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Crypto Daily Topic

Investing in ICOs – What You Need to Know

An ICO (Initial Coin Offering) is a strategy startups use to raise capital to fund a project by selling digital tokens. The project’s nature could vary from building an app to creating a new service to developing a new cryptocurrency. It is a similar concept to an Initial Public Offering (IPO) – the sale of shares by corporations to raise lump sum capital. 

ICOs, just like IPOs, often excite investors, which is why: at the launch of an ICO, tokens are usually sold at an outrageously discounted price. If the project goes well, the startup will become attractive to investors, and so will be the tokens. At this point, early-bird investors can sell their tokens at much higher prices and walk away with their newly-acquired wealth. This is the same thinking IPO investors have.

Despite the potential to gain massively from these investments, the risk of losing everything always lingers. If the project is a false start, the startup behind the ICO will fail to attract investors, and the tokens will be, at best, a little more than useless.

This article explains ICOs in detail, the benefits of investing, and the risks involved. Read on to know if they are a worthy venture.

How ICOs Work

First, it’s worth noting that cryptocurrency startups typically offer iCOs. Startups have limited access to funding. To make it worse, crypto startups lack the assets to back up liabilities such as credit, and this fact makes them particularly unattractive to creditors. 

When such organizations want to raise capital, ICOs come to their rescue. It all starts with publishing a technical paper detailing their idea. The whitepaper will explain the capital requirements, what the project will achieve at the end, how many tokens investors will keep, how the tokens can be redeemed, and so on. An elaborate paper is crucial in convincing investors to jump aboard. 

During the offering, those who have read the paper and see potential in the idea will buy the tokens using fiat money or crypto. In the future, issued tokens can be redeemed for cash. However, there are cases where the tokens only represent a stake in the organization and only entitle the holders to dividends. 

If the ICO fails to raise the amount needed to pursue the project, the startup may refund investors. Otherwise, it will use the funds collected to implement the proposed project. It is important to note that ICO activities are not regulated – and that’s a huge risk. Luckily, the US Securities and Exchange Commission (SEC) can intervene if it believes the ICO is illegal and may harm investors, as was the case with Telegram’s 2018 ICO. Nonetheless, the SEC’s jurisdiction is limited to the United States, something that you need to keep in mind. 

Comparison with IPOs/ Stocks 

ICOs and IPOs have a lot in common, especially in terms of how they work. Below are some of how the two compare:

  • Both are used to raise funds from the public 
  • Investors receive a token that represents their contribution. In ICOs, digital tokens are issued while IPOs feature shares
  • Both are supposed to be tradeable or redeemable 

Despite the similarities, there are notable differences between the two. For instance: 

  • ICOs are not regulated, while stocks are regulated by government agencies (SEC does this in the US)
  • Returns on IPOs are straightforward – stockholders reap annual dividends. On the other hand, ICO tokens do not grant investors ownership of the project. Still, they can be redeemed at a fixed rate, grant buyers access to the startup’s offices, entitle them to a share of the company’s profits, or whatever the whitepaper says – it’s usually all in the whitepaper.
  • IPOs are restricted to specific stock markets, while ICOs can be purchased anywhere the internet has reached.
  • IPOs usually have a high minimum amount of shares that one can purchase. ICOs, on the other hand, offer more flexibility when it comes to the minimum number of tokens that can be purchased.

How to Participate in an ICO

There is no specific process for venturing into ICOs. However, the general guide below can help you get started.

  1. Search online for upcoming ICOs. Using Google search terms like “upcoming ICOs” should be sufficient. You can also check out icodrops.com. The website provides a summary of active, upcoming, and concluded ICOs. When contemplating which ICO to settle for, take your time to read and understand the whitepaper. If you can, consult an investment expert for advice.
  2. Once you have made a comparison and settled on an ICO of your liking, register with an exchange. Since you are likely to purchase the tokens using crypto, you will need to exchange your fiat money for the said crypto. Most ICOs can be paid for using Bitcoin or Ether – that’s if they are not accepting fiat money.
  3. Buy crypto from the exchange and transfer that to your private wallet. 
  4. Go to the ICO’s official website and follow the participation guide. Most of them have simple well-explained guides. That’s it.

