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8 things you need to know before starting an ico

8 Things You Need to Know Before Starting an ICO

By Ratko Stambolija
Published about 1 year ago

Launching a successful ICO is not an easy task, especially if you are not familiar with all the things it involves. That is why we have prepared a list of the eight most important things you need to know before making the first step. For those who do not know, ICO stands for Initial Coin Offering, and it is used for crowdfunding the release of a new project, typically related to cryptocurrencies. You can learn more about it here.

1. The Idea of ICO

The ICOs act as financial mechanisms which allow raising capital in a similar fashion to crowdfunding. This system currently operates outside of the traditional financial system, so it is essential to be aware of that. Tokens for the new project are sold in the ICO process in order to gather funds. This sale collects the money for further development of the project. In some ICOs, a proportion of the offered coins is sold to early investors in exchange for legal tender and the rest for well-established cryptocurrencies such as Bitcoin or Ethereum.

2. Who Is Creating the ICO?

ICOs are typically created by startups who would struggle to gather the funds in the traditional lending sector. The ICO builds a road that allows these businesses to gather money while bypassing rigorous, regulated funding channels and restrictions set upon the formal financial sector.

3. Crowdfunding or Crowd-Sales?

Crowdfunding is becoming more popular with each passing year. For example, over 5.1 billion US dollars was raised via crowdfunding globally in 2013, while in 2014 the figure grew to 16 billion and over 34 billion dollars for 2015. The reason why is crowdfunding so successful lies in the way it works - by gathering smaller amounts of capital from a larger number of individual investors new business projects can be funded with less risk for each investor.

Crowdfunding leverages the network of individuals connected through the Internet and social media to connect investors with entrepreneurs. This way of funding has led to a significant increase of entrepreneurial activity across the globe. Be aware that crowdfunding is restricted in the US by regulations which define who can invest and how much in the project. These regulations are made to protect investors against the high-risk investments, in which they categorize ICOs too.

ICOs differ from crowdfunding, as the investors in the ICO are motivated by potential returns on investment, while the money raised in crowdfunding can be in the form of outright donations in the majority of cases.

4. How Does an ICO Work?

A startup involved in cryptocurrencies wants to gather funds – they decide to start an ICO. A plan is presented through a whitepaper which explains the details of investment requirement, the goals of the project and a timeline of what is expected to be achieved. If the amounts raised do not meet the minimum funding requirement set by the company, the funds are returned to the investors, and the ICO is considered to be unsuccessful. If the ICO meets the funding requirements, the money is used to launch the project. An ICO usually lasts from 1 week to 1 month.

5. Token Supply

The company will set the funding goal for the ICO – this means that the price of each token is pre-determined. The price of the coin cannot be changed during the ICO. The token supply is static during this time. Besides the static coin supply, it is possible to have a dynamic supply too. In this case, the tokens are distributed depending on the amounts of funds received, and the receipt of money to the ICO drives the price of the coin higher. In a dynamic ICO, a token price and supply limit can be set either to match the financial goals or the time frame.

6. What Attracts Investors?

Early investors are attracted by the possibility of the coin price growth after official launch. Ethereum is an excellent example of a successful and profitable ICO.

In 2014, the Ethereum project held its ICO. The Ethers (the name of the coins) and the ICO raised 18 million US dollars’ worth of Bitcoins (an average of 0.40 US dollars per Ether). In 2015 the project was officially launched, and in 2017 the Ether value reached highs of 290 US dollars bringing investors huge profits.

7. What Is the Difference Between ICO and IPO?

In the IPO, a share of the company is sold to gather funds for the operations of the venture. While in ICOs, many supporters have other motivations for investing in the new project. Besides this, a significant difference between an IPO and ICO is the fact that IPOs are heavily regulated, while ICOs still lack regulation in any form.

8. The Risks Involved

Despite the fact that many successful and profitable ICOs were held over the recent years - the risks involved remain high. Due to the lack of regulation in this segment and considering it is happening online the risks of fraud are very high. The US financial regulator, the SEC, has cautioned the investors that funds that are lost in an ICO may never be recovered.

Overall, ICOs are moving forward with success and greater momentum. It appears that this financial mechanism is speeding ahead with a continuous flow of new ideas and the leverage of creative and highly effective digital tools.