ICO Investing 101:Be Smart And Avoid Costly Mistakes
What Is an ICO?
ICO is an abbreviation for Initial Coin Offering. Simply explained, ICOs are a way cryptocurrency investors can sell their underlying crypto tokens for ether and other cryptos and raise funds.
If you’re familiar with an Initial Public Offering (IPO) in which investors buy shares in companies, you’ll have a good grasp on how ICOs work from a financial standpoint.
IPOs are used by public companies to sell shares for the first time and raise some capital for reinvesting and growing their company.
An ICO is similar, just in the cryptocurrency space. You can look at it as a crowdfunding project through creating and selling digital coins or tokens to fund further development in the same way.
The main advantages to launching an ICO is how quick and accessible they are. Anyone can invest in one without going through the red tape and financial scrutiny of a bank loan or vetting a round of personal investors.
Another great advantage compared to IPOs is that in ICOs there is no minimum amount of money you have to invest, compared to IPOs that you need millions of dollars in order to participate.
The main disadvantage therefore is that there is a higher risk when investing in an ICO as opposed to an IPO.
However, if you do your due diligence such as reading the whitepaper and getting to know the team behind the ICO better as I’ll explain later on, you will be able to make the best-informed decision and lower the risk.
What is the process of creating an ICO?
The first thing for the team is to announce the project they will be creating. This is a crucial step because they have to introduce their idea in an innovative way and convince people their product will be solving an existing problem and somehow differentiate from the competition.
The second and most crucial step is the creation of a whitepaper. A whitepaper is an academic document where they describe the purpose of the product, the problem it solves, the characteristics, the technology behind it and in most cases everything people need to know about the ICO process; the number of tokens, token price and token allocation.
It is very important to have a well written whitepaper as it is the document that everyone interested for the project will read.
The next step is to start building their project and have some prototype or MVP before doing the ICO. This is not obligatory, as we know a lot of successful ICOs have started with just a whitepaper but in most cases a prototype or MVP is developed before the ICO.
Next step is the token creation. At this point the team has to make some important decisions. They have to decide on the type of tokens they will create, the number of these tokens, the price and token allocation. Also, they have to decide on the date and length of the ICO. All these decisions are based on the funding needs of the project and the team’s market research.
Then they have to advertise their ICO and run it. Usually the team will hire some advisors and marketing specialists for this job. They have to create a buzz in the blockchain community and convince people that their product is something revolutionary. They do this by using paying advertisement and interact with the crypto community in places like reddit and bitcointalk. In certain cases, they might pay an influencer to vouch for their product.
During the marketing period the team will collect emails from potential byers and help them pass the KYC process.
Finally, they have to make sure everything goes smoothly during the ICO. The ICOs are broken into two parts the presale and the public sale.
Presale – This is the first part of an ICO that is designed for VC and big money. There is a discount on the price of the token with some additional bonuses most of the time. Also, there is a minimum contribution limit that can be as high as 100 ETH in certain cases.
Public Sale – This is the part where most people buy tokens and know as the actual ICO. There is a really low minimum contribution barrier 0.1 ETH in most cases and some times team sets a maximum contribution level if they think it will sell out in couple minutes.
What Is a Token?
I mentioned above, ICOs are used to create and sell digital coins and tokens. When investing in a project you’ll pay the developing team in Ethereum or other altcoin, and receive tokens to the same value in return.
Tokens basically represent any trad-able asset, so this means they can include other cryptocurrencies or commodities and so on.
Creating tokens is pretty straightforward on the Ethereum platform. There is a standard template on the blockchain to follow, so no need to modify codes or use any third-parties.
Tokens are divided into two main categories explained as follows (we will cover all the types of tokens in another article):
Usage tokens act as native currency and allow you to use a service (Ethereum Virtual Machine and the Bitcoin payment network) . You can exchange them for FIAT money or other tokens.
These are the tokens you will buy during a currency ICO.