Pump-and-Dump ICO Schemes

Not all ICOs are established with genuine intentions. Like it is the case with any other investment alternative, you should be extra-careful when approaching an ICO investment. Pump-and-dump schemes involve overly hyping an idea to mislead investors into thinking that the proposed project will be super successful. In a typical pump-and-dump scheme, ICO owners will make outrageous claims about the potential of their idea. Then, clueless investors will buy the tokens in large quantities. Naturally, the project will fail after the capital collected has been spent, meaning the startup will have no money to pay investors.

It might be difficult to read the intentions of ICO owners from the start. However, if you see an influencer promoting a certain ICO, you should be vigilant. Using authoritative figures to market ICOs is among the best-known tactics pump-and-dump schemers use.

The ICO Bubble

ICO critics have long speculated that the concept is just a fanfare whose curtains are due to close. In 2017, Wired predicted that the ICO bubble was about to burst, but obviously, it didn’t. In 2018, cryptocurrencies saw an all-time decline in market capitalization, with Bitcoin losing over 70% of its value. The thing is, cryptocurrencies ride on speculation, and speculation cannot be predicted. Therefore, we cannot validate claims of a looming ICO bubble burst. What’s more important is to do your due diligence before diving into this unpredictable business.

Final Thoughts

ICOs present an exciting investment alternative to crypto enthusiasts. They offer many benefits that traditional IPOs lack. For instance, you can invest for as low as a few dollars. You are also not restricted to any country – provided you can access the ICO’s website, you can participate. Generally, ICOs have opened up investment opportunities to more people. However, it would help if you exercise caution when dealing with them. Their unregulated nature means if anything goes wrong, legal redress might be impossible. But since all investments are risky anyway, you might want to give it a try regardless.

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Cryptocurrencies

What Does it Take to Launch A Successful ICO?

For the last three years, Initial Coin Offerings (ICOs) have been compared to the dot-com bubble of the early 2000s. The two are much alike in that they led to significant loss of investors’ money. The only difference being that ICOs caused an 85% drop in the crypto market cap, which is steeper than the dot-com’s bubble – 78% crash.  

Well, the ICO bubble may have popped as recent data suggests, but there are valuable lessons to be drawn from its failure. These lessons can be used to form the basis of what it takes to launch a successful ICO despite the prevailing skepticism around such projects. 

How to launch a successful ICo

i) Formulate a Sound Business Model

Similar to traditional businesses, most ICO projects fail due to the lack of a strategic business plan. As such, ICO investors are willing to invest in a project that has a sound business model with a concrete idea of the product or solution the project offers to the market. To achieve this, you need to objectively study the market, know your audience, and weigh your project’s contribution to the crypto community. 

Once you have all the relevant data, it is always recommended to write a whitepaper for the investors to review. Essentially, a whitepaper is a comprehensive description of your entire project and its goals. Be sure to also include crucial details such as development strategies, legal issues, and available resources. Sure, a well-crafted whitepaper isn’t a guarantee of success. But a poorly written whitepaper with an impractical approach to achieving the project’s goals will certainly turn investors away. 

ii) Create Value for Your Token

Ideally, an ICO campaign will launch its own tokens that give investors access to the service or product set to be launched. If your token is to gain value, it will need to be in high market demand to attract more investors. Note that demand can be created only if your business model offers better solutions than your competitors. Besides, there are numerous project offerings in the market, so you have to make yours stand out. 

Provided you have a solid business plan, there are two main approaches to increasing the value of your token. The first is designing a token distribution plan, and the other one is deciding on the exact number of tokens to be issued. To start with, the token distribution plan is done through private sales pre-sales or crowd sales. Private sales are closed ICO sales targeting high profile investors and professional investors. The idea here is to raise a significant amount of funds and leverage the influence of wealthy investors to gain the attention of others during the public sale. 

Pre-sales are usually held in preparation for the main public sale. They are usually done to raise awareness of the token among the general public. The crowd sale targets investors, including those with limited amounts of investment. 

