an ugly side as well. The unfortunate reality is that Initial Coin Offerings have become increasingly popular among scammers.

Scamming the System

The success of the Ethereum ICO is well documented in the crypto-sphere. That success has led to a lot of ICOs being launched that offer no real value. With investors eager to get in early, and suffering from FOMO (Fear of Missing Out), lots of money is being invested into these projects. The ‘ugly side’ of ICOs involves projects with no real use case, development teams that are incompetent, and sometimes outright scams to gain your Personally Identifiable Information, PII.

Getting Risky

ICOs are not regulated in the same way that IPOs are. Unfortunately, this has led to a fair share of occurrences where the group behind the ICO has run off with all the funding. This leaves the investors behind with nothing but a useless coin or token and gives the term ICO a bad name.

Participating in an ICO comes with an assumed risk. While the payoffs can be huge, you’ll need to be well informed before you make any decisions. This article is not about giving advice on any specific ICO. Instead, I will provide you with a framework for assessing any ICO you come across using your own judgment.

ICO Assessment Framework

Below are the first steps you should take when analyzing a new ICO for possible investment. You should expand on each area mentioned below and be thorough in your research. Your hard earned money is at risk here!

The WhitePaper

The first thing to do when considering investing in an ICO is to view the companies, WhitePaper. A whitepaper is a document that outlines the key details of a project. The companies whitepaper should be readily accessible through the company website.

The following items should be included in the whitepaper:
  • Details of the Project (Use Case, What Problem does it Solve? etc.)
  • Crowdsale Structure (How the initial coins will be sold)
  • Project Roadmap
  • Details on the Key Team Members

If all of this information is not readily accessible within the whitepaper, this would be a Red Flag not to participate. The whitepaper may also go deeper into the technical specifications of the project. It should also reference the companies Git repository where you can view the code. Even if you are not a developer it is important to make sure these things exist and are accessible.

You will also want to take into account the quality and appearance of the whitepaper, make sure the look is professional and appropriate.

Assuming the appearance of the whitepaper passes the eye test, you will then want to go through each aspect thoroughly. This article is a brief overview, but in reality, this should be an extensive process. Be thorough in your examination of the whitepaper. The website should have an option to contact them, feel free to ask questions if something is unclear.

Project Details

Read and understand the entire whitepaper before making any decisions on investing. This document should tell you everything you need to know about the project.

The first thing you want to consider is, is there a need for this project? Think about the use case for the project, does it solve a real-world issue? The project should offer us something new and useful. One thing I like to do is think about if it is something I would personally use?

The usefulness of the project needs to be compared with the feasibility of the project. You want to stay away from investing in projects that don’t seem possible at this time (I feel like this goes without saying, but I’m saying it).

What are you Buying?

Make sure that you separate the value of the company compared to the value of the currency. Unlike an IPO you are not buying stock in the company, you are buying the companies currency. This currency is tied to a Product that will succeed or fail. Understand how the success of the product correlates to the value of the currency.

How Much is for Sale?

The details of the token sale should be made clear in the whitepaper. If simple information is missing like the start and end date, or how many coins will be sold? This is a Red Flag! Understand where your money is going. If this is not totally clear in the crowd sale details, contact the company or check the roadmap. This will give you an idea of the companies top priorities.

The roadmap is the companies short-term plan for the future and usually extends 2-5 years. Evaluate the team’s mission and vision, and evaluate them on ambitiousness and practicality.

Soft Cap vs Hard Cap

An ICO has reached its goal once the Soft Cap is reached. The soft cap is the minimum amount of investment required for the project to move forward. Most ICOs will also have a Hard Cap. The hard cap is the maximum amount the company will accept in investment during the ICO.

If an ICO fails to reach its soft cap, most will return money to the investors. Some ICOs will require investors to provide more personal details as part of the KYC, or Know Your Customer checks. While other ICOs may only be available to specific private investors.

Choosing Teams

The final step is looking at the team members behind the project. Examine these individuals carefully, and look at their past projects. ICOs have an inherent risk to them, the most important step is judging the team that is creating the product. I personally will Google all team members, reading a little about each to make sure there are no skeletons in the closet.

Don’t Get Too Excited

Now that we have outlined the framework I want to reiterate that passing all 4 areas does not guarantee success. Think of this as a starting point for your evaluation, the bare minimum. If an ICO you are looking at does not check all the boxes, you should probably get away. And if it does, that’s great! However, there is still a very small chance for success.

Less than 5% of ICOs will have a payout like Ethereum. However, if you do get in early and one does succeed the upside could be life-changing. Keeping this in mind, you should only participate in those that make you feel confident enough to do so.

Conclusion

ICOs allow funding for some of the most innovative distributed ledger projects in the world. It is always essential to do as much research as possible before committing to any investment. Just like gambling, you should only invest what you are willing to lose.

Top 5 Cryptocurrencies by Market Cap (at the time of Publish)

Bitcoin: $3,605
XRP: $0.32
Ethereum: $118.65
EOS:
$2.47
Bitcoin Cash:
$127.00
Bitcoin Dominance: 
52.4%
According to CoinMarketCap

2 Comments

  • Boom
    Posted January 24, 2019 2:55 am 0Likes

    Really thorough article. I’m curious though about likelihood of achieving a reasonable return. I get that only 5% will reach Ethereum levels, but one can only hope (not expect) unicorn level returns. Are most non-scam ICOs at least moderately successful for early investors? Given the proliferation of cryptocurrencies, I’d have to think that it’s harder and harder to find a unique angle or meaningful improvement or innovation beyond what’s already in the market leading to what, I presume, are a lot of flops. Or perhaps I shouldn’t be thinking about this like investing in securities where a stable, reasonable return is desired and instead think about this like trying to win the lottery with educated bets.

    • Jay Freed
      Posted January 24, 2019 5:26 pm 0Likes

      Thanks for the response. I would not say that most non-scam ICOs are successful. I guess ultimately it would depend on your definition of success. Obviously, success cannot be guaranteed in any aspect, but preparation and education give the best chance of success.

      There are some reports that say as many as 80% of ICOs are a scam. If you take a rough estimate of 1500 ICOs, that would mean only 300 are valid projects. Examining the use case and team behind the project will give you the best indicators of the potential project success.

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