Initial Coin Offering – ICO
Initial Coin Offerings, or ICOs, are a type of crowd-funding or crowd-investing into blockchain ventures conducted entirely P2P on the blockchain. ICOs are similar to Initial Public Offerings (IPOs) if the token represents a stake in the project. But unlike IPOs, most ICOs don’t give investors a stake in the startup. That’s why investors who buy into those kind of tokens, are usually supporters of a project, who could be mainly motivated by the idea, and also by the return of their investment when selling at a higher rate at a later point in time. As opposed to traditional crowdfunding where the investment is considered to be a donation, ICOs give the supporters the possibility of a return of investment. Therefore ICOs could be seen as a mix between a donation and investment.
The main idea of ICOs so far has been to fund new blockchain projects by pre-selling coins/tokens to investors interested in supporting the project: Project developers first present a white paper describing the business model and the technical specifications of a project before the launch of their ICO. They lay out a timeline for the project, set a target budget where they describe the future funds spending (marketing, R&D, etc.), and determine coin distribution (how many coins are they going to keep for themselves, token supply, etc.). The team also determines a fixed exchange rate for the tokens. The price of a token during ICO period often runs through different stages. The price, for example, could increase incrementally over time. This way early investors get the best price per coin ratio. Gnosis (a prediction market) for example used a different crowd sale mechanism for their ICO: a dutch auction.
At the time of writing, in most countries, these blockchain based token sales lack any type of government regulation and can produce a lot of insecurities for the stakeholders involved (entrepreneurs and investors alike). In many cases, buying into new crypto tokens does not give investors a stake in a company, but rather the hope that if the project becomes successful, they will be able to sell their coins at a much higher price. This is why many refer to current market dynamics to potential pyramid schemes. (Source: Ben Dickson; Investopedia).
Types of ICOs
So far, developers have had full freedom to chose how they want to implement the crowdfunding campaign. During a campaign, interested investors can purchase tokens with already established cryptocurrencies, for example Bitcoin or Ether. It is important to note that currently, the way ICOs are set up, procedures are solely determined by the team behind a certain blockchain project. Each team can come up with their own rules. No ICO has been the same as another.
Most ICOs run in rounds where the first round starts off with the lowest price per token. Each round sets a higher price for the coin until the campaign either expires or reaches its funding goal. A new approach is the dutch auction mechanism introduced by Gnosis (a prediction market) where the crowdfunding starts off with the highest price per coin and decreases with time. Some startups like Tau-Chain have decided to leave their campaign running without a cap and an end date. People interested in the project would buy tokens from an exchange at any time.
How to participate in an ICO token sale?
First, you need to find an upcoming ICO. Websites such as Cyber Fund inform about upcoming ICOs. In order to participate in an ICO investors need to set up a cryptocurrency wallet. For further information regarding the wallet setup read our Cryptocurrency Tutorial. Different ICOs have their own rules and procedures and can differ in their own way. However, at the end of the day investors are required to send tokens to a blockchain address. This address will be listed on the ICO-website accompanied with a step-by-step guide on how to properly participate. The most important thing to remember before investing is not to use any kind of an online wallet or exchange. Often after investing in an ICO backers are required to import their private keys into another wallet in order to access their new coins. Therefore checking if your wallet’s private keys are exportable is crucial! Some ICOs are offering a functioning online wallet for their token sale where people could send money directly to. The received funds are exchanged for the new token using the current exchange rate and are deposited into the wallet. Other ICOs instantly send back tokens to the address where the funds came from. This is the case with some Bitcoin-based ICOs where the new tokens get sent but may not be visible to the user even though they got stored in his/her blockchain address. This is caused by the incompatibility of the wallet with the new token. However, users should not be concerned if their private keys are exportable because they can always import them into a new wallet which supports this new token. In the recent years, ICOs became more accessible after the introduction of Ethereum. Developers can set up a user-friendly campaign much more quickly and because the Ethereum protocol and Wallet supports multiple tokens, and users don’t have to worry about accessing the newly created coins.
Initial Coin Offerings are fairly new concept and therefore represent a small amount of the total crowdfunding capital worldwide. Global crowdfunding volume in 2015 was around $34 Billion, whereas the ICO volume was less than a percent from the total volume with $240m raised (Source: Outlier Ventures). The most notable ICO in the blockchain space happened in 2016 where a project called The “DAO” managed to raise $150 Million.
Top 8 ICOs
- The DAOA Decentralized Autonomous Organisation called “The DAO” on top of the Ethereum Blockchain raised $150 Million in 2016
- EthereumEthereum is an open-source, public, blockchain-based distributed computing platform featuring smart contract functionality. The project raised $18 Million in 2014
- WavesWaves is a non-permissioned, non-privatized blockchain that intends to deal with banks national currencies. Funds raised: $16 MIllion in 2016
- QtumOne of the primary goals of Qtum is to build the first UTXO-based smart- contract system with a proof-of-stake consensus algorithm. Total raised funds: $15,5 Million in 2017
- ICONOMIEthereum-based investment fund platform. The developers raised $10,5 Million in 2016
- GOLEMGolem aims to serve as e distributed open-source computer. They managed to raise $8,5 Million in 2016
- MaidsafeSafe network aims to become a new peer-to-peer decentralized, encrypted internet. The ICO managed to raise $8 Million in 2014
- SingularDTVSingular is a blockchain entertainment studio, with smart contract rights management platform and video on-demand portal. The team raised $7,5 Million in 2016
(March 2017, picture above)
Curated ICO Listings
Crypto Currency Funds or Fund Management Platforms
Managing a token-portfolio might get complicated. The following asset management platforms aim to make it easy for investors to keep their tokens in one place.
- How to Evaluate an ICO – Part1 by Shermin Voshmgir
- Analyzing Token Sale Models by Vitalik Buterin
- How to Evaluate Initial Coin Offerings by William Mougayar
- 10 Steps for Evaluating Digital Asset Crowdsales Tokenmarket
- Investment Guide To ‘Crypto’ Coin Offerings Rating Blockchain Startups, Forbes
- WeTrust: Lending Circles Going Blockchain, Daniel Zakrisson, WeTrust
- ICOs, Token Sales, Crowdfundings, Smith & Crown
- What is an initial coin offering?, Blockgeeks
- What is an Initial Coin Offering (ICO)?, Ben Dickson
- Initial Coin Offering, Investopedia
- An Introduction To Initial Coin Offerings (ICO’s) – The Venture Capital Disrupters, Tim Lea
- Crypto tokens – a breakthrough in open network design
- WTF is an ICO, Techcrunch