Initial coin offerings, or ICOs, are like IPOs but in the crypto space. When new cryptocurrencies make their debut on the public markets, they go through the ICO process — which is more intricate and involved than many people may believe. Given that it can pay off big to “get in early” on investments, ICOs understandably capture the attention of many crypto traders and investors.
Read on to learn more about initial coin offerings, how to invest in ICOs, where to find ICO listings, and what you should take into consideration before betting on a new crypto.
What Is an Initial Coin Offering (ICO)?
As mentioned, ICOs are similar to IPOs (initial public offerings) which mark the first time that the public can purchase a stock on an exchange. The big difference is that ICOs concern the public sale of cryptocurrencies, while IPOs concern stocks.
And just as some investors take part in IPO investing, they can likewise participate in ICO investing. That basically means buying a stock, or a cryptocurrency, as soon as it hits the market, with the hope that it increases in value.
How an Initial Coin Offering (ICO) Works
Companies go public in an effort to raise money. They’re essentially selling pieces of their ownership for cash. The same logic applies to ICOs, which are crowdfunded efforts to fund a new cryptocurrency.
As such, ICO stands for “initial coin offering,” and allows crypto investors to get in on the ground floor of a cryptocurrency startup. These investors are among the first wave piling into new crypto, and as such, stand to potentially benefit the most if (and it’s a big “if”) the crypto in question appreciates in value.
As for how an ICO actually works? It’s different from an IPO, which has a very standard process involving multiple parties and regulators. Bringing a new crypto to the market is more of a do-it-yourself process. In short, the person or team behind a new crypto outlines their plans in a white paper, explaining what the crypto is and how it’ll work.
After that, the crypto creators focus on a marketing push to get people to invest and buy into the currency. Those who opt to participate and become investors will exchange money for the new project’s coin or token.
Cryptocurrency creators collect money from some investors by making the coin available pre-ICO for sale. During this period, they typically issue coins at a discounted value, often in order to get capital to continue building out the currency.
This is, of course, a basic overview — the process can get much more granular. But this should give you an idea of how ICOs work.
Types of ICOs
Initial coin offerings can use a variety of structures to achieve their end goal: Additional financing for a crypto project. Here are a few of the main types of ICOs:
Static Supply and Static Price
An ICO involving a static supply and static price has a specific funding goal. That means that each token being sold has a preset value, and that there is a fixed supply of tokens. The tokens are then sold at the predetermined price until the supply is exhausted.
Static Supply and Dynamic Price
An ICO utilizing a static supply and dynamic pricing model does not have a specific funding goal. There is a predetermined number of tokens, however, but the value or price of those tokens can change, and consequently, the total amount of funding raised at the end of the process.
Dynamic Supply and Static Price
An ICO with dynamic supply and static pricing is one in which tokens have a predetermined value or price, but the supply is not static. Again, this would mean that there is no set funding goal, and the total raised would depend on the number of tokens sold.
3 Types of ICOs
|Static Supply & Price||Static Supply/Dynamic Price||Dynamic Supply/Static Price|
|Preset token value||No preset token value||Preset token value|
|Fixed token supply||Fixed token supply||Undetermined token supply|
|Predetermined funding goal||Funding goal undetermined||Funding goal undetermined|
How to Value ICOs
IPO valuations typically reflect careful research into the underlying company’s books and performance. But the process of valuing ICOs is different, since there is no underlying company with financial records (or history) to comb through.
As such, hype and investor sentiment represents a big underpinning of ICO valuations. Crypto assets, in general, derive their value either from functioning as cryptocurrencies, or as security or utility tokens for specific networks and systems. That makes it difficult to determine a monetary value out of the gate.
Investors typically determine the value of an ICO value based on potential uses the coin may have in the future, which could lead to price appreciation. The more hyped investors get, the higher potential values can soar, but the reverse is true as well.
Negative investor sentiment can lead to negative first-day returns for an ICO, which can impact the performance of the currency for at least six months.
That makes ICOs a notoriously risky investment. Hype men and con artists can easily take advantage of investors with little knowledge of the crypto space, and government regulators have only recently started outlining potential regulations for the industry.
Factors to Consider Before Investing in ICOs
It bears repeating: ICOs are incredibly risky — they are the opposite of safe investments. Because of that, there are some key considerations to make before putting your money on the line.