Work tokens give you give you rights within their native environment, they are not used as currency. You can use them to vote on certain decisions within their native environment and so on. You can earn these by doing a certain work depending on a DAO.
These are tokens you will buy during a project ICO
What is an ERC20 Token?
ERC20 Token standards are rules set in order all Ethereum tokens have a particular standard. While there is not obligatory to follow these rules the vast majority of Ethereum tokens are designed according to ERC20 standards so they can easily interact with wallets, smart contracts and exchanges.
These standards we mention above is a set of 6 functions when executing result in the 4 following activities.
- · Transferring the token between accounts
- · Get the balance of the account
- · Get the token supply (total)
- · Accept the token as a currency
How to Invest in an ICO
If you’re interested in investing in an ICO it doesn’t have to be as daunting as you may think. I’ve outlined a step-by-step process from buying cryptocurrency to finding and investing in the right ICO for you below:
Step 1 - Buying Ethereum
The first step is to buy some Ethereum. Ethereum is the second largest a trade-able cryptocurrency (behind Bitcoin), and most tokens can be bought with Ethereum.
The largest and most well-known online marketplace for buying Ethereum is Coinbase. Coinbase was one of the first on the scene, has a great reputation, and is trusted. So, it’s a safe bet if you’re a first time-buyer.
If you like to shop around however, there are other options. Gemini, BitPanda and Switchain are just a few of the many marketplaces you can buy Ethereum.
You may find they have lower fees than Coinbase as they are keen to compete for your business but the process will unlikely be as smooth or as fast.
Step 2 - Creating a Wallet
To make crypto transactions you need to set up a wallet. A cryptocurrency wallet is basically a virtual wallet, it handles your currency just as a real-life wallet does with physical monies.
Keep in mind that you cannot participate in an ICO by using your exchange wallet. (ex. Coinbase)
I recommend using MyEtherWallet. It’s a free, open-source, client-side interface for generating Ethereum wallets.
To prepare first time users for what to expect; when you set up a wallet you’ll be prompted to create a passport and set up a private key by downloading some files.
You’ll then be given a public address to access your wallet. All users in the network can see your address and all the transactions that go through your account as they are stored in the blockchain, but it’s anonymous so no one will know it’s you behind the wallet.
A word of warning - make sure you make a note of your private key somewhere safe as it’s the only way you can get access to your wallet.
We recommend to write your private key in a piece of paper and keep it somewhere in your house in case something goes wrong with your computer.
If you lose your private key you will never be able to access your currency. That’s right, your cryptocurrency (money) will be gone forever. It’s a painful lesson many have learned the hard way, don’t be one of them.
Step 3 - Finding an ICO
With so many ICOs to choose from and billions of dollars being raised each month, finding the right one to invest in is a daunting task for a lot of people.
As I explained above there is some risk involved when investing in an ICO, just as there is with any financial investment.
There are some basic questions to ask yourself however, and a few important due diligence points to tick off when evaluating each ICO.
The first thing you should do is read the whitepaper from start to finish. Each ICO will have a whitepaper outlining their business model, detailing the progress to date, projections for the future, how they intend to use their funds, and most importantly - explain why this is a project/service/idea that needs to be done on the blockchain.
If you’re not convinced that this is a project that belongs on the blockchain and has value to the end users, it’s probably not something you should pursue.
I always like to look at some key areas when evaluating an ICO:
The Idea - Is the idea for the project innovative? Does it solve a problem and offer value to users? Is it something innovative? How about the competition?
Most importantly is it an idea you fully understand and believe in?
The Team - You can have the best idea in the world, but without the right team to execute it and see it through to the end it’ll never work.
Ask some questions before investing. See how quickly the team responds and how knowledgeable they are. Check how often they provide updates, good communication is key to the success of any project.
Finally check their LinkedIn profiles, do they have experience on the industry or they are just opportunists looking to cash out on the cryptos hype?
