What is an Initial Coin Offering?
An investment savvy person is well aware of an Initial Public Offer (IPO), which is a type of public offering where shares of the company are purchased by institutional and retail investors. ‘Initial Coin Offering or ICO’ is relatively a similar concept where tokens are purchased with the underlying idea.
Cryptocurrency in itself is a revolutionary type of investment where many investors view this asset class as an unregulated security making it easy for the issuer to raise capital.
In simple words, ICO is a mechanism where the issuer will issue his token coins for an underlying product in exchange for cryptocurrencies such as Bitcoin and Ethereum.
Funds are mostly raised through ICOs when the product is in its initial stage. This makes ICO projects risky as a business since most investors cannot judge how a product will turn out to be just by looking at the idea.
Fundamentals of ICO
Whenever a crypto-firm wants to raise lump sums of money through an ICO for its project, it issues a Whitepaper which consists of all the details of the product.
The Whitepaper answers basic investor questions like how much time it would require to complete the project and how many funds would be needed to build the product.
Types of ICOs
Tokens can be generated through six different methods:
I. Capped Token Sale (First-come-first-served)
In this method, funds are generated to a certain limit. Tokens are distributed at a pre-determined price on a first-come-first-serve basis.
II. Uncapped Token Sale
In this system, investors can acquire as many tokens as they want. There is no limit on the funds that can be raised by an issuer. The token generation process continues for a longer term.
III. Capped Auction of Tokens
Along with the cap on the amount that can be raised, investors can bid on the price they would want to pay for every unit of the token and also on the total amount they hope to shell out.
Most Importantly, the price of the token is taken as the lowest bid received from investors and is in proportionate to the amount each investor is willing to spend.
IV. Uncapped Auction of Tokens
This system is the exact opposite to that of a capped auction of tokens. The price starts from the quote given by the highest bidder and the sale is directed at a declining rate of prices until all the tokens are sold. There is no limit on the capital that can be raised.
V. Capped Token Sale Structure with Parcel Limit
There are a lot of restrictions in this system. Not only are the price and amount of tokens to be sold fixed, but there is also a limit on the number of tokens an investor can acquire.
An investor is also restrained from carrying out a number of transactions. Undoubtedly, there is a limit on the number of funds that can be raised from the token sale with a parcel limit.
VI. Capped Token Sale Structure with Redistribution
Under this system, investors are granted the purchase of a predetermined number of tokens at a fixed price. Nonetheless, it shall equate to the amount they want to spend on such purchases.
Bids are invited from the investors to decide upon the amount they wish to spend. If there’s any excess money being received from the investor then it is returned to him.
Advantages of ICOs to Investors
ICOs are a different ballgame, unlike IPOs where investors get to hold a part of the ownership of the company to the extent of their shareholding. In ICOs, the subscriber will get new tokens in exchange for Bitcoins.
If the ICO is successful then the value of the tokens will increase substantially, making the subscriber wealthy in a short span of time.
After looking at the basic mechanism of the ICOs, we shall take a look at the most important part for crypto-investors.
There would be many tools that will help us understand the correct method to pick ICOs but all of those may be misleading or not very clear, drawing our conclusion to the fact of cryptocurrencies being a speculative investment.
The following pointers are a few tips to invest in an appropriate ICO:
1. BASIC Rule of Thumb
Before investing in any ICO, you need to have a stock of fundamental cryptocurrency (Bitcoin/Ethereum) in order to buy new tokens in exchange. In addition to this, an investor needs to sign up with a crypto-exchange and have a wallet.
2. READ, before Investing
Before choosing any ICO to invest in, one needs to read up on all the available information about it. Verification on the authenticity of an ICO must be done, usually by searching on the internet.
3. NEVER Invest Blindly
This is a no-brainer.
Carry out an accurate and detailed research on the development team behind the ICO. Try to get insights on their previous projects and their experience in cryptocurrency.
Make a background study on their level of knowledge, and the impact they have had on all their previous assignments.
4. Search for TRANSPARENCY
A genuine ICO team will look at engaging with their potential investors through interviews, or through social media.
Try interacting with the team, if possible, and seek out more clarity about the ICO through their press releases or via discussions with the other interested investors.
5. Check for Involvement of any Venture Capital Investments
Venture Capitalists or VCs are professional investors that provide funds instead of loans, where these investments require a high rate of return. It is for this reason that VCs are wary of what they invest into, and don’t fall for any traps.
Generally, VCs take calculated risks and only invest if they see potential returns from the project. Therefore, the involvement of a VC in an ICO will only increase its worthiness.
6. READ the White Paper
Never invest in an ICO without reading the White Paper. It is, fundamentally, the most important thing. The development team behind the ICO mentions all the objectives of their project and their plan of action to achieve those objectives, in their White Paper.
It also consists of the procedures involving how the tokens will be distributed, and at what price.
7. Browse on Open Forums
Be updated on the latest trends, and news regarding the ICO that you’re planning on investing in. Search engines like Google and Bing provide adequate information in this regard.
Planning on investing in an ICO? What are your thoughts on it? Let us know in the comments section below: