Initial Coin Offering: The Complete Guide
Heard of Kickstarter? The platform that helps projects to get funded by millions of people? If yes, then you have almost understood what Initial Coin Offering is.
ICO is an Initial Coin Offering also known as Token Sale. It is a way for blockchain companies to fund their projects in a pre-defined timeframe. The people who fund these projects are people like us. In the ICOs, investors are issued ERC20 tokens of the project which have a certain value. For Example, there is a project called ABC. The value of each ABC token is $0.5. You decide to invest $100 in it so in return you get 200 ABC tokens which represent a share in the project & you can choose to hold it in your ERC20 Wallet or sell when it gets listed on an exchange.
Initial Coin Offering: Important terms
1. ERC20 Token are tokens which work on the Ethereum Blockchain. ERC20 is a standard list of rules that the token has to implement. A major fraction of the tokens is ERC20 tokens.
2. The Whitepaper is a technical & business report released by projects that consist detailed information related to the concept, problems solved, tokens, team etc.
3. Pre-ICO/ Pre-Sale is the token sale event conducted by blockchain companies to raise initial funds which take place before the Main ICO. The fund targets for Pre-ICOs are often lower as compared to that of the main ICO and tokens are sold at cheaper price. Usually, pre-ICOs are limited to accredited investors & VC Firms.
4. Accredited Investors are investors who have a minimum net worth of $1,000,000. A person with a minimum annual salary of $2,00,000 ($3,00,000 combined with the spouse) is also eligible to be an accredited investor.
5. Softcap is the minimum funds that are compulsory to be raised in order for the ICO to be successful. For example, if the softcap of ABC is $1,000,000 & after the ICO ends if the funds raised is said $8,00,000 then the ICO has failed & the company has to refund its investors.
6. Hardcap is the maximum capital that can be raised in the ICO. For example, the hardcap of ABC is $10,000,000 & due to its potential it has managed to raise $ 10,000,000. After reaching the hardcap the project can’t raise anymore in the ICO even if there are more investors ready to invest. Reaching a hardcap is generally a sign that the project has potential. But unlike softcap, there is no necessity to have a hardcap.
7. Maximum Supply indicates the maximum number of tokens that will ever be created.
8. The medium of Investment is the currency through which the investor will invest. BTC & ETH are commonly considered for investments. Some projects do accept fiat currencies(USD, EURO).
9. Deposit Addresses are the BTC or ETH wallets of those projects where the investors send their funds to. These addresses are mentioned on the project websites. It is also mandatory for the investors to submit their ERC20 wallet address. So that once the ICO is done, the team can send the assigned amount of tokens to that wallet.
10. Minimum Investment is the smallest amount that can be invested in ICO. Generally, ICOs don’t have pre-determined minimum investments. They are open to any amount. There is no maximum limit on how much an investor can put in, it’s up to the investor to invest the deserving amount. As an investor, you should always remember to invest only what you can lose.
11. Liquidity is giving the opportunity to buy or sell once the token has been listed on an exchange.
Initial Coin Offering: Know about the upcoming events
Online Portals/ Websites such as icobench.com, icoalert.com, icowatchlist.com are some good resources to follow. The best way is to visit ICO websites like icoalert.com to know about upcoming ICOs. There are hundreds of ICOs listed on these websites. Shortlist some projects that you think is practical, possible and is interesting.
Initial Coin Offering is a Big Deal!
For a long time, early-stage investing in startups and projects have been restricted to Accredited Investors, VC Firms because of the high entry barrier. After the introduction of ICOs, anyone can become an investor & be part of companies/ projects due to its low entry barrier & requirements. But it also poses to be a high-risk investment because ICOs are not regulated by the government. This allows scam artists to take advantage. Therefore it is very important to research & analyze a project before investing in it.
Some successful ICOs to read about: Stratis, QTUM, TenX, Lisk.
Initial Coin Offering analysis: Invest or Divest?
ICOs are different than buying a stock in a company. This is because the policies & rules vary from one ICO to another and this is largely due to the fact that there is no regulatory body like SEBI (India). An absence of these bodies also means that there is no need for a DEMAT account or a broker.
Whitepapers are a technical & business document that consists of details of the project like a detailed description of the technology, as well as growth anticipations and requirements for the issue and the use of tokens. It provides a list of project team members, investors, and advisors. This document can say a lot about the project & without a proper whitepaper, it can fail to generate interest among investors. An ideal whitepaper should explain the below-mentioned details without using complex & confusing terms/ phrases that it is not even understandable by experienced investors.
- The Problem
- Product Description
- Product interaction with the real world, economy
- Project deployment & timelines
- Team Members
2. Researching on the Problem
Before investing in a product it is necessary to check whether there is even a need for the product. For this, you need to spend a considerable amount of time on research because the problem the project intends to solve may not have been heard by you. So you need to learn basics of that field, read reports/ articles and then come to a conclusion and decide if the project can solve the problem. Once you are convinced only then proceed to the next step.
3. Understanding the Product technology
This is a very crucial part of the investing process. You need to understand how the product works. If you don’t understand at the first glance then consult with people in the same or similar industry, understand whether a blockchain enabled project is really needed to solve the problem. It’s a plus point if the project already has a working prototype/product.
4. Check the Team
A project that has a very good potential is hard to execute if the team behind the project is not experienced in the particular field. Anyone can come up with ideas, propose technologies and solutions but all that is worth only if it can be executed. The Project websites & whitepapers have the details of the team members with their LinkedIn profiles. Check their previous work experiences in solving or undertaking a similar problem.
5. Analyse the Numbers
The white paper consists of the details like the price/ token, total supply, amount of tokens allotted to ICO, Token held by the team. A project where most of the tokens are owned by the team can be a questioning act. Check short & long-term growth possibilities with the total supply. If the supply is too high then short-term growth is quite less.
6. Social Media Activity
A project having a great solution & team wouldn’t be successful if it fails to generate interest among investors in the industry. Marketing and Public Relations is very important. Social media has become one of the biggest platforms to market & advertise one’s product. Check if the project is on the popular platforms like Facebook, Twitter, LinkedIn, YouTube etc. Look for the project communities on Reddit & Telegram, see if the team responds to queries of the people and whether the community is active. An inactive community makes advertising useless and reduces chances of a successful ICO.
7. Important Documents & Wallet Address
When you register to invest in an ICO, the company makes it mandatory for you to submit a National ID (Adhaar/ PAN Card/ Driving License), Utility bill ( Broadband/ Electricity / Gas etc). It is also compulsory to submit an ERC20 wallet address during registration. Before creating an Ethereum wallet always make sure that it is ERC20 compatible (Use MyEtherWallet) or else you won’t receive the ICO tokens.
8. How to transfer funds?
- Most ICOs accept only BTC & ETH for investing though they have token prices in USD. So buy USD equivalent investment amounts of BTC / ETH from an exchange.
- During the registration process, the BTC / ETH deposit addresses i.e the wallet address where investors have to deposit funds is mentioned, you can directly transfer the funds from the exchange and always re-check so that you don’t send BTC to ETH wallet.
- It is advisable to use ETH to fund your investment so that you don’t lose much on withdrawal fees.
How much should you invest in ICO Cryptocurrency?
Though ICOs don’t have a minimum limit to invest but always invest an amount which you think is right, leave greed out and invest what you can afford to lose because you never know which ICO turns out to be a fraud & since there is no regulation, the government can’t protect you. Hence, Research properly, Invest diligently.
Until next time, HODL Strong.