First and foremost is that investors will have little, if any protection if an ICO goes awry. As the crypto space is still largely unregulated and investors aren’t afforded many of the same protections that those in the stock market may see, there’s a real chance you could lose your money.
Finally, know that you may not receive your tokens, even if you paid for them. There are no guarantees in crypto, at least not yet, so if you’re particularly risk-averse, then ICO investing may not be for you.
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How to Buy ICO Tokens in Five Steps
Wondering how to buy ICO tokens? Follow these five steps:
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 putting your money on the line. As mentioned, this can be tricky in crypto, since there’s limited historical data and information related to many projects out there, but you should do the best you can.
In crypto, your research usually begins with the project’s white paper; you’ll want to learn everything you can about the development team behind it, and whether it has attracted much interest from other investors. If the white paper does not have details about token’s code or security features that’s a potential red flag that may require more due diligence.
Step 2: Register for the ICO
Once you’ve found an upcoming ICO that appeals to you, sign up to take part in it. This may require some legwork, but you can track down a pre-ICO list and ICO listings on numerous crypto-focused websites.
Be aware, though, that each ICO typically has different registration procedures. So, if you’re interested, poke around to 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. This means having money set aside in order to facilitate the investment.
You’ll need to have either fiat currency, such as dollars, or some other crypto ready to make an exchange, as needed (typically, either Bitcoin or Ethereum, the two biggest cryptos). You’ll also need to have money and or crypto standing by in a digital wallet so that you can make the trade.
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And finally, be sure that you’ve joined the appropriate or correct crypto exchange for the ICO. Some exchanges only allow investors to trade certain cryptos. You’ll want to be sure the ICO you’re targeting is listed on the exchange you’re working on.
It’s also a good idea to do a little research on any platform that you plan on joining. There are factors that make a good crypto exchange, and not all are created equal.
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.
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 (whichever of the many types you choose) for safekeeping. From there, ICO investors are largely at the mercy of the market to dictate what happens with your new investment.
It may be worth it to closely watch the ICO and other news around the new crypto, so that you can make wise decisions about when or if you should sell. One upside to ICOs compared with IPOs is that there’s no IPO lock-up period preventing sales.
How to Buy Tokens After an ICO
After a crypto token completes an ICO, it’s now available for purchase on the open market. So, if you want to buy tokens that recently made their market debut, all you need to do is buy them on an exchange or through a brokerage. The key, though, is making sure you’re using an exchange that trades the token you’re looking for.
Similar to how stocks trade on the open market following an IPO, tokens are on the secondary markets following an ICO. It’s just a matter of investors making sure they’re on the right exchange to trade them.
ICOs involving bringing new crypto tokens to the market, just like an IPO brings new stocks to the market. The ICO process varies from project to project, but ICOs give investors a chance to get in early on a new or emerging crypto asset. But investors should keep in mind that ICOs are risky, and do their homework before putting their money into this type of investment.
If you’re ready to start building your crypto portfolio with ICOs or existing cryptocurrencies, a great way to start is by opening an account on the SoFi Invest® brokerage platform. You can use the app to buy cryptocurrency as well as other types of investments such as stocks, exchange-traded funds, and even IPOs.
Who can participate in an ICO?
For most projects, anyone can participate in an ICO granted they’re registered, and have a crypto wallet and cryptocurrencies to trade with. Depending on the specific ICO, prospective investors may need to join a certain exchange to facilitate the transaction, too.
What’s the difference between an ICO and an IPO?
The main difference between an ICO and an IPO is the asset that’s being debuted. ICOs involve crypto tokens or cryptocurrencies, whereas IPOs involve stocks, or shares of companies going public.
Who can launch an ICO?
Anyone can launch an ICO, granted they know what they’re doing. Because the ICO and crypto markets are lightly regulated in the U.S., anyone with a crypto project can bring a new crypto to the market.
Is an ICO legal?
Yes, ICOs are legal. But there are some considerations to make before engaging in one. Regulators in the U.S. may consider an ICO a securities offering, and as such, could enforce securities law on those engaging in an ICO. As always, it’s best to consult with a professional about the details.
What is an ICO used for?
An ICO’s primary purpose is to generate funding for a crypto project. The project sells tokens which generates money, which can then be reinvested in the project.
Photo credit: iStock/ismagilov
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