Initial Coin Offerings: ICOs Explained

Disclaimer: I hold LTC along with several other crypto currencies. None of the following constitutes investment advice. Readers are encouraged to do their own research and to never risk more money than they can afford to lose.

What is an ICO?

ICO stands for ‘Initial Coin Offering’ and is a method for new projects in the crypto currency space to find funding in the community. This is instead of traditional funding avenues that new companies or projects would have to go through, like angel investors, etc. The crowd funding of a project through an ICO always involves a crowd sale of a new coin or token, hence the name Initial Coin Offering [1].

ICOs all come with their own set of rules. These rules dictate how the crowd sale will be operated. For example, a new ICO may say that for 1 BTC you get 10,000 of the newly created token. Sometimes there are rewards for buying into the ICO earlier and penalties for waiting until the end. There can even be rewards based on how much you contribute. ICOs usually have a minimum and a maximum amount of funding that they are looking for as well.

The first ICOs only accepted Bitcoin as payment for the crowd sale. However, as Ethereum emerged, it has become a common payment method for ICOs [2]. In fact, Ethereum as a platform is designed for the creation of development apps, whose ICOs have naturally been conducted on the Ethereum Blockchain, and usually only accept Ether for payment. Several platforms that are similar to Ether are entering the space, like NEO, Lisk or EOS, which should make for some interesting ICOs in the near future.

Notable ICOs

Ethereum (ETH)

One of the earliest ICOs was for Ethereum (ETH). I’m not alone in wishing I had taken part in this crowd sale. During the crowd sale, 1 BTC bought you 2000 ETH during the earliest days of the crowd sale (as a frame of reference, 1 BTC will buy you between 13 and 14 ETH at the time of writing!) [3]. As mentioned earlier, Ethereum has become the go-to platform for many ICOs. It has been described as Bitcoin’s little brother and fans believe it has a bright future. As the second largest coin by market cap, they have reason to believe [4].

Basic Attention Token (BAT)

The Brave browser project aims to be a browser option for those who want a faster internet browsing experience, all the while blocking ads and pop-up windows typical in most browsers. Brave released the Basic Attention Token (BAT) to function within their advertising platform which will give users a share of the revenue generated [5]. The BAT ICO was notable because of its speed and size. Its ICO was run on the Ethereum Blockchain and was one of the most successful to date, raising 35 million USD in 30 seconds [6].

EOS

EOS is an interesting token, because the blockchain itself is billed as a competitor to Ether [7], but the company’s ICO is being run on the Ether Blockchain. The ICO is also extremely long (by other ICO standards) and is ongoing with a total duration of a little under a year. The ICO is not actually for the tokens that will be used on the eventual blockchain, but rather for an Ether token that will be exchanged for new tokens when they’re issued. Investors are warned to research the implications of this to avoid loss of assets if getting involved [8].

Red Pulse Token (RPX)

The Red Pulse Token (RPX) is a token created by Red Pulse, a Chinese company that operates a financial analysis platform by the same name [9]. Their upcoming ICO is notable, because it is one of the first on the NEO platform, accepting NEO instead of BTC or ETH. Its timeline and rules were altered ahead of the regulation coming out of China [10].

Should you participate?

ICOs are a controversial subject. On one hand, they are an invaluable tool for raising funds for new ideas. They promote decentralized and crowd-sourced funding of projects that enable them to get off the ground faster and without selling off larger portions to traditional investors. This makes them extremely important to the growth of the crypto-currency economy.

However, because they are vehicles for raising large amounts of money, there are lots of ICOs that are scams and need to be avoided. Also, even the legitimate ICOs are generally riskier than investing in established coins. The same rules that apply for normal investing should also apply to investing in ICOs. Namely, do a lot of research, have a healthy sense of skepticism and never risk more money than you can reasonably afford to lose.

Making things even more confusing, regulatory bodies have weighed in against ICOs in several large markets. China recently laid out strict regulation that all but banned ICOs for at least the time being. Also, the SEC in the United States makes it hard for new ICOs to accept American investors. If you are in one of these regions and are interested in ICOs, chances are that you’ve encountered one that you cannot participate in due to your location.

To summarize, the question of whether you should participate in any specific ICO depends on your location and country of origin, the project, the legitimacy of the team and how much money you are willing to risk. Beware of the scams, but there are some great projects out there that are using ICOs to generate revenue in an innovative way, and at the same time rewarding investors.

Want to learn more about ICOs? There are plenty of additional resources available [11, 12].

Sources

  1. https://blockgeeks.com/guides/what-is-an-initial-coin-offering/
  2. https://techcrunch.com/2017/06/08/how-ethereum-became-the-platform-of-choice-for-icod-digital-assets/
  3. https://ethereum.stackexchange.com/questions/4522/what-was-the-approximate-cost-of-1-eth-during-pre-launch-aug-2014/4530
  4. https://coinmarketcap.com/all/views/all/
  5. https://brave.com/
  6. https://www.coindesk.com/35-million-30-seconds-token-sale-internet-browser-brave-sells/
  7. https://steemit.com/eos/@trogdor/introduction-to-eos-the-epic-blockchain-operating-system
  8. https://eos.io/
  9. https://coin.red-pulse.com/
  10. https://cointelegraph.com/news/neo-based-platform-red-pulse-bans-chinese-citizens-from-their-ico
  11. https://en.wikipedia.org/wiki/Initial_coin_offering
  12. https://www.coinstaker.com/initial-coin-offering/
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