From the roots of Bitcoin, the blockchain industry is growing at a phenomenal rate. But it’s not just the technology that’s maturing fast, the start-up financing and investor opportunities around it are rapidly evolving too.
Spend a few hours in any online crypto forum and you’ll quickly begin to think the world of big tech stocks and IPOs is old hat. For many, the biggest buzz in digital these days is investing in new cryptocurrencies and crowdfunding emerging crypto projects.
For IPO, read ICO. That’s right. ICO stands for Initial Coin Offerings and it is effectively crowdfunding for new crypto-based start-ups and initiatives. It gives you the opportunity to invest in a new crypto project by buying tokens. The start-up team then uses that money to develop their idea into a fully-working product. And you could benefit by seeing the value of your tokens rocket upwards in price. That’s the idea anyway.
ICOs have been gathering pace for a couple of years now and are generating some huge investment numbers. But are they worth your attention and, more importantly, your investment?
Our guide gives you the inside track on the ICO ecosystem to help inform your crypto investment strategy. We’ll take a look at the dramatic rise in popularity of ICOs, explain the typical ICO process and warn you against the scams and pitfalls you might encounter in this unregulated environment. But first, let’s start with the ‘need to know’ essentials for all aspiring crypto investors.
ICO Essentials – 10 Things You Need To Know
- Mutual benefits
An ICO is a great way for ambitious start-ups in the crypto space to generate considerable funds to help them develop their business idea. It’s also potentially a great way for investors to buy into a new business idea very early at a low price and sell for a profit should that start-up become a roaring success.
- ICO versus IPO
ICOs are often compared to IPOs (Initial Public Offerings), perhaps because the latter is a more commonly understood concept. But they’re actually quite different. When you acquire tokens through an ICO you generally don’t gain part ownership of the company as you would in an IPO – It’s not equity-based in that sense – but you get to buy the tokens at what may turn out to be a very low price.
Because of this distinct difference between ICOs and IPOs, or crowdfunding for that matter, an ICO is sometimes referred to as a ‘Crowdsale’. The company sells its own cryptocurrency tokens to raise funding, usually in exchange for Bitcoin, Ethereum or US Dollars.
- The first
It’s widely recognised that the first project to ever launch an ICO was Mastercoin in 2013, which secured $5m worth of Bitcoin through sale of its own tokens.
- The biggest
Many companies quickly followed suit on the back of Mastercoin’s successful ICO. Ethereum raised $18m in 2014. The Ethereum-based business management platform Aragon pulled in almost $25m in just 15 minutes when it ran its ICO in May 2017. But just a month later, Bancor, which enables the creation of smart-tokens, attracted an incredible $150m. And the records are set to continue tumbling!
- How it works
If a start-up firm wants to raise money through an ICO, it usually creates a plan on a whitepaper and a set of initial product specs and prototype code to evidence some early momentum. The project plan will typically explain the concept, the potential business value, how much money is required to launch the venture, how many of the virtual tokens the start-up team and early investors will get, how long the ICO will run for, and so on.
- ‘Failed’ ICOs
If the budding start-up team doesn’t secure the minimum funds they need to progress, the money is returned to those that did back the project and the ICO is deemed unsuccessful. They may of course then regroup, bolster their project plan and run another ICO when ready to do so.
- Rules and regulations
Unlike an IPO, there is little or no government regulation of an ICO. This has led to a raft of ICOs sprouting up at will, which can mean a multitude of great investment opportunities and fast-track blockchain development per se, but it can also foster an environment for unscrupulous parties – hackers and scammers – to operate in.
Heads are easily turned by the mind-boggling growth numbers in Bitcoin and Ethereum. Everyone wants to invest early in ‘the next big thing’. Scammers can prey on such naivety and greed. With very few hoops to jump through it’s easy for someone to cobble together a handful of visually impressive web pages, fill it with ambitious marketing prose and take your money and run.
- Play safe
We explore the fraudulent side of ICOs in more depth later on, but for now we’ll highlight just a few of the key warning signs to watch out for when researching an ICO: A viable project is likely to have a detailed and realistic roadmap, transparency by way of code snippets or beta releases and ideally some level of independent community support for their idea. If they don’t have all these in place, be careful.
A short history of ICOs
ICOs are still a relatively new concept. The first ICO – for Mastercoin – only ran in 2013. Then again, a few years can be a long time in blockchain. Indeed, since then we’ve seen the number of ICOs steadily grow. There are currently around 20 ICOs globally each month, sometimes significantly more than that, and it looks set to increase over time.
