Initial Coin Offerings, often referred to as ICOs or token sales, can be considered as an alternative form of crowdfunding that has emerged outside of the traditional financial system. An Initial Coin Offering is an event that usually extends over a period of one week or more and in which everyone is allowed to purchase newly issued tokens in exchange for established cryptocurrencies like Bitcoin (BTC) or Ether (ETH).
This model has helped a lot of successful projects and companies get the funding required to start their business. In 2013, over US$5.1 billion were raised via crowdfunding worldwide, which increased to US$16 billion in 2014 and was estimated at over US$34 billion in 2015.
Here’s how Robert Hackett described it to Fortune: It’s sort of like an IPO, except for early stage blockchain projects. It’s effectively a Kickstarter campaign that uses blockchain-based “tokens” (aka app coins, cryptocurrencies, digital assets) to raise money.
EG: Bob, what is an ICO?
BH: It’s basically a way for blockchain startups to raise money outside the traditional VC world.
EG: Only blockchain startups?
EG: Are lots of companies using ICOs?
BH: One of the first projects to host an ICO was Mastercoin in 2013 (called OMNI since 2015). Ethereum had a particularly successful token sale in 2014, raising ~$18 million in bitcoin—although the project lost millions when the price of bitcoin crashed that year. The DAO, a decentralized venture capital firm built atop the ethereum network, became infamous after it raised something like $160 million in the summer of 2016 and soon after got hacked to the tune of $50 million. The number of token sales has been ticking up since the latter half of last year. Smith & Crown, crypto-market research firm, maintains a curated list of upcoming and recent token sales that you can check out here.
EG: Does this have ramifications outside the cryptocurrency world? Why should investors care?
BH: In my world, this is a big thing, yes. It’s how the most exciting blockchain projects are getting funded. Some VC firms, like Andreessen Horowitz and Union Square Ventures, have already gotten involved by funding cryptocurrency hedge funds to buy up tokens when they go on sale. A lot of crypto boosters compare the present time to the early days of the internet. There will be gold and there will be ghost towns. If you buy into the church of blockchain, then you’ll want to pay attention.
BH: Indeed. It’s sort of like an IPO, except for early stage blockchain projects. It’s effectively a Kickstarter campaign that uses blockchain-based “tokens” (aka app coins, cryptocurrencies, digital assets) to raise money.
How to Find an ICO Opportunity
The best way to find out about upcoming ICO’s is to do your own research. Most of the information is out there in the open market. Keep an eye out on social platforms such as Twitter where founders of ICO’s are likely to inform people about them. If you simply search “ico” into google you will find hundreds of articles. There is also a great Facebook page called “Cryptocurrency Collector’s Club” where there is ongoing discussion about cryptocurrency and of course upcoming ICO floats.
Buying into an ICO
Firstly I would not recommend investing in an ICO if you are not already familiar with cryptocurrency operations such as wallets, exchanges, fees and encryption. If you are okay at basic crypto procedures, then once you have found an opportunity simply head to that coins website. Yesterday I invested 2 ethereum into “Status”, a mobile application that integrates ETH technology. There was a large green button on the homepage which said “contribute”, once I clicked on that link an individual address was created for me to deposit funds into. You simply cannot however deposit funds from wallets such as coinbase or Poloniex. A supported wallet was needed such as MyEtherWallet or Mist. For 1 eth invested you receive 10,000 SNT (status) tokens. I essentially received 20,000 tokens, therefore worth about 3 cents each. I am now patiently waiting until the coin is released into the market which may take a few months.
- Gives you the opportunity to buy the coin before the general sale. So normally you buy a cryptocurrency by going on one of the exchanges such as Poloniex or Bitrex. This is the general sale, when its available to the open market. But in an ICO you are essentially buying it pre-sale, before it is offered on the open market. It gives you the opportunity to get the coin at the cheapest price as it hasn’t been put on the open market and it hasn’t been speculated or bought and sold (pumped and dumped).
- Generally once the coin is released onto to the market its price will increase dramatically due to flocks of purchasing by speculators late to the party and news articles that will further bump it up. I’m talking 3x to 10x in value, so get in early folks!!
ICO’s can be very risky, some coins that undergo the ICO process are never even released into the open market as the project or startup has failed, normally due to a lack of interest or issues in development. You are therefore essentially buying it on a complete punt, however most ICO’s will have a vision behind them and if you see that vision becoming a reality, thats when you should invest in the ICO. In other words only invest if you passionate about the idea. If you are in it just for the greed, you will only feel even more regret and hatred if the project fails.