About this guide: Our ICO beginner’s guide will tell you everything you need to know. We will talk you through what an ICO is, why you might consider investing in one and exactly how to invest. We do always urge caution before investing in any cryptocurrency. Don’t invest money you cannot afford to lose. We encourage you to do your own research before making any investments.
What Is An ICO?
ICO is simply the shorthand for Initial Coin Offering. They are used by crypto project teams to raise funding for developing their project and roadmap. ICOs are exploding as a method for crypto startups to raise money. In 2017 alone, $5.6 billion was raised through initial coin offerings. We expect crypto projects to raise even more than this in 2018.
Many commenters draw parallels between ICOs and crowdfunding or these being the crypto worlds equivalent of a stock market IPO. The amazing thing with ICOs is that pretty much anyone can invest in a project at the earliest stage. Traditionally, people like us don’t have the opportunity to invest early in a Facebook or a Google. Instead, venture capitalists and the big money men get their investments in early and don’t allow us to participate. We on the other hand have to wait until a company goes public and the shares are publicly traded. When this happens we have to pay significantly higher prices than the early investors got. After all, someone has to be selling shares when a company IPOs for people to buy. Who is profiting? The early investors/venture capitalists.
ICOs give you the opportunity to be the guy investing in startups on Dragon’s Den or Shark Tank. It’s your job to evaluate if a project will be successful, be adopted and if the team can execute.
It should be noted that the majority of ICOs and crypto projects in general are building decentralised applications (DAPPs). DAPPs do not develop their own dedicated blockchain, instead they build on top of a chosen platforms blockchain, like Ethereum. Ethereum allows for the creation of tokens without the need for a project to build this infrastructure themselves. Even Ethereum platform rivals like EOS, have initially issued their crypto as an Ethereum ERC 20 token. Once the dedicated EOS blockchain is ready, then these tokens will be moved away from Ethereum.
Ethereum is the most popular platform in the world right now and the majority of projects are being built on it. This is why most ICOs issue ERC20 tokens and why there are over 500 projects using Ethereum.
Why Invest In An Initial Coin Offering?
- Enormous Profit Potential: The key to successful investing is making the largest multiple on your money with the lowest risk. Yes, you might buy Ethereum at $1,000 when its market cap is over $100 BN and it could be a great investment in the future. But can you realistically expect Ethereum to hit $100K a coin and make a 100X return on your money? Probably not. Here is the secret: people who invested in Ethereum at ICO have already made monster returns. The current Ethereum price is $871.80 and those that invested at Initial Coin Offering have already got +279,843% returns!
You simply get the best returns by investing as early as possible. There are numerous other examples of monster Initial Coin Offering returns and Ethereum has not even been the most profitable one. If you are interested in the type of returns investors got for existing cryptos, just checkout ICO Stats.
- Stay Ahead Of Crypto Trends: Researching ICOs will help you keep up or stay ahead of the cryptocurrency community. You will be evaluating the latest projects that are entering the crypto space and you are getting the opportunity to invest first.
- Stronger Hands: You will build up knowledge on a crypto project right at the beginning. Chances are that you will also be emotionally invested in ICO’s you choose having put work and time into backing them. This can be a massive strength if the market goes against your crypto; you are likely to have the strong hands to HODL. Investors not emotionally involved in a crypto tend to sell faster and are more likely to sell at losses. Time has shown that great projects rise again to even higher valuations.
Lack of Regulation: The Initial Coin Offering market is currently unregulated. Indeed some countries such as the US and China have completely banned their residents from participating in them. This lack of regulation means there is no one to turn to if things go wrong. Investors simply do not have the same protection as they have when investing in traditional stocks. This being said, we do expect increasing regulation of ICOs in 2018 and we see this as a good thing.
No Working Product: Many ICOs are raising money with only a white paper and a promise that they will deliver their roadmap. Ideas can sound amazing, but they only truly have value if the team can execute them. You must be aware that some projects are literally valuing an idea at $100 million. Yes, if they deliver what they say, then the project might be worth many billions. It’s the wild west out there: please be careful and look at any investment proposition with skepticism.
Scams: There are some bad people involved in ICOs. Some have raised money with just a white paper and run off with investor funds. Other bad actors pose as admins in a project’s official Telegram accounts and convince investors to send them money. It is exceptionally important for you to do your due diligence before investing or sending funds to anyone.
Initial Coin Offering Shills: Be aware that some people are paid to promote ICOs. So be skeptical and do your own research. Personally, we never invest just because someone is hyping it and nor should you! Be aware that some people may have other motives for being so positive on an investment opportunity. Listening to someone’s opinion may have value, but please don’t blindly buy based off one person’s recommendation.
How To Invest In An Initial Coin Offering?
