What is an Initial Coin Offering (ICO) and how does it work?
Learn more about what an ICO is and how to get involved.
ICO stands for “initial coin offering.” It’s a lot like an IPO (initial public offering), but for cryptocurrencies.
Buying a successful cryptocurrency in its ICO stage might be an extremely good investment. Just like someone who bought a lot of shares in Apple, Microsoft or Google might become a millionaire later as the shares increase in value.
For example, Ethereum started life as an ICO. Each Ether token was initially sold for 0.0005 bitcoin, but has multiplied in value since then.
How does it work?
An ICO is when a company sells a new cryptocurrency coin to the public for the first time. It’s designed to spread the new currency widely and make sure it has plenty of investors.
ICO scams and problems
It’s not all good news. There are countless ICOs happening all the time, and the vast majority of new coins won’t get very far. Some are even outright scams or ICO pyramid schemes, where people simply hype up and start selling worthless tokens.
However, there’s a lot of money to be made in ICOs, for both investors and new companies offering a new coin. By some estimates, 2017 saw more than US$3.5 billion pumped into ICOs.
If you want to strike gold in an ICO, it’s important that you know exactly what you’re investing in, and that you make an informed decision.
How to choose an ICO
The best ICO to invest in is one that you understand, can believe in and genuinely think will succeed.
Look for the professional coins that have clearly had a lot of work put into them, and avoid the shady “get rich quick” schemes. Here are a few tips:
- Understand what the coin is meant to accomplish. It typically needs to fulfill a function in order to become valuable.
- Look at the team behind it and what kind of experience they have. Avoid anonymous ICOs, and consider whether the team has the experience to successfully develop the coin.
- Look at how much research has been done for the coin. Each new coin should come with a published whitepaper which explains the technology and functionality of the new coin.
- Look at the long term plans. These will typically be found on the ICO website and in the whitepaper. The ICO team should have a clear roadmap for the future that extends months, or years, into the future.
- Look at the ICO terms and conditions. A legitimate ICO should make your rights very clear, for example the policies on refunds and coin ownership.
- Look at the coin supply limit. This is the total number of coins that will ever be minted. Consider the number of total coins that will ever exist, and how many are being released in the ICO. Make sure the price is an accurate reflection of the coin supply. Note that not all coins will have a supply limit.
How to invest in an ICO
Currently the most popular way to buy into an ICO is probably with Ether. This is because the Ethereum network is a very useful and flexible platform for creating new applications.
You’ll often see coins in ICOs specified as “ERC-20”. This generally means it can run on the Ethereum network, and can usually be held in an Ethereum-compatible wallet.
If you’ve found an ICO that you think will succeed, you might buy into it. However, before you do, check a few things:
- Check the dates. ICOs are limited offers only, with tokens only being available for a limited time. There are usually several weeks or months of advance notice ahead of ICOs, and a clear indication of how long it will run for.
- Check the prices. Consider the price next to the supply limit. To give you some perspective, bitcoin has a relatively low 21 million supply limit, while the Ether supply is unlimited, although its inflation is capped instead.
- Check the wallet requirements. You might need to download a new wallet to support the coin you’re purchasing, or you might be able to hold it in a current wallet.
- Look for red flags. These might be signs that an ICO is a scam, or that it’s just a rubbish coin which won’t go far.
ICO red flags: How to spot scams and junk coins
The number one rule used to be that if it seems too good to be true it probably is. But that rule doesn’t always apply to ICOs.
The most popular cryptocurrencies have years of development behind them, and today’s legitimate and successful ICOs might be aiming to reach maturity years later, with exceptionally ambitious goals.
Consider two real coins that sounded too good to be true. One is legitimate and the other was a scam.
IOTA vs PlexCoin
IOTA doesn’t use a blockchain. Instead it uses a “directed acyclic graph” network of its own design called a tangle.
Through this its developers promise to create a cryptocurrency network with:
- Zero transaction fees
- Infinite scalability for an endless number of users to get instant data transfer
- Potential compatibility with almost any device imaginable
It’s an ambitious project that uses buzzwords to make promises that sound too good to be true. But it’s also a legitimate, transparent and viable open-source project, and the value of IOTA tokens has multiplied since the ICO. Its ICO investors are probably very happy with their decision to buy.
