An initial coin offering (ICO) is a type of capital-raising activity in crypto and blockchain environment. The ICO can be viewed as an Initial Public Offering that uses cryptocurrencies. An Initial Public Offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance for the first time. However, there are differences between the two fundraising activities. ICO are not regulated by IPO does.
How Does an ICO Work?
An initial coin offering is a complex process that requires a deep knowledge of technology, finance, and the law. The main idea of ICOs is leveraging the decentralized systems of blockchain technology to raise fund for blockchain startups or projects.
For an ICO to be successful there must be information describing the whole activities happening in the company or the organization. Those information can be found in projects white paper.
What are White Papers? And What Purpose Do They Serve?
A whitepaper is a document released by developers that explains the technology and purpose of the project they are working on. It tells prospective investors how the cryptocurrency was conceived and highlights its purpose.
White paper provide investors with important information. This information will include, but is not limited to: what the project is about; what objectives the project will aim to fulfill upon completion; how much money is necessary to undertake the venture; how many virtual tokens the issuers will keep for themselves; what type of currency is accepted; how long the ICO campaign will run for; and who the team is behind the white paper. The company issuing the ICO prepares the white paper prior to launching the currency. The white is the crucial as many investors make decision based on what they read from the whitepaper .
Steps in Initial Coin Offering (ICO)
1. Identification of investment targets
Every ICO starts with the company’s intention to raise capital. The company identifies the targets for its fundraising campaign and creates the relevant materials about the company or project for potential investors. At this stage, the company or the project create the white paper detailing the token economics (Tokenomics), the intention , the future projection and revealing the team behind the project.
Tokenomics is a term that captures a token’s economics. It describes the factors that impact a token’s use and value, including but not limited to the token’s creation and distribution, supply and demand, incentive mechanisms, and token burn schedules.
2. Creation of tokens
The next step in the Initial Coin Offering is the creation of tokens. Tokens are representations of an asset or utility in the blockchain. The tokens are fungible and tradeable. The total number of token created is pre-defined in the white paper.
The tokens are created using blockchain platforms. The process of the creation of tokens is simple because a company is not required to write the code from scratch . Existing blockchain platforms such as Ethereum allow the creation of the tokens with minor modifications of the code. There some website that also facilitate token creation, you can create token by just filling a form .
3. Promotion campaign
At this stage , the company runs a promotion campaign to attract potential investors. The compaign runs on social media ads (facebook, instagram,youtube,…) Some campanies pay celebrities to advertise the ICO. Currently, Facebook and Google ban the advertising of ICOs. There are some online website that advertise ICOs.
4. Initial offering
After the creation of the tokens, they are offered to the investors. The offering may be structured in several rounds. Investors acquire the token by paying with cryptocurrency like BTC and ETH. Some ICO also allow investors to invest with fiat. The company can then use the proceeds from the ICO to pay developers and pays for any expenses relating to the project.
How to Join Initial Coin Offering?
Step 1: Do Your Research on the ICOs
As a crypto investor, you should always be doing some homework and research on a specific token before investing in any project. Do not invest because there is hype around the project. ICO is not regulated , anyone can issue it. You ought to be careful since there are bad actors in the space.
In your research, make sure there is transparency in the white paper. The white paper should reveal all necessary information. White paper should tell you everything you need to know essentially about the development team . If the white paper does not have details about token’s code or security features that’s a potential red flag and you should run for your safety.
Step 2: Register for the ICO
Once you’re satisfied with your research on the upcoming ICO, sign up to take part in it. ICOs typically has different registration procedures. So, if you’re interested, learn the appropriate procedure, and follow it as needed.
Step 3: Set Aside Funds for Payment
Next, you’ll need to prepare to actually invest when you’re ready to put some money up. You’ll need to have either fiat or crypto ready to make an exchange, as needed .
And finally, be sure that you’ve joined the appropriate crypto exchange for the ICO. Some exchanges only allow investors to trade certain cryptos. You’ll want to be sure if the ICO you’re targeting is supported on the exchange you want use.
Step 4: Make the Exchange
This part is pretty simple: Execute the trade! The specifics here will depend on the individual ICO, exchange, and procedures. If your using crypto, make sure you send the money to the correct address. This applies to fiat as well. always make sure you are transacting to the correct address.
Step 5: Receive and Store Your ICO Purchase
Ideally, after the execution of the trade, your new coins will go right into your crypto wallet . Always make sure you keep your private key safe. Do not give your private key to anyone. I repeat DO NOT GIVE YOUR PRIVATE KEY TO ANYONE.
Now that you have your token, just wait patiently for pump and you can start enjoying your profit.
ICOs offer high potential profits if you can determine which project is worth investment. Since you’re buying early, prices are often lower, and some ICOs offer tokens at discounted rates. There’s no regulation on ICOs, you ought to be careful since there are a lot of fraud. Do you Due Diligence before investing in any project. if the white paper contains small red flag, run away and be safe.
Investing in cryptocurrencies and other initial coin offerings (ICOs) is highly risky and speculative. This article is not a financial advise non a recommendation, it’s for education purpose only. You should do your own research before making any investment decision.
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