What are ICOs?

ICO has been one of the buzzwords of 2017. Fast and easy money is always a magnet for attention and opportunists. After the succes of Etherum (more of that below), it’s no surprise that ICOs took off like a wildfire. While the ban on ICOs from China did hit the breaks a bit, the train doesn’t show marks of stopping anytime soon.

ICO means initial coin offering. It’s very similar to initial public offering, which is the very first sale of stock issued by a company to the public. It’s also similar to crowdfunding. If you’re not familiar with crowdfunding, here’s an excerpt from Investopedia for what crowdfunding is:

Entrepreneurs typically have found seed money to start a new business by taking loans from banks, family & friends, or by offering equity ownership in return for investment from family & friends or from angel and venture capital investors. Investment crowdfunding now allows a start-up to seek relatively small investments from a large number of backers when other fundraising options are not available or come with too much cost. Backers receive shares of the new company commensurate with the amount invested.

So an ICO is like an IPO, but without regulations (this will change in a big way) and with a crypto twist. Basically a startup that raises funds through ICO issues its own digital currency in exchange for other cryptocurrency, typically bitcoin or etherum.

First ICOs

It’s likely that the first cryptocurrency that raised funds via ICO was Ripple. It was in early 2013 when Ripple Labs started to develop the payment system called Ripple and created around 100 billion XRP tokens, which were sold to fund the development of the Ripple platform.

There have been many ICOs since, but one stands above them all. It’s Etherum. In 2014, Etherum Foundation sold ETH for 0.0005 Bitcoin each and raised almost $20m. It was one of the largest ICOs. Today, together with the ICO boom, the sums have vastly grown – Filecoin $250m, Tezos $232m, Bancor $153m (raised it in roughly 3 hours), Status $108m, EOS $185m, etc.

As Etherum unleashed the power of smart contracts, it opened the door for a new generation of ICOs. Many of the startups raising money via ICOs are built on top of Etherum. It’s also likely that the money flowing into these ICOs is due to early Etherum adopters making crazy return. Investors that made a lot of money on ETH will invest more in hope to hit another homerun, and people that missed out – they’re looking for their first jackpot.

Regulations (or lack of them)

First, ICOs are not regulated at the moment. It’s both good and bad. It’s good because less regulations means it’s cheaper to do an ICO for a startup and it’s easier to participate in one as an investor. Generally speaking, less regulations is good, but there’s a difference between few regulations and no regulations at all. Currently, ICOs are basically unregulated. How’s that possible?

Because the legal state of ICO is undefined. The industry is so new and has been small enough for law makers to discard until 2017, when cryptos seem to have blown up. The token is sold not as a financial asset but as a digital good like many other products or services. This means that in most jurisdictions ICOs are not regulated by the same tight rules as financial assets are.

This, however, will not last. There will be regulations, it’s only a matter of time.

While we do hope the lawmakers will not over-regulate the industry, it’s reasonable to have some regulations, as there are enough examples of scams or at least signs of bad intent. You can read this reddit topic, or this coinjournal article.

Before investing

You have to understand that most of the ICOs are promises. There’s no ready product. There’s a promise what the startup will do. Are they actually capable of doing what they promise? Do they intend to do it? This is for you to judge on case by case basis.

Here are few things you should look at when it comes to ICOs:

  1. Read the website and the whitepaper.
  2. Look at the team behind the company. The team is crucial. Google their names. What have they done before? Check their LinkedIn profiles.
  3. Look at the competitors and what competitors promise. What are the differences? Are there any? Do they have a better or more capable teams? Check both centralized and decentralized space.
  4. Join their Slack, subreddits etc of the company.
  5. How far are they with their development? Do they actually have any product or beta version available? If not, then it’s a lot riskier investment from the start.
  6. What is the ICO valuation (should be stated in the Whitepaper)? What’s the amount of the hard cap and what’s the % of the token ownership the ICO participants receive? Can the company generate more tokens as they want whenever they want in the future (it’s not a good sign)?
  7. Don’t fall into the trap of fancy list of advisors. While it’s definately a good sign if there are good advisors, they might be there mainly for the marketing purposes. Maybe they talked once, and that’s all.
  8. Try to understand the technology and business behind the ICO. Is there a market for it? Is there a network effect?
  9. Don’t fall for a fancy promotion and the talk about the “size of the market opportunity”.
  10. Investigate as much as possible about upcoming ICO which you want to participate in. Is it popular? Maybe there’s a presale – if it’s a popular ICO, you might want to get in early.

 

How To Participate in ICO?

1. Get some cryptos.

Register with one exchange, for example, Coinbase (receive $10 worth of free Bitcoin), and buy some cryptos. Most likely you’ll need ETH.

2. Register Your Wallet

Register your wallet. MyEtherWallet is highly rated wallet thanks to the excellent user interface. Transfer your coins from exchange to your wallet. Even if you don’t participate, you should still do it as it’s a lot safer than keeping your cryptos on an exchange.

3. Read the ICO Instructions

If you’ve joined the company’s Slack or any other media channel, then you won’t miss it. If you haven’t, most likely you’ll need to do some research. Anywho, the team behind ICO will publish instructions some days before the ICO takes place. Read it carefully.  Additionally, read the general terms of the ICO and the token purchase agreement.

4. Follow the Instructions

Do everything as said in the instructions or you will lose your investment. You will need to send ETH to the address specified in the instructions. You also need to set a proper gas limit. What is a gas limit?

Here’s an explanation from MyEtherWallet website:

The gas limit is called the limit because it’s the maximum amount of units of gas you are willing to spend on a transaction. This avoids situations where there is an error somewhere in the contract, and you spend 1 ETH….10 ETH….1000 ETH….. going in circles but arriving no where.

However, the units of gas necessary for a transaction are already defined by how much code is executed on the blockchain. If you do not want to spend as much on gas, lowering the gas limit won’t help much. You must include enough gas to cover the computational resources you use or your transaction will fail due to an Out of Gas Error.

All unused gas is refunded to you at the end of a transaction. So if you go to MyEtherWallet, send 1 ETH to out donation address ( ? ), and use a gas limit of 400000 you will receive 400000 – 21000* back. However, if you were sending 1 ETH to a contract and your transaction to the contract fails (say, the Token Creation Period is already over), you will use the entire 400000 and receive nothing back.

*21000 is the gas limit for standard transactions

5. When you send your ETH

There are different scenarios what might happen:

  • You’ll receive your tokens immediately after the token sale ends
  • You have to redeem your tokens manually
  • You have to wait few days for your tokens

6. Be careful

There are hackers that might try to change an address of the ICO address, for example by changing the website of the ICO team. This has happened in the past.

Where can I find ICOs?

There are different websites that list the upcoming ICOs:

 

 

 

Conclusion

ICOs definately remain an exciting opportunity for investors and speculators, and they will produce many jackpots together with many dissapointments. We urge you to do your research before contributing to any ICO, as this is the best protection you can have. There’s definately a boom in ICOs and correction will come. The really good companies that will emerge in the space will be good investments, whether it’s a boom or bust.