What is an ICO?
ICO (Initial Coin Offering) – is a model of crowd sale, a way to raise funds from the public for the development of a project, product or startup. The public funds a project in order to receive benefits of it’s development in the future. Generally ICO is a sale of a newly created cryptocurrency to the general public.
How do ICO’s work?
A company creates cryptocurrency tokens, which are then are exchanged to fiat currency (USD, EUR) or crypto currency of liquid value (Bitcoin or Ethereum).
What happens if an ICO is successful?
If the raised money meet the minimum funds, the new cryptocurrency tokens are distributed to those who bought them and become liquid on the crypto currency market with potential value growth. If the funding goal hasn’t been completed, the money is returned to the public.
What kind of companies or projects use ICO’s for fund raising?
Any kind of projects can use the ICO model to attract investments. The first ICO’s where launched by blockchain-based projects, but as the popularity of the ICO’s grows it is changing and becoming mainstream. In 2013 Mastercoin sold Mastercoins for Bitcoins with a suggestion that the Bitcoin value exchanged on Mastercoins would rise after the company’s platform is build up.
Why is ICO such a hot topic lately?
It’s a fast way to earn millions just by reaching out to the public. Interesting fact – a new web browser Brave’s ICO generated about $35 million in under 30 seconds. While during summer 2017 two coin offerings combined raised amounts nearly equal to what companies tend to fetch by using a traditional IPO scheme. In 2016, according to Dealogic, companies undertaking IPO’s raised an average of $219 million. For comparison, it took Tezos and block.one several days to raise $211 million and $185 million respectively.
What is a token?
A token is a form of a crypto currency in other words a digital coupon that is sold for fiat currency (USD, EUR) or crypto currency of liquid value (Bitcoin or Ethereum). Tokens can have various functions, for example, they can give access to services of the company, but not the ownership rights to it.
What type of tokens exist?
Company’s can release various types of tokens. Here are the most popular types:
- These tokens are not sold, but users can earn them through various activities, for example by content popularization or by mining (like in case of Ethereum).
- Credit type tokens. This type of tokens offers a certain annual percentage rate from the loan amount.
- Share value tokens. This type of tokens allows owners to earn a slice of revenue or money on commissions from cryptocurrency transactions.
Why do people buy tokens?
There are three main reasons for buying tokens. First of all, the token owners can gain profit from selling the tokens if their price grows in comparison with the original ICO price. Second, The ICO participants may use their tokens in the future to get access to the services and functions the projects will provide after launch. Third, tokens are bought in order to support business initiatives and projects with high potential.
Participation in an ICO
How to launch an ICO?
Launching an ICO will allow to quickly raise money and avoid registering an IPO with regulatory agencies. Here are the first steps to create an ICO:
- Create the best team. A highly professional team, each member of which can be found on social networks, ensures trust from potential investors.
- Create a plan on a whitepaper with information about the project:
- Needs of the project, problems it will solve and technical aspects of the product
- Funding goal of the project
- Timing of the ICO campaign
- Currency of the ICO
- Amounts of tokens you are planning to keep. Normally from 10% to 50% of tokens.
- Create a test or a prototype of the product or service that will be offered
- Create guarantees for investors. Create Escrow wallets and a transparent procedure of returning funds to investors. Escrow wallets hold funds until the promised product or service is completed and the developer starts distributing the crypto currency and the coins become available for sale and exchange.
- Find the best professional platform for your ICO launch. These platforms are aggregators of different ICO projects and allow to launch at almost no cost.
- Create a strong PR support after launch. Early bird premiums for investors can attract the public, but constant communication via social networks and forums throughout the campaign will keep the heat up.
How to invest in an ICO?
- Chose the ICO you’re interested in and follow the links to its webpage. The ICO webpage will give details about participation in the ICO and an opportunity to sign up for updates.
- After selecting the ICO make a careful study of its whitepaper: make some research about members of the project, procedure of returning investments in case the enterprise is unsuccessful.
- Study the ANN – announcement on the announcement message board – it is the first message to appear about an altcoin to be launched. Read the questions and answers on the thread and join ICO forums.
- After you are sure that the selected ICO is trustworthy proceed with an investment on the ICO’s site. Check the currency the ICO accepts (Bitcoin or Ethereum).
- Create a wallet and make sure you have money on it before the ICO starts. The procedure of coin transaction is pretty similar to online banking.
Are ICO’s legal?
They are legal, but not regulated properly by the law. Companies and projects are relatively free to name their fund-raising operatives as donations or crowd funding. In this case they can avoid legal requirements that come with any form of a security sale. Only in July 2017 an influential financial authority Securities Exchange Commission (SEC) has started the first investigation of ICO sales by DAO (Decentralized Autonomous Organization), stating that capital raising through blockchain technologies doesn’t remove conduct from the purview of the U.S. federal securities laws. Further guidelines and enforcement proceedings against some ICO’s are yet to come. SEC also posted a bulletin warning investors to be careful in their investment decisions.
What are the risks of investing in ICO’s?
There is no guarantee that the product or project will take off in the end or meet the public’s demands, it can become a disappointment. Some companies may also launch ICO’s for projects they were never planning to develop. It is suggested to consider investments in ICO as donations that can be generously rewarded if the enterprise turns out be successful. With lack of legal regulation some ICO campaigns can be fraudulent. Before investing in an ICO search its name and check if has ever been stated as “con”, “scam”, “MLM”, “hack”. Always check the process of fund returning in the white paper.
