There is nothing new under the sun. There is something that they say: “Look, this is something new,” but in fact, it was already in previous centuries. This is what the ancients said, and it is difficult to disagree with this. Yes, mankind has made significant advances technologically, but the basic principles of economic and social relations have not undergone fundamental changes.
The launch of business projects based on the latest developments is carried out by old proven methods that were used in ancient Babylon but became more widely known after the creation of commodity exchanges. We are talking about the sale of shares of commercial enterprises, or rather about their analog in the field of the crypto industry, which is ICO projects.
What is ICO: detailed analysis
ICO is a type of investment attraction by the creators of the new cryptocurrency of the project. And if an ICO is similar to the placement of securities on a trading floor, then what are ico tokens, if not the same shares that were sold on the London Mercantile Exchange 300 years ago. The only difference is that if earlier investors who wanted to increase their capital were offered shares in gold and silver mines, then in the era of the formation and development of blockchain technologies, owners of digital assets are offered tokens of a new virtual coin that is almost unknown to anyone in exchange for bitcoin or ethereum.
The abbreviation ICO stands for Initial Coin Offering, which translates from English as the initial coin offer. These virtual coins are called tokens. Miners and master nodes do not participate in the preliminary release of coins for ICO, all costs are borne by the administration of the project.
By producing and exchanging their own digital tokens for popular crypto coins (BTC or ETH) or traditional money (US dollars or Euro currency), the developers of the new ecosystem receive the additional funds necessary to start and successfully develop the project. Often, the ICO is carried out at the very first stage and all the assets received go to ensure the final stage of development, or are sent to a reserve fund created for long-term support.
Key differences between ICOs and IPOs and CEOs
ICO projects are really very similar to IPO ( Initial Public Offering ) public offering of shares on the stock exchange. But keep in mind that the presence of tokens, most often, does not give ownership of the company’s property and the receipt of dividends. Your profit only depends on the increase in the value of the new altcoin on the trading platforms. In addition, IPOs are accepted by large investment funds and companies with large capital, ICO in this regard is more democratic both from the legal and financial side.
In order to start the process of selling shares, it is necessary to meet a number of stringent criteria related to:
- The authorized capital of the enterprise.
- The amount of cash collateral.
- Duration of the firm’s existence
Financial and economic expertise is required, naturally at the expense of the organizers of the new project. In fact, the IPO, due to bureaucratic obstacles, has become almost inaccessible for young businessmen seeking to start a business from scratch. It is more convenient for large corporations to sell the entire block of shares at once than to fiddle with small investors. As a result, there was an outflow of investments from the securities market into the crypto industry.
IEO (Preliminary Exchange Offering) can be called one of the forms of ICO campaign. But unlike the traditional sale of tokens before the launch of a new startup on the exchanges, if an IEO is launched, they immediately begin to be sold on one of the trading platforms and it becomes easier for potential investors to form an opinion about the prospects of the startup.
Nevertheless, ICO is in demand among investors, let’s see is the reason for the ever-increasing inflow of capital investments in projects related to blockchain technologies.
Reasons for the popularity of ICO
Selling tokens is much easier than stocks and income from investments in cryptocurrency networks is often several times higher than that of securities holders. The risk is quite high, but he who does not take risks does not win.
ICOs owe their popularity to the acceleration of the development of digital payment systems, after the release of the first bitcoin cryptocurrency, and then the Ethereum ecosystem, which makes it possible to conclude smart contracts. Many tokens were created on ERC-20 .
In the current period, the market capitalization of Bitcoin is 185 billion dollars, this figure reflects the scope of the cryptocurrency project. More and more inhabitants of the Earth believe that digital money and blockchain technologies are the future of our civilization and are ready to invest in cryptocurrency.
During the ICO, virtual tokens are sold at a price below the potential value of a new altcoin on exchanges. In addition, full anonymity is provided to depositors.
For organizers, ICO projects are an excellent opportunity to receive financial support without bureaucratic delays and debt obligations. If your idea grabs attention, you can create a new blockchain ecosystem without your own funds. It happens that even billionaires, for example, Richard Branson, participate in ICO campaigns. Such cases are highlighted in the media, which immediately attracts the attention of potential investors and increases the degree of confidence in both a specific project and decentralized payment systems in general. And it is not at all necessary to spend large sums, the minimum investment can be as little as $ 10. In addition, by taking part in the development of the project, you can receive a reward in tokens through the Bounty system.
How to make an ICO, what you need to know
There is no legal basis for this procedure, and any company or even an individual can assume the role of initiator of the initial token offer. Audits and share capital are usually not required, most of the work is done online.
The process and stages of entering the ICO
The main thing that you must-have for an ICO is a new idea. It is for its implementation that money is collected. The procedure is divided into several stages.
