What is an ICO?
An initial coin offering (ICO), also known as a digital token sale or crowdsale, is a way of raising funds from the public for the development of a product outside of the traditional VC world. Usually products are blockchain-based technologies, but the crowdsale model is increasingly being used for other kinds of projects as well.
Each project creates a new cryptocurrency in the form of tokens, which are then sold to the public to raise funds for project development.
If a product successfully completes their ICO funding goal, their tokens are distributed to those who bought them and they become tradeable on the cryptocurrency market. If the product itself is then successful, these tokens can potentially become very valuable (ex. this is what happened with ETH, the computing platform Ethereum’s coin, which was originally sold to the public as tokens during the project’s own ICO).
What are tokens?
A token is a digital asset that is sold to the public during an ICO campaign, usually for other popular cryptocurrencies, namely BTC or ETH, or sometimes directly for fiat currency. Unlike a cryptocurrency, tokens usually do not have their own blockchain, but rather are hosted on another blockchain, such as Ethereum’s.
Once an ICO campaign is complete, the token developers can release the tokens on an exchange, where they can be traded and fluctuate in value, like any other cryptocurrency.
Tokens can also have other functions that are particular to the product that issued them. However, tokens themselves do not necessarily give rights or equity to the product/company that originally issued them – in that sense tokens are definitively not equal to shares in a traditionally structured company.
Is it safe to invest in an ICO?
Yes it is; however, you should always do proper research on the background of the projects before committing. Because ICO’s are largely unregulated there are a lot of scams and fraud. Luckily we are here to help expose the many flaws of these ICO’s saving you time and your money. We have a complete guide with how to’s for investing in ICOs in our members area.
Are ICOs legal?
ICOs are perfectly legal, provided all documentation is in place and proper legal counsel has approved the ICO terms. In most cases, as long as the company or foundation which is conducting the ICO does not misrepresent their coin/token as a financial security, representation of company ownership, and investors follow their local laws of their own country regarding reporting of income, it is perfectly legal for everyone involved.
How much should I invest?
Risk management plays a huge role in becoming successful. Never invest more than you are willing to lose and never go “all in”. Depending on your risk tolerance, a solid investment amount cannot be determined.
How much can I make from investing in an ICO?
This is a number that will vary and will depend on your investment strategy and how much you have invested. Obviously the more money you put in, the bigger the return however, the riskier it becomes. Time also plays a huge factor when investing in ICOs, you could take out money early or wait it out. These factors will impact your earnings/losses.
What is Ethereum?
The entire Ethereum blockchain is a giant mass of computers connected in a peer to peer network. This creates a supercomputer that competes with existing centralized systems. In fact, the entire network can be visualized as a single entity called the ‘Ethereum Virtual Machine’ or EVM in short. All the transactions that have happened and will ever happen in this network are automatically updated and recorded in an open and distributed ledger. So what is the advantage of this?
Before we explain, it is important to know what a ‘smart contract’ is. Smart contracts are a series of instructions, written using the programming language ‘solidity’, which work on the basis of the IFTTT logic aka the IF-THIS-THEN-THAT logic. They can control, for example, the exchange of: money, possessions, communications, documents or anything else that has value.
What is a Smart-Contract?
A smart-contract is basically just computer code that is executed (calculated) by all the computers in the Ethereum network. The Ethereum blockchain gives the code some unique features, such as: unchangeability, distributed, and verifiable state. This unchanging and verifiable state is stored on the blockchain and is accessible by everyone.
The best way to understand how a smartcontract works is by imagining a coffee machine. Each and every step that you take acts like a trigger for the next step to execute itself.
- I give the coffee machine some money
- I push the button corresponding to the coffee i want
- the coffee comes out
The machine delivers the coffee without any human intervention.
Now an example of an application that uses a smart contract:
A start-up called Slock.it, has developed a smart contract for renting apartments. When a tenant has paid the bill, arrives on the right date, and identifies himself as the correct person, the door automatically unlocks. A scanner, which is built into the door, verifies these facts on the blockchain and when approved, the door is opened. The blockchain eliminates the need for a trusted intermediary or counterparty. Every transaction that you do through the smart contract will get recorded and updated by the network. What this does is that it keeps everyone involved with the contract accountable for their actions. It takes away human malice by making every action taken visible to the entire network.
What is gas?