In each stage of the token sale, decide in advance how many tokens will be issued in total. 

You should also create room for issuance of additional tokens just to maintain market equilibrium. 

iii) Build Your Team

Much of an ICO’s success depends on the team behind the project. From the marketing team, product developers, engineers, to the initial investors; they all need to be in sync with the objectives of your ICO project. It is also wise to include a lawyer in your core team to help you streamline the legal process of launching the ICO. Currently, there aren’t any lawyers specializing in crypto space, but an experienced lawyer in corporate formation can serve you just right. 

Other members of your team, such as financial experts and developers, should have a good reputation in the blockchain industry. This goes a long way into giving your project the credibility it deserves to win reliable investors. A good team should consist of members who can complement each other’s skillset and even bring like-minded professionals on board. 

You might also consider having well-known advisers and promoters in alliance with your team. Although this doesn’t always translate to success, these individuals will help vouch for your project. 

Keep in mind that a team doesn’t entail those tied directly to the project only. Your target customers also have a place in your team. Advertising might win you some customers, but it’s an expensive approach considering that not everyone is interested in ICOs. A good place to start is by interacting with your customer base is through established online crypto communities such as Bitcointalk, Steemit, and Reddit. You can also work closely with YouTubers specializing in cryptocurrency. This way, once you start your marketing campaign, the audience will already be familiar with your offering and be likely to be swayed into investing. 

iv) Build an Online Presence

Having an online presence is not only a viable marketing tool but also a good way to give your project a touch of legitimacy. 

You can start by creating a website that showcases the necessary details of your project. As such, it makes sense to post an online whitepaper of your project on the website. Most importantly, remember to create a ‘team’ section on your web where all the project stakeholders appear. This section should be detailed, explaining the role of each team member, including their previous work and the milestones they have achieved. Be sure to include a passport size picture of each member above their profile. 

You also need to know that only a handful of investors read the whitepaper to the very last page. For this reason, it is a good idea to have a ‘roadmap’ section on your website to concisely outline realistic goals of the project, including the set timeframes to achieve these objectives. 

Your online presence wouldn’t be complete without creating social media platforms. You should have one platform for your entire project, and several others for every member of your team. The platforms provide an interaction medium between your brand and customers. 

v) Launching Your ICO

Launching an ICO is a pretty straightforward process, especially if you observed the aforementioned procedures. But there are a few twists and turns to navigate before you can put your ICO out to the world.

The first hurdle to overcome is deciding the location in which to launch your ICO. Different countries have varying policies regarding fundraising, particularly in the crypto space. For instance, offering your ICO tokens to U.S residents may not be a good idea since the tokens will be subject to the Securities and Exchange Commission (SEC) regulations. This will come with its share of legal problems given that the U.S government hasn’t exactly warmed up to blockchain. Instead, aim to launch your campaign in ICO-friendly countries such as the British Virgin Islands, Singapore, Hong Kong, Switzerland, and the Cayman Islands. 

Lastly, determine the token pricing strategy to use based on your goals. Generally, there are four token pricing strategies: 

  • Undetermined price: This method is divided into several price stages, whereby the token price in the initial stage is fixed. As more investors come in, the price increases as the stages advance. 
  • Fixed price per token: In this method, the tokens are offered at a set price that doesn’t change with the number of investors. This is to say that investors can buy as many tokens as they wish without affecting the price. To avoid market overvaluation, the tokens are frozen for a pre-set period, after which they are made available for trading on the market. 
  • Random price token: This strategy doesn’t have a fixed price for the token. Instead, tokens are issued to investors as per their amount of funds. 
  • Price decreases over time: As the name suggests, the tokens are offered at a higher price than decreases as the sale period passes.

Conclusion 

ICOs are a revolutionary way through which the average investor can access investment opportunities that would be otherwise reserved for venture capitalists and institutional investors. This provides blockchain entrepreneurs with a platform to actualize their business goals and contribute to the advancement of the entire blockchain space. However, setting up an ICO project and finally raising funds isn’t as easy as it was a couple of years ago. As such, the above-mentioned guidelines will help you adjust to the changes in the ICO market, bringing you closer to the objectives of your ICO project. 