- Presentation. Tell the crypto community in general terms about your idea, analyze the level of interest and the willingness of potential contributors to fund your project. The announcement is carried out through Internet publications, social networks, and in the form of direct communication at conferences.
- Publication of the offer. An offer of cooperation can only come from a legal entity, so a private programmer cannot do without being attached to some organization. It is necessary to announce the specific dates for the launch of the new blockchain network, the amount of money required for this, and the total number of tokens issued. For preliminary fundraising, private sales can be organized, and the collected assets are used for the official start.
- Advertising campaign. At this stage, there is a comprehensive presentation of the finished product. The technical details are revealed, the benefits of using it are described, the conditions for the purchase of tokens are published. There are analytical platforms, for example, the English-language I bench or the Russian Neironix, through which the ICO is entered. Both developers and those wishing to profitably invest in a new crypto project are registered on these sites.
- At the beginning of sales, trading takes place both within the network and on cryptocurrency platforms.
Both the developer and the potential investor need to know the unspoken rules of ICO etiquette.
- It is necessary to clearly explain to investors why they should invest in this project.
- The development model and technical features are presented.
- The specific amount of money required to launch the network and for what purposes they will be spent is indicated.
- The startup must have a beta version and a public development team
- The mechanism for extracting tokens and the value of these coins within the ecosystem should be described.
- The money received during the ICO goes to Escrow accounts, that is, a third party accepts the investors’ money and not the project administration.
Special terms used in ICO.
- Pre-ICO (Pre-Sale) fundraising for the ICO itself. During this period, tokens cost less than after the launch of the main campaign.
- CrowdSale (crowdsale) is a sale of coins, the term is used by startups due to the drop in confidence in ICOs due to a large number of scammers.
- Bounty is payments from the ICO administration for participating in an advertising campaign. For example, for a subscription and a certain number of publications on the Telegram page, and other social networks and forums.
- White Paper (white paper) – these are materials for acquaintance with the project. They set out the idea of creating a crypto coin and development prospects. For the preparation of the White Paper, consultants from outside are often invited. The success of the ICO largely depends on this document.
- DAO is a decentralized network that supports crowdfunding (ICO) based on smart contracts of the Ethereum platform. It was after a large amount of money was stolen due to errors in the program code of this project that the network split and the Ethereum Classic cryptocurrency appeared.
- A roadmap is a development plan for a startup, it contains a complete chronology of the development of the project. Completed stages, the current state of affairs, and plans for the future.
- Jurisdiction, each project must have a place of registration. Usually, this is one of the countries with favorable conditions for the development of the blockchain industry, for example, Singapore or Estonia.
- Scam is a project with no future, launched for the banal theft of depositors’ money.
To some extent, ICO is a blockchain casino, the one who bets on the correct number will break the bank. But, unlike a gambling house, you can try to predict carefully the long-term prospects of a new startup by studying the documentation. True, without special education and experience in this area, it is impossible to determine with certainty what a particular ICO is.
Examples of successful ICOs
In the most successful cases, the profit of investors is from 100 to 1000% per annum. An example is the following projects:
Several opposing examples should be cited.
Tezos, a smart contract network touted as the killer of the ETH platform. In the course of sales, $ 200 million was raised, but the launch was constantly postponed and as a result, everything ended in a lawsuit. Disappointed depositors demanded to return the money.
Confido. The organizers of the Confido startup managed to disappear with $ 375 million. Later, other members of the project team announced their readiness to return the investors’ money, but nevertheless, this precedent undermined the confidence of many people in the ICO.
PlexCorps. The project was frozen by the decision of the US Securities Commission (SES). The organizers were charged with fraud and it was not surprising, during the advertising campaign the investors were promised 15,000% per annum. By that time, $ 15,000,000 had already been raised.
Due to the rather frequent cases of fraud in the initial coin offering, the issue of ICO regulation is being carefully studied in many countries. SEC can recognize tokens as securities, thereby equating ICO to IPO with all the ensuing consequences.
The regulatory package depends on local legislation and may include:
- Mandatory verification of the identity of the initiators of the project.
- Providing White paper.
- Strict requirements for the roadmap.
In some cases, the development company may be required to provide material support or limit the maximum amount of investment.
Stricter requirements for depositors are also allowed. The maximum allowable amount for the purchase of tokens is established, depending on the legal status and experience of the investor.
Detractors draw parallels between the ever-increasing number of ICOs and the massive sale of shares in Internet companies at the end of the last millennium, which culminated in an economic bubble called the dot-com crisis. The value of the securities of enterprises focused on doing business on the World Wide Web has skyrocketed, but it all ended in a massive loss of money by depositors. New business models proved to be ineffective, and the proceeds from the sale of securities were spent on advertising campaigns.