ICO (An initial coin offering) –a way to raise funds from the public. A company creates a new bitcoin-like cryptocurrency and offers it for sale to the public. Sometimes ICOs are described as a cross between traditional public offerings and crowdfunding. In 2017, more than 70 startups raised money this way.
Token – is a form of a crypto currency in other words a digital coupon that is sold for fiat currency (USD, EUR) or crypto currency of liquid value (Bitcoin or Ethereum). Tokens can have various functions, for example, they can give access to services of the company, but not the ownership rights to it.
Blockchain – is a history of transactions that uses cryptography to link timestamped batches of events together in order to make it evident if tampering has occurred. Blockchain facilitates direct exchange of value between parties, without the need for a trusted intermediary. For example it means that in block chain digital code confirms transactions, while in traditional economy centralized authority validates a contract between two parties. It is important that data written to a blockchain can never be changed and is visible to everyone. Blockchain runs on an entire network of computers, meaning there is no single system that can fail or be compromised. But it is suited to storing small transaction records only.
Fork – is a technical event in a block chain, when two miners find a block at the same time. In result subsequent blocks are added to one block, while the other block gets abandoned by the network.
Hash function –is a cryptographic function that takes any text as input, then chops it up and returns a string of characters of a set length as output. For bitcoin mining, a specific hash function is used called SHA-256. The input can be any set of characters – from simple “hello world” to a Shakespeare sonnet. The output will always be a string of letters and digits 64 characters long that looks like this: e3b0c44298fc1c149afbf4c8996fb92427ae41e4649b934ca495991b7852b855
SHA stands for Secure Hash Algorithm. It was designed by the United States National Security Agency, but currently is in public domain.
Mining – is mining means searching for new blocks to continue the chain of bitcoin transactions. A chain of completed transactions is a block chain. Blocks are hard to produce. Miners have to compute a cryptographic hash of the block that meets certain criteria; typically a valid block must start with a certain number of zeros:
Many cryptographic hashes need to be computed before the right one is found. Miners run computer programs on specialized hardware that automates the process of securing the network. For each block of transactions validated, the successful miner receives bitcoin reward.
Blockchain scaling – reducing the time of operation needed for every transaction. Each transaction in a block chain is shared with every member of the network. This makes the transaction process transparent, but slow and uncompetitive with VISA or SWIFT. The problem lies in a parameter called the “the block size limit”. Its increase would lead to centralization of Bitcoin since only big company’s would be able to afford the storage space and computing power. This is contrary to Bitcoin’s idea and philosophy.
Smart contracts – digital contracts, blockchain contracts, also called self-executing contracts – computerized transaction protocols that execute terms of a contract. These contracts are converted to computer code, stored and replicated on the system and supervised by the network of computers that run the block chain. In other words, the system of smart contracts automates the process of legal interaction between the two parties: upon completion of the terms of the agreement automatically transacts the payment. Smart contracts are needed for avoiding third parties, cost reduction, cutting legal red tape and time needed for each transaction.
Crypto currency – is a digital or virtual currency, an alternative to fiat currencies and centralized electronic money. The underlying technical scheme for crypto currency production is based on hash functions – mathematical operations run on digital data. Thus, each unit of crypto currency is an encrypted code. Crypto currency helps to secure transactions and it’s a cheaper way to produce money. Anyone can buy crypto currency on specialized sites after creating a wallet in the internet. The first crypto currency to appear was Bitcoin.
Altcoin – Any crypto currency except Bitcoin, which is positioned to be better than Bitcoin and is aimed at replacing it. There are hundreds of altcoins, some use the same hashing algorithm as Bitcoins (Namecoin), others use scrypt algorithm like the popular Litecoin. There are crypto currencies using innovative hashing algorithms – Ethereum is Bitcoin’s biggest rival.
SCAM (“con”,“MLM”, “hack”) – A fraudulent or deceptive company that is using an ICO model to raise funds with no intention to proceed with the project development.
ANN (announcement on the announcement board) – is the first message to appear about an altcoin to be launched.
Whitepaper – is an official document released by the company that is planning to launch an ICO. The document provides potential investors with information about the project, the market and potential risks. The white paper is needed to pursue investors in funding the project and normally answers why the product needs a token, which services will be available for tokens, why the demand of these services will grow in the future.
Escrow wallet or escrow account – a financial arrangement where a third party holds payment of the funds required for two parties involved in the transaction. It’s a transparent procedure of returning funds to investors. Escrow wallets hold funds until the terms of the agreement are completed, after that the payment becomes available (e.g. new altcoins become available for sale and exchange).
History of the question in milestones
2008 – a software developer Satoshi Nakamoto proposed an electronic payment system based on mathematical proof. He called it Bitcoin and suggested it to be a new digital currency that is produced thanks to mathematical formulas and specific software programs. Nakamoto argued that Bitcoin allows to avoid digital currency to be spent in two places. With Bitcoin one entity could confidently transact value directly with another entity without relying on a third party.
2012/2013 – Blockchain 2.0 appeared as developers understood that underlying Bitcoin technology can be used for all kinds of other cooperation.
2013 – Mastercoin launches its crowdfunding campaign on Bitcointalk forums. It was one of the first projects to use an ICO. Mastercoin was also one of the first attempts to suggest altcoins and use a meta-protocol written above Bitcoin blockchain with an aim to provide additional features to Bitcoin.
2015 – a second-generation block chain system called Ethereum is launched. Ethereum’s innovation is based on smart contracts and enables to validate deals, payments and contracts without using traditional legal procedures with the help of blockchains.
2017 – the crypto currency market is facing two main problems: legal regulation and block chain scaling process development. The resolution of the latter is crucial for the future of crypto currency in the face of Bitcoin centralization.