Each smart contract is executed (calculated) by all computers in the Ethereum blockchain. This means that there is much redundancy (good) but also that it costs a lot of energy (bad). It is therefore costly to carry out these calculations. These costs are directly linked to the calculation that your code performs when you make a transaction through your smart contract. These costs are calculated in the form of gas “fuel”, in this case ethers.
The word gas is completely random, it’s just a label for the costs you have to pay to perform a calculation on the network.
The cost of gas is determined by the market, when you decide to pay more gas for a transaction, the computers in the network will prioritize your transaction. This gives the miners who calculate the transaction, additional revenue.
What is a dAPP?
In order to fully understand what ICOs are all about, we first need to understand what dapps are. Although it is not difficult to build your own blockchain, it is difficult to maintain its continuity. This is why many developers are currently building dapps that are running on top of the Ethereum Network. This has the advantage that they do not have to maintain their own blockchain in order to operate. Dapps are like apps which you currently find in the Apple or Google play store. But dapps are not hosted by one authority, such as Apple or Google, but hosted and shared across all the computers that are part of the Ethereum blockchain.
Webpage → API → database
A dapp is similar to a traditional website, the interface uses the same technology to make the page (or dapp). However, the big difference is that the dapp does not contact a central database through an API. The smart contract acts like the API. The smart contract communicates between the dapp and the blockchain, like this:
Dapp → smart contract → blockchain
Dapps are essentially decentralized apps who cannot be censored or shut down by one authority.
What do I do with ICO tokens?
You store your tokens in a digital wallet just the same as you would store a cryptocurrency like Ethereum. Which wallets you can use is dependent on which blockchain the tokens are issued on. Most commonly tokens launch on the Ethereum blockchain. This would enable you to use any Ethereum wallet. We have a complete guide of howto’s on wallets here.
How to evaluate an ICO?
The best way to evaluate an ICO is to analyze every single aspect of the project and narrow it down to its precise strategy. Some factors to consider include:
- Business model: Identify the strong points and weak links of the business model. Does the company really need an ICO with its own currency? How does the company integrate crypto token with its business model? Can you use the crypto token outside its ecosystem? Enquire from people who understand the technology and discuss these points with them.
- Project team: Find out every single detail you can about the development team and the advisory board. Look for ICOs that have teams with proven track record in the crypto-asset and blockchain industry.
- Community feedback: ICOs are announced on community forums and the marketing part kicks in afterward. Check the community feedback for the project and how the project team responds to it. Visit, Twitter or Facebook pages of the projects. Be aware of paid reviews or bounty posts that pay participants to spread positive information about the project.
- Current product state: ICOs that have a product near completion or halfway down the development track have higher chances. Find out the current project stage and whether the development team is on schedule or not.
- VC involvement: The involvement of a big crypto VC is a positive sign. Find out if the company has VC support or better if they have a VC on board.
- Market niche: How intense is the competition in the selected market niche? Research on any previous businesses working in the same industry, and match their fundamentals with what the company is working on.
How to participate in an ICO?
The first requirement to participate in an ICO event is the ownership of cryptocurrencies. Start by registering an account on a digital currency exchange like Coinbase.com. The next step is to load fiat currency such as USD, EUR, or Yen, in your account, and purchase the desired cryptocurrency. After the purchase, you can store your digital currency in a web wallet or choose a hardware cryptocurrency wallet.
At the time of an ICO, start by carefully understanding the ICO agreement, which includes the details such as target price per coin, timeline, and other rules governing the transaction. Every company recommends specific wallets for the transaction, so go ahead and download the wallet. The norm is for ICO projects to provide a receiving wallet address on the ICO web page that people can send their contributions to. Investors are encouraged to send any amount they are comfortable with provided it corresponds with the price per project token. The project team then delivers the corresponding token amounts to the investor’s wallet. The tokens can be stored on web, mobile, or hardware cryptocurrency wallet.
How do I buy specific tokens?
You can buy specific tokens through various cryptocurrency exchanges. Before trading on these platforms, be wary of their transaction/withdrawal limits, transaction and conversion fees, history of the exchange, and its reputation. If an exchange had multiple security breaches, find out how they dealt with it. Some of the popular cryptocurrency exchanges are listed below:
Considering the presence of over 800 cryptocurrencies in the market, trade in new crypto-coins only when you understand the industry in-and-out.