The Community - There is strength in numbers with ICOs. How big is the community and what’s the morale like?
Get involved in the forums or groups where people are discussing the ICO, there should be Slack or Telegram channels too you can join.
There should be members of the team in with the community answering questions. See what you can find and you should get a feel for the ICO.
The Prototype - Well, this is debatable, but the point is that especially for someone that is starting to invest in ICOs you should not invest in an ICO without a prototype or an MVP.
You will have probably heard that most profitable ICOs have launched without an MVP but keep in mind that there are tons of others that launched without an MVP and you never heard of cause things didn't go too well for them.
Yes, you might lose some good opportunities if you apply this rule but you will reduce your risk significantly.
The Tokenomics - I will not get into much details about tokenomics here, as it is a subject that cannot be covered in a single article and we also talk about them in depth in our classes but you should pay great attention to them.
What is the hard cap, soft cap, token price, total token supply and what will they do with the unsold tokens?
Also make sure to check the rewards and bonuses.
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Step 4 - Whitelisting and Passing KYC
Next you will need to complete a Whitelist registration and a KYC process. Know Your Customer (KYC) is a process used to identify a buyer’s/investors residency and identity.
You will need to provide a copy of one or more documents that prove you are who you say you are. Usually a passport or an identity card is required, it depends on the KYC.
It’s a small ask and you need to remember this is for the greater good and your own protection. With the lack of rigid regulation governing ICOs validating a customers identity is a huge step against fraud, tax evasion, money laundering, and so on.
A Whitelist registration form is used to collect emails from potential investors of an ICO. It’s basically a way for you to put your name down to participate in the ICO you’re investing in and gives the team some numbers of the investors interested in the project.
Step 5 - Buying Some Tokens
When you have been through the previous steps and know the ICO you want to invest in you need to be prepared to buy tokens when they are live for sale.
ICOs will typically give you a date and time for when the public sale of their tokens will be live and give you their wallets address.
They will also make it as easy as possible for you via their interface (it’s in their interest to do so), so don’t worry about anything. But please check and double check everything before clicking send.
A tip from experience, be ready the moment the tokens go on sale and have your wallet settings already optimized and ready to go(more on this on another article).
A lot of good ICOs will sell out within minutes, and these are the ones you really don’t want to miss out on. Especially after spending all that time doing your due diligence on the project and going through the KYC and Whitelist.
All you need to do is send the Ethereum to their wallet address and wait for confirmation that the transaction went through.
Sometimes the transaction will be instant, sometimes it will take hours, days, or more. Keep in communication with the team and be patient.
Some of the most successful ICOs of all time
By the time i am writing this article everyone in the crypto world knows Ethereum, the smart contract platform with the second biggest cryptocurrency (ETH) with a market cap of almost $54 bn.
Ethereum's ICO happened in the summer of 2014 raising $16 million with the token price at $0.31.
NEO formerly Antshares is another example of a successful ICO. NEO is the first Chinese blockchain with the purpose of tokenizing proof of ownership.
NEO's ICO happened in two parts. The first one happened in October 2015 and gathered a bit over half million selling 17.5 million tokens and the second one happened almost a year later in September of 2016 where they managed to gather $4.5 million dolars by selling 22.5 million tokens.
Keep in mind that the price of a NEO token during the ICO was $0.032 and the price now is almost $40 .
This is a really interesting case study as it is one of the first ICOs and happened in a really different way from the ICOs we know today. NXT is a blockchain platform for financial services and DApps.
NXT ICO happened in September 2013 through Bitcoin Talk Forum!! They gathered $16.800, yes there is no typo here, they gathered almost 17 grand, but if you think that the token back then could be bought for $0.0000168 and the price now is $0.1133 you can understand why we consider it a success story.
Analyzing some of the most successful ICOs of the past can be really educating. Find the common characteristics they share and try to see if the ICO you are thinking to invest has them.