Plexcoin is on the other end of the spectrum. It skipped over all the technical details and instead offered some fairly basic features, most of which already exist. All the details were vague, except its promise of a 1,354% return on investment in the first month.
This alone makes it almost certain that it’s an ICO scam. No legitimate ICO will ever guarantee a return on investment.
Its creators are also anonymous and there are no details of the team behind it. But if there were, they might show that “Plexcorp” was created by a Canadian businessman named Dominic Lacroix who has previously been charged with six counts of fraud.
Despite that, it managed to raise over US$15 million from unsuspecting investors afraid of missing out on the next big thing.
You can still find its website here, although you probably won’t be able to make an investment even if you wanted to. Its accounts have been frozen by the US Security and Exchange Commission (SEC), and its creator charged with illegally profiting from defrauding customers.
Look for signs of a scam, and indications that it might not be a very successful investment.
Scam ICO red flags
- Empty repositories for open source projects. This is when they claim to be open source but have no published documentation.
- No communication channels. Trust is crucial for an ICO, and a legitimate one should be ready to earn it by being easy to contact.
- An unknown team. An anonymous team that doesn’t provide their real world identities, or a group that doesn’t have any crypto-related experience among them probably won’t be able to create a successful coin.
Garbage ICO red flags
- Serves no purpose. Becoming valuable is not a purpose. A coin needs to be able to do something in order to become valuable. For example,one goal might be to become the native token of a revolutionary new system that offers real value to users.
- Imbalanced premine. The premine refers to the coins that are reserved for the development team, and set aside for them prior to the ICO. It’s meant to cover ongoing development costs. If too many are hoarded by the inside team, it suggests that they’re more interesting in getting rich quick than creating a usable system.
- No clear roadmap. There should be a clear series of objectives for the developers to achieve following the ICO, and estimated dates for completion of each.
- An inexperienced or unknown team. Creating a successful cryptocurrency isn’t easy. Most reputable ICOs will have experienced backers or developers who are willing to put their reputation behind the project, and have previous successes under their belt.
You should also look for ICOs that are committed to working in line with all government regulations where possible.
If they aren’t, the entire project might be on thin ice later, and prone to being shut down by regulators.
ICO laws and regulations
ICOs are getting regulated differently around the world. They might be off-limits to investors from certain countries, or might have their own terms and conditions to satisfy regulations.
For example, in China all ICOs were banned outright. In other parts of the world, an ICO might be classified as either a managed investment scheme or a share offer, and subject to the laws of each.
What happens when an ICO breaks the law?
It depends on the situation, but in the examples to date there are generally three potential outcomes:
- The ICO refunds investors where applicable and either shuts down or moves to work with regulations.
- Where there were clearly activities that were deliberately shady, those behind the ICO have been charged with fraud or similar. The difficulties around cryptocurrency mean investors are typically not refunded.
- The ICO takes the money and disappears without any consequences.
Whenever you buy into an ICO, remember that there’s always a chance of losing your money. With some due diligence you can minimise the chances of this.
How to find an ICO
Simply search for upcoming ICOs and you’ll find hundreds of them. Just remember that most of them probably won’t go too far. Look for the ones that offer more use, more practicality and show every sign of being set for success.
In many cases you’ll also notice that they only accept certain currencies. The most commonly accepted are Ethereum and bitcoin, so you might need to buy one of those first and then trade it for the ICO coin.
As the name suggests, Augur is a fortune-telling platform. It’s a decentralised platform built on the Ethereum blockchain to crowdsource predictions.
It allows its users to make predictions. They get rewarded for accurate predictions, and lose out on inaccurate ones. For example, users might wager 50c (in crypto money) on a sports match that has a 50/50 chance. If they’re correct they get back a dollar, and if they’re wrong they lose the 50c.
Collectively all these predictions have come together with an unusually high rate of accuracy, often with a higher success rate than any individual expert.
The Augur ICO ran from 17 August 2015 to 1 October 2015, during which it sold 8.8 million tokens at less than a dollar each (out of a pool of 11 million), to raise US$5.1 million
At the time of writing, at the end of 2017, each of those tokens is worth about US$29.
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