According to Investopedia, “An initial coin offering (ICO) is the cryptocurrency industry’s equivalent to an initial public offering (IPO). A company looking to raise money to create a new coin, app, or service launches an ICO as a way to raise funds.”
This way, investors who are interested in the project can buy into the offering and receive the coins issued by the company. When we talk about coins or tokens, we may think them as the equivalent of shares during and IPO.
So far, nothing intricate. However, having some previous understanding regarding mechanisms (understanding of how to use cryptocurrency wallets and exchanges) and key information about the project are a must when investing through an ICO.
How do ICOs work?
When a project or company intends to raise funds, one of the key elements that will be part of the process, is the so called “White Paper” (One of the most famous cryptocurrency whitepapers is Bitcoin: A Peer-to-Peer Electronic Cash System, which was published by Satoshi Nakamoto in 2008), outlining what the project is about.
These documents, generally provide statistics, diagrams, facts to convince investors to acquire the coin. They may outline what technology is behind the project, what problems it intends to solve and how the team plans to do it, how much money is needed, how many coins the team/founders will keep, how many will be used for marketing activities, what type of money will be accepted and a detailed roadmap drawing a timeline to show project’s goals and following stages completion time. Consider a few dozen pages as a good sign.
As we can see, White Paper and roadmap are key elements that provide investors with certainty at the time of selecting a promising project to invest in.
During the ICO, investors buy some of the project’s tokens with fiat (a government-issued currency that is not backed by a commodity such as gold) or digital currency. The money may be returned to the backers/investors if the amount raised does not meet the minimum funds required by the company and the ICO would be deemed unsuccessful. If the funding requirements are met within the specified timeframe, the money raised is used to achieve the goals of the project outlined in the roadmap.
Advantages of investing during an ICO
Early investors are usually motivated to buy tokens at a discount and in the hope that the company’s plan will succeed after it launches. If this actually happens, the value of the tokens they purchased during the ICO process will jump higher than the price set during the ICO itself, and therefore boosting investors’ gains. The potential for very high returns is the primary benefit of an ICO.
How to spot the right ICO
If possible, know the developers. Investors should aim for 100% transparency from a project/company launching an ICO process. Having the right Whitepaper is key, meaning that project developers can clearly define what their goals are. Successful ICOs usually have straightforward and understandable whitepapers. Pay attention to legal terms and conditions established for that specific ICO. Crypto space generally do not fall under regulatory scrutiny. Finally, be sure that ICO funds are stored in an escrow wallet (multiple keys needed in order to be accessed).
Paying attention to these basic suggestions, will in part contribute not to fall for scams.