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Crypto Guides

What Is An ICO and What Were The Biggest ICOs Ever?

Introduction

We have discussed many things cryptocurrencies in our recent guides, which talk about their evolution, properties, pros & cons, etc. We also learned a lot about Bitcoin and some of the other major altcoins. As of Feb 2020, more than five thousand cryptos are prevailing in the market. Have you ever wondered how these cryptos come into existence? The answer to this question is ICO. To understand what ICO, AKA, Initial Coin Offering

Irrespective of its size, every company needs sufficient funds to bring an idea to a reality. In the case of conventional companies, there is a concept known as IPO, which translates to Initial Public Offering. Here, a company would go public after they establish their brand name in the market. ‘Going public’ essentially means selling a part of their company to raise more funds and expand its business across the markets to gain more profits.

What Is An ICO?

Like how IPO is for traditional companies, ICO is for the companies who are willing to raise funds to build a cryptocurrency. There might be various agendas for crypto companies, which we will be discussing in the later parts of this article. But not every random crypto company can have an ICO and raise funds. Companies must make their whitepaper public that has all the technicalities of the coin they are going to launch. They must also mention the amount of money they are willing to raise through this ICO.  Along with this, the complete business plan and the acceptable Fiat or Cryptos should also be clearly mentioned.

Once they release the duration of the ICO, interested people can go through the whitepaper of that company and understand the problem they are willing to solve. If that is making sense, and all the other technicalities interest them, they can participate in the ICO by purchasing tokens of that company. Most of the companies accept both Bitcoin and Ethereum to purchase their tokens. The ultimate goal here is to bet on a company that has enormous growth potential in the cryptocurrency space. If that happens, the money they have invested here can have exponential growth and yield huge profits in the future.

If the funds that are raised meets the goal set by the company, the ICO can be considered to be successful. The companies can use these funds and bring their whitepaper to an actual cryptocurrency. But, if the funds raised don’t meet the goal, we can say that the ICO is a failed attempt, and the collected funds will be returned to the investors. Returning the collected funds is a seamless process because all of these transactions are executed through Smart Contracts. So the entire process of an ICO is decentralized and is not regulated by any central authority.

Notable ICO Success Stories

In the year 2013, the first-ever ICO took place where Mastercoin raised around 500k worth of Bitcoin. Then, the ICO of Ethereum took place, which changed the face of the crypto world forever. Without this particular ICO, the crypto world wouldn’t have been the way we are seeing it today. This record-breaking ICO took place in 2014, where the company has raised $18 million worth of funds. This ICO’s massive success enabled the amazing Ethereum platform to transform from an idea on a paper to reality.

Once the Ethereum platform was live with the revolutionary smart contract feature, ICO token sales have been extremely simplified. This resulted in the formation of some of the biggest ICOs to date. One such ICO which is conducted on the Ethereum platform is DAO. If you are a crypto enthusiast, you must have heard about this crypto. DAO has raised about $150 million worth of Ether in just four weeks.

Some of the biggest ICOs we have ever witnessed include EOS ($4 Billion), Telegram ($1.7 Billion), Dragon Coin ($320 Million) & Huobi ($320 Million). Most of the biggest ICOs like the ones mentioned above, happened in 2017-18. This is considered as a golden age of ICOs. The number of ICOs has reduced significantly, and there could be many reasons for that. Some of them include the fall of the crypto market, regulations from the US Securities Exchange Commission, frauds and scams occurred, etc.

Bottom Line

That’s about ICOs and some of the biggest ICOs ever to take place. We must be extremely cautious while participating in an ICO. Getting to know the founders well, analyzing the whitepaper, understanding the feasibility of the project, etc. is crucial before making your investments. Market experts believe that the ICOs are almost dead, but there are a few promising ICOs that are going to take place in 2020, and most of them can be found here. In the upcoming articles, let’s understand what IEOs and STOs are and how different are from ICOs. Cheers!