The record-breaking numbers have been rolling by thick and fast since Mastercoin secured $5m. Lisk also raised $5m, Waves pulled in $16m, then Brave generated $35m in under 30 seconds. Bancor, as we mentioned earlier, hauled in an astonishing $150m. The leaps are getting larger.
But it was arguably the Ethereum ICO in 2014 that changed the blockchain and ICO landscape the most. That particular ICO raised $18m – far short of the funding volumes we now see but considered a huge amount at the time. Ethereum unleashed the power of smart contracts. This opened the door for a new wave of innovation and, with that, ICO campaigns. You could say Ethereum became a distributed platform for crowdfunding and fundraising.
The Ethereum ICO and subsequent stratospheric rise in demand for Ether saw those early token-snatchers sitting on an enormous potential profit. At ICO, Ether was sold for 0.0005 bitcoin. Fast forward three years and its price had shot up by a mesmerising 10,000%.
Augur token enjoyed a rise in value of around 500% post-ICO. Not quite in the same league as Ethereum but still eye-catching enough and such back-up stories started to give credence to the notion that Ethereum wasn’t a one-hit wonder – there could be a conveyor belt of success stories and untold riches awaiting those in the know. If only…
With such figures being thrown about, the curse of human nature is to think ‘what if…?’ And so inexperienced traders and crypto novices suddenly wanted to plunge £1,000 into the next random ICO in the hope it transformed them into a millionaire, if not overnight then within a year.
With such emotionally-driven, irrational demand there’s always likely to be a gaggle of unscrupulous characters ready to take advantage. In ICO territory it has been relatively easy for such characters to do just that. They simply fashion together a glossy website and laden it with superlatives to befuddle and impress the unwitting newbie. Before you know it, they may have gathered an investment pool of several hundred Bitcoin, closed the site down and vanished.
This is where any comparisons between ICOs and IPOs can be extremely dangerous. IPOs are heavily regulated by the government. A company looking to hold an IPO has to prepare a vast quantity of paperwork and go through numerous submission phases and audit processes before they can possibly release shares on a stock market. Cryptocurrency crowdfunding is totally new and largely untouched by government.
Thing are improving and viable start-ups looking to hold ICOs nowadays will tend to do a lot of work to evidence their credentials and potential. They often store the contributions from its community members in escrow wallets. To access those funds, the owners need several private keys – and one of the keys may be owned by a trusted independent third party. They may also establish a legal entity for the company and draw up a detailed set of binding terms and conditions for the ICO.
If you’re looking to contribute to an ICO, we would urge you to be extremely cautious and carry out your own extensive research before committing funds.
In most cases, the crypto-tokens that are available during an ICO are sold at a fixed price – usually in Bitcoin or US dollars. As you’d expect, that price is likely to be very low in the grand scheme of things. After all, the ICO team have very little of value yet and are reliant on your trust and faith in their abilities, as well as the project idea itself, to generate the funds they need to continue operating. Should they raise the funds and develop their idea into a working product of real-life value, then you could see the price of your tokens rise considerably. But that’s not a given.
CoinMarketCap lists almost 1,000 cryptocurrencies. Conservative estimates might therefore put the total number of crypto projects currently running or being imagined in the thousands. It makes sense to assume that not all these projects will even result in a completed working product or fully-formed and proven end-to-end concept, let alone be a hugely successful one. So for every big story like Bitcoin or Ethereum, how many failed projects will there be? 100? 1000? We simply don’t know. But it does suggest the need to pick your ICOs carefully, look for sensible diversification if you’re keen to invest in these extremely early-stage businesses, and be prepared to see most initiatives come to nothing.
With so many unknowns, we believe it is likely that many crypto traders will balance their appetite for ICOs by continuing to trade and invest in the emerging and the more established crypto entities. There are hundreds of projects that are now past the initial fundraising stage and, of course, some that are on the cusp of mainstream appeal. Bitcoin, Ethereum and the like have seen explosive growth in value and, while volatility is calming to an extent, there may still be potential opportunities to profit, whether it be from short-term trading or investing for the longer term.
If you’re looking to take the next steps towards ICO-investing, or to accelerate your knowledge of crypto and blockchain developments more broadly, there are a number of excellent resources you can tap into.
First off, there’s our very own eToro crypto community. We have many highly experienced crypto traders across our global network of 6 million divulging their own insights and passionate opinions online, day in day out. Take a look at our Bitcoin and Ethereum feeds and market pages to get started.
Elsewhere, you should find excellent information and research data at the following websites:
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
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