Everything you Need to Know about ICOs
An ICO, which is the acronym for “Initial Coin Offering”, is a method of fundraising in which a new cryptocurrency project will raise money by selling their underlying crypto tokens for Bitcoin or Ether. It’s a new method of crowdfunding made possible with blockchain technology, presenting immense opportunities for entrepreneurs and new projects which before were not possible.
People participate in ICOs because they present an opportunity to buy the projects underlying crypto tokens at a discounted price. When the project launches and makes their crypto tokens available to everyone through exchanges, the price of the project’s crypto token will hit exchanges higher than the ICO price and will either go up or down from there. Therefore, investing in ICOs are of high risk, but also present a potentially very lucrative investment opportunity.
So now that we know what an ICO is, how exactly does it work? First off, the developers and marketing team will announce their new project and generate interest and hype around it. They do this by reaching out to the cryptocurrency community and presenting their whitepaper. A whitepaper is an academic document detailing everything you need to know about the cryptocurrency and the overall project. This includes technical, financial, business, and fundamental details regarding the project.
Next, the project will release details of their ICO. Which includes; when and how long it will run for, the total number of tokens, number of tokens to be sold, the price of the tokens, how long buyers must hold their tokens for, and which platform the project will be launched on, (more parameters may apply). Once the ICO is commenced, investors will be able to send either Bitcoin or Ether to the projects public address and in exchange receive the ICO tokens.
What is an ICO rating?
Upon investing in an ICO, it’s of the utmost importance to research and understand all aspects of the project to minimize your risk and choose viable projects to invest in. After all, there are many scam ICOs and poor projects out there, so it’s important to know what you’re investing your money into. One aspect of researching the quality of an ICO is to review the ICO rating. An ICO rating is based on an unbiased and clear assessment of a project which takes into consideration various aspects of the project and its ICO. For instance, an ICO rating takes into consideration; (the projects technical features of its platform, the team behind the project, the business model, the strengths and weaknesses of its decentralized structure, its use case, the problem it solves, etc.) By analyzing these aspects in an unbiased, transparent and reliable way, an ICO rating can be created to represent the projects potential and associated risks.
What are the requirements and regulations for an ICO?
ICOs operate in a decentralized nature with no central authority due to them running on the blockchain. Therefore, ICOs in large are not regulated. However, some governments such as China outright ban their citizens from participating in ICOs. As well, other governments such as the United States threaten strict regulation from the Securities and Exchange Commission (SEC). Therefore, many ICOs are not available for U.S. investors because of the risk of being labeled and governed as a security in the United States. As for the rest of the world and in some cases the United States, ICOs can legally be carried out in an unregulated gray area. However, this may change as the cryptocurrency ecosystem matures and gains mainstream adoption. To prepare for impending regulation, many ICOs now require investors to comply with KYC (know your customer) and AML (anti-money laundering) laws. Therefore, in some cases, ICO investors must submit identification and banking information.
How is an ICO price calculated?
Determining the ICO price of a cryptocurrency is dependent on a variety of metrics which affect each other tremendously. For instance, the ICO price is dependent on the amount of money they wish to earn during ICO (ICO hard cap), the total number of tokens (max token supply), number of tokens to be allocated during the ICO and after (token sale allocation), expected market capitalization, ICO length of time, lockup periods and bonuses. All of these aspects must be taken into consideration when determining the ICO price of a cryptocurrency. As well, in most cases, the ICO price of the tokens being sold will be very low at the start of the ICO and increase in stages as the ICO is carried out and the tokens are bought up.
With all these metrics to consider, the price of an ICO can be very complicated and the calculation process varies between projects. However, a good indicator to determine a fair ICO token price value is to make a simple calculation based on three things 1) ICO Hard Cap 2) ICO Token Allocation and 3) ICO Bonus Percentage. See the calculation below.
Token Price = (ICO Token Allocation * (ICO Bonus Percentage / (100 + 1))) / ICO Hard Cap
What an ICO Token is and what an ICO Token Sale is?
During an ICO token sale, investors will buy the ICO token in exchange for another cryptocurrency, usually Bitcoin or Ether. The ICO token is not yet considered a cryptocurrency like Bitcoin or Ether because it has yet to be launched and is not in use. Therefore, it remains as an ICO token until it can be traded and exchanged with other cryptocurrencies or is used in the project’s ecosystem. The ICO token sale is the process in which ICO tokens are distributed to investors partaking in the ICO.
What is the benefit of doing an ICO?
ICOs are a revolutionary method of raising funds for a new project or business. They take crowdfunding to a whole other level and allow people from all over the world to easily participate and invest. ICOs have gave birth to a number of start-ups which would have never been possible through traditional forms of funding. As well, the ICO model generates an immense amount of network effects, allowing these projects to faster develop their open source blockchain technologies. All in all, projects who conduct an ICO better set themselves up for massive success.