Initial Coin Offerings (ICOs) or token sales are gaining a lot of attention, from institutional investors and individuals alike. ICOs are referred to the new IPOs or next generation crowdfunding. But the blockchain ecosystem is still young and lacks standards, thus making token sale participation a hurdle for the average person. In this post we explain how to participate in a token sale with an easy step by step guide.
Most token sales today run on top of the Ethereum blockchain through a smart contract that collects Ethereum tokens and automatically exchanges these for a new token presented by the start-up company. This happens completely P2P without any exchanges or brokers as middle men.
Every ICO has a different pricing mechanism (price decreases, increases, is fixed, non existent)*. For more info on types of ICOs click here. If the exchange rate of the token issued is fixed giving investors the opportunity to get as many tokens they like at that fixed price. This mechanism is appealing to large investors because they don’t have to worry about influencing the price by purchasing a big number of tokens. After a token sale ends, there is a cool-off period where tokens might be frozen (investors are not allowed to transfer their coins for a certain amount of time) or kept away from exchanges. After the the end of the cool-off period, exchanges can start listing token thus allowing other people to trade it at a market price.
1. Register with an Cryptocurrency Exchange
To participate in an ICO you need cryptocurrencies, usually Ether or Bitcoin. You cannot participate in an ICO with fiat currency. If you don’t own cryptocurrencies, you will first need to buy some. The best way to buy large amounts of Bitcoin is through online exchanges and send your transfer money from your bank account to your newly created account with a crypto currency exchange. Please note that the registration process might need some days due to strikt KYC and AML regulation. If you don’t have a bank account or don’t want to give up your privacy by sending your ID to a third party like Coinbase there are other options like buying ether from an ATM or locally from other people. More info read our tutorial on How to buy Bitcoin & other Cryptocurrencies.
2. Exchange Fiat for Bitcoin or Ether
Once you registered on an exchange and the money from your bank account has arrived in your cryptocurrency exchange account, you now have to exchange your EUR, USD, etc for the cryptocurrency you want to buy. This process take a few seconds to minutes depending on when the next block is created (note: block creation times differ from blockchain to blockchain). Your cryptocurrencies will be send to an online wallet offered by the exchange you registered with. Keeping large amounts of coins online might be dangerous since online exchanges are vulnerable to attacks. In the past money has been stolen from online exchanges. Therefore it is highly advised that you send your cryptocurrency to a wallet which is under your control. For more info on how to securely store your coins read our tutorial on How to buy Bitcoin & other Cryptocurrencies.
2. Transfer your Coins from the Exchange to a Blockchain Wallet you Control
3. Set up your Wallet
Most token sales today happen on the Ethereum network. Therefore you will need an Ethereum wallet to participate in the token sale. Not every wallet is suitable for ICOs. The most user-friendly and widely accepted Ethereum wallets are MetaMask and MyEhterWallet. MetaMask is a plugin for the Google Chrome browser. It is not only a wallet but also a lightweight Ethereum dApp browser. MyEtherWallet is a client-side wallet and does not hold your private keys. It also connects with hardware wallets like the Ledger Nano S or Trezor. Depending on the startup and the ICO one of these wallets might be recommended for the participation. If the startup hasn’t defined a preferred wallet for the ICO, we recommend using MetaMask.
MetaMask is a desktop type of wallet, and we do not recommend storing large values in it. Use it only for the ICO and then move your funds to a more secure place like a hardware wallet or paper wallet. Don’t forget backing up your wallet. Store your 12-word seed in a safe place (not in the cloud). After your wallet is properly setup & backed up send Ether from your online wallet at the exchange to your MetaMask wallet.
4. Buy ICO Tokens
Before you proceed make sure to read the general terms of the ICO and the token purchase agreement. Most start-ups provide step-by-step guides for the token sale participation including screenshots for each step. Make sure you read these. You should also join the social media channels including slack and follow the news around the ICO. Sometimes token sales experience technical problems and staying up to date during the token sale is crucial.
All ICOs start either at a certain time or a previously specified block number. You can use an Ethereum block explorer to check the block numbers translates into real time of the time you live in. Note that some ICOs end in a matter of minutes. Therefore using wallets like Parity that allow for a more advanced setup options might be recommended, if you expect the token sale to end quickly.
When the token sale starts, you will have to send ETH to the address specified by the team. You will need to set a proper gas limit which is controlled by the MetaMask interface. After you send the transaction there are a couple of scenarios:
- You receive your tokens right after the token sale ends
- You need to wait for couple of days for your tokens
- You will need to manually redeem you tokens (look at eos.io)
Note! In some cases, hackers have manipulated ICO websites, by exchanging the real ETH adress with their own ETH adress, which means that the money investors send to the ICO wallet adress indicated on the ICO website was corrupted and the hackers got all the money instead of the team behind the ICO.
5. Secure your Tokens
After you receive your tokens in your MetaMask – or MyEtherWallet, or Parity – address make sure to transfer these to more secure wallet. You will need to have some extra ETH (small amount) store in your wallets to pay for transaction costs of sending money from wallet to wallet. Note that this will change once Ethereum updates to Metropolis, but currently it is still something you will need to keep in mind.
*Note: developers have the full freedom on how they want to setup the token sale. Covering every possible ICO scenario is almost impossible. A developer might decide not to sell his tokens at a fixed exchange rate but rather let people invest in his startup and then distribute the new tokens proportionally by giving each person a percentage of the tokens corresponding to the percentage of his investment which is part of total investments. In this case if a startup gets a single investor he/she will get 100% of the tokens. Another option would be a dutch auction as presented by the Gnosis team for the first time, where the sale starts at the highest price per token proportionally decreases until the end of the auction.