Stage 1: Awareness
You want to plan ahead and be aware of upcoming ICO opportunities. This gives you time to properly assess projects and shortlist the ones you wish to consider backing. These days there are Initial Coin Offering whitelists for most projects, so planning in advance is essential to get your token allocation.
Stage 2: Due Diligence
You certainly need to do your own research to determine if an ICO is worth investing in. This usually involves:
- Reading the white paper and determining if you think there is a use case for the project’s product. What problem does the project aim to solve? Do you think the product or service has a high chance of adoption?
- Blockchain. Ask yourself if the project actually needs to be on the blockchain? Or if the project is just tagging in the blockchain to raise money for a pointless project?
- Look at the competition – what other projects are out there that are doing a similar thing? What differentiates the Initial Coin Offering from its competitors?
- Checkout at the team. If you cannot see a team or any LinkedIn profiles, this should be a massive red flag. You need to assess if you think the team is capable of executing the vision outlined in the white paper. For example, a project building an AI DAPP with a team holding no AI experience is unlikely to succeed.
- Look at the advisors. If a project has many advisors that have played key roles in successful crypto projects, then this is positive. Checkout the white paper to see what token allocations advisors get. Well incentivised advisors are more likely to offer good advice and spend time on the project.
- Checkout the partnerships. If a project has partnerships with big names you recognise, this is usually good news. Do take time out to check and verify these.
- See if there is a working product, if so test it out. Working products mean that adoption can happen a lot faster – you are investing in something more tangible.
- Following. Large Telegram groups and high numbers of followers on FB, indicate a strong community.
Stage 3: Work Out How Profitable The Initial Coin Offering Could Be
Before making any investment it is important to assess your upside. ICOs are risky and you need to be rewarded for that risk. I shall go over how we assess Initial Coin Offering profitability quickly:
1 – Work out the token supply and a valuation range. Usually ICOs will specify:
- How much money they are looking to raise and for how many tokens.
- How many tokens are available for public and private sale.
- The total token supply. Sometimes ICOs will state lockup periods for tokens allocated to founders, the team, strategic partners, advisors and so on. A lock period is simply an amount of time that the tokens cannot be sold. For example, a team might be allocated 20% of the tokens and have a 1 year lock period. This simply means that the team cannot sell their tokens for 1 year.Lockup periods matter as this gives us valuable information to help us better calculate the circulating supply when the token hits exchanges. From this we can get a valuation range for the crypto, before it hits an exchange. A tokens market cap is calculated as:
Token price * circulating supply = Market cap
2 – Once we work out the valuation range for the Initial Coin Offering, we then look at the market cap of competitors. You can do this on sites like Coinmarketcap. For example, the ICO we are examining is a decentralized exchange we would look at valuations for other decentralized exchanges:
- Airswap – ATH (All time high) C.$310M
- 0X – ATH C.$1.2 BN
- Kyber network – ATH C.$780M
- Loopring – ATH C.$1.3 BN
We look for at least a x50 difference between our top competitor market cap and the projected ICO market cap. We also need real reasons why we think an ICO project can blow its competitors out of the water.
Stage 4: ICO Participation
- Most ICOs now have a whitelist, but what is a whitelist? A whitelist simply means that to participate you must register interest in the ICO ahead of time. Sometimes this involves sending in a copy of your passport to verify your identity to for anti money laundering purposes.
- Check the ICOs website and see what crypto it accepts contributions in. This maybe BTC, ETH, NEO, GAS. Make sure you are stocked up on the Initial Coin Offering’s contribution crypto well ahead of time. If you need to buy Bitcoin or Ethereum to participate in an ICO then checkout our Coinbase Guide. If you have to get your hands on NEO or GAS then we show you how in our Binance guide.
- Make sure you have your own wallets setup. Never use an exchange wallet for an Initial Coin Offering – you will not receive your ICO tokens. If the ICO is issuing an ERC20 token then make sure you have Myetherwallet setup and stocked with your Ethereum. Or a NEON wallet setup if the Initial Coin Offering is running on NEO.
- Ensure you get the ICO instructions for the official site and join the ICOs Telegram group. Just make sure you follow the official instructions and watch out for scammers on Telegram. Personally, we only ever pay attention to pinned messages on Telegram as we know they are posted by admins.
- Make sure you are ready as soon as the Initial Coin Offering goes live. ICOs are competitive and usually sell out fast.
- Initial Coin Offering tokens are usually credited within 4 weeks of the ICO taking place but often sooner.
- Usually you will be notified when the token will hit the exchanges in the Telegram group. This gives you an opportunity to sell them or alternatively to buy some if you missed out on the ICO.
Stay safe guys and may all your Initial Coin Offering investments go to the moon.