What are ICO investments? How do they work?
During the launch of new innovative projects in the sphere of high tech, for example, their creators are often in lack of initial capital for crucial things like development funding or for covering the related costs as well, for example, primary product promotion. Initial capital involvement by shares emission and its placement on the stock exchange (during so called IPO) is an old and habitual method of solving this problem, but this method has a range of disadvantages, for example, high level of formalization, additional expenses and a range of bureaucratic obstacles. For some startuppers this way is extremely inconvenient or absolutely unacceptable.
Modern technologies have allowed to create IPO alternative, and this alternative is called ICO – Initial Coin Offering (primary coins placement, also known as “crowdsale”). While ICO launching the group of project developers sales out special cryptographically protected coins (tokens) to those who’ll want to invest into the project to profit from cryptocurrencies. In fact, tokens are specialized cryptocurrency varieties (Note that ICO-cryptocurrencies, as any other cryptocurrencies in general use blockchain to ensure their work).
What profit the buyers of token hope to get?
1) First of all, the company which has introduced tokens is obliged to accept tokens as something like its internal currency. Using them, the owners will be able to buy services or goods of this company (quite often it’s the only method of payment).
2) After being placed on the cryptocurrency exchanges (such as EXMO cryptocurrency exchange, where new pair WAVES/BTC
was added recently), tokens can start to increase in price rapidly if the company thrives.
3) Some token types provide their owners with other advantages, for example, fixed salary paid in cryptocurrency. We’ll review this moment a little bit later.
What types of ICO could be highlighted?
The mechanism of preliminary token sale is not uniform for all ICOs - it differs according to token type. So, what token types exist?
1) User Tokens (Appcoins). They are also called access tokens (or “gas”). User tokens enable to use services of ICO launching company. For example, in Ethereum network you have to spend some amount of this cryptocurrency to support smart contracts functioning.
As any other cryptocurrency, User tokens could be sent to other people, in other words, they could be sold not only to the company which has launched these tokens, but to other counterparts.
2) Equity tokens. This token type is the closest to the ordinary shares according to its fundamental nature, though, certainly, its functioning is less regulated. This token type is not suitable for payment of company services, but their owners get the right for dividends (or percentage of the commission if start-up activity is connected with funds transferring using cryptocurrency created by them). In some cases the holders of equity tokens holders even obtain the right to vote using their assets while solving questions connected with a company development.
3) Debt tokens. They are tokens, which could be compared with bonds - their owner gets fixed income (in fact, it’s another method of getting the profit from cryptocurrency). For example, Steem Dollar token generates the income of 10% per annum (the income is paid in the same currency), and this is not the limit (less liquid Steem Power provides 100% per annum).
The mechanism of primarily token salle differs a little bit, depending on the token type, though there are common features.
So, pre-sale of User tokens is performed according to so-called Nacamoto scheme (Note in brackets, that bitcoin - Nacamoto’s brainchild, also could be called token in a way, but the one which represents not a certain company, but decentralized community, that provides money transfer services, however, Satoshi Nacamoto was behind bitcoin ICO, first of all). During the realization of this scheme:
1) The description of future network design and plans of its development as well as token source code are published in so-called “white paper”.
2) Coins generation begins. Sometimes it is accompanied with pre-mining, sometimes it’s accessible to anyone interested from the beginning.
3) Furthermore, after advertising campaign, token trades are opened to everybody, usually through currency exchanges. If the startup is successful, thanks to network effect, users’ amount and token demand increase, that means further increasing of its price.
In case with equity tokens, the first and the third stages are the same, but in between the “white paper” creation and the advertising promotion of token it’s necessary to create smart-contracts and hire provider for network development.
Which companies were the most successful in ICO launching?
Many companies were able to get necessary investments thanks to successful ICO launching. Some of them have overcome others.
So, at the beginning of summer 2017, Bancor project gained 396 720 ETH from token sale (that means approximately 144 mln USD according to ETH rate
existing for that moment), and these money were gathered during only three hours. Bancor success is based on good advertising campaign and general prospects of the development (the protocol which performs tokens transformation based on smart-contracts).
The creators of the innovative Brave browser also have gathered funds using ICO, and they succeeded to gather the equivalent of 35 mln USD during the first half a minute of token trading. Thanks to ICO, other prospective projects, such as Aragon, Gnosis, mobileGo, Status and Storj (the list is not exhaustive) have got the sums that are equival to tens of millions of dollars.
What risks exist while investing in ICO and how they could be minimized?
There is pretty a lot of ICO nowadays, and those who want to invest in tokens of some venture company has a lot to choose from. But a person inexperienced in this sphere of investments can face significant risks of partial or total loss of money (first of all, in case if ICO developers are frauds, that is very often in ICO sphere).
These risks increase dramatically in case of neglecting the main rules of ICO project selection. What are the rules?
First of all, you should carefully investigate the “sale agreement”, the main legal document between the investor and the company, launching ICO. Then ask about business reputation of people who stand behind ICO data, whether they have been working for a long time in the relevant sphere of activity, does their reputation carry any dark spots, for example, organisations of projects that constantly get users’ poor reviews. Besides, the existence of registration, escrow-account, technical correctness of “white paper” provided by the company which launches ICO are also important. The existence of ready-made well-functioning prototype (a program or a device) also creates a good impression.
Though, there are some risks in ICO that are hard to neutralize, even while demonstrating certain foresight. That is user’s poor legal security, in the first case (especially while cryptocurrency investments, but not the fiat money). The other side of still low legal regulation of ICO sphere is the fact that the company won’t be able or won’t perform its obligation, although an investor can rely on some legislative support, but still this support will be much weaker than in case with traditional IPO funding.
Besides, there are always significant risks that the final product would not be finished and the company will prematurely terminate its existence due to the reasons that are not connected with product implementation (that could be followed by bankruptcy, lawsuits etc.).
In sum, we can say that ICO is an interesting investing possibility for fiat money and cryptocurrency investment. This investing possibility is able to surpass traditional financial instruments in profit. But in order to give the right estimation of the necessity to invest in ICO and for estimation of particular ICO, an investor should be good at technical and financial peculiarities of this question and decide for himself whether it is possible to consider risk level in this sphere as allowable.
Additional materials that may help you:
Monero and Zcash - new level of the anonymity
TOP-5 facts about Ethereum
What are the pros and cons of investing into cryptocurrency
Why do miners choose exchanges to exchange cryptocurrency for fiat funds
Thank you for staying with us!
Your respectfully, EXMO team
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