What is an ICO and is it possible to make money on it?

1. What is an ICO?

ICO stands for Initial Coin Offering, which means initial coin (token) offering. In an ICO, the project team sells digital tokens for cryptocurrency or fiat money to investors. Later, these coins can be used on the project platform as an internal currency or traded on exchanges. Also, instead of an ICO, the term crowdsale is often used.

2. For what purpose do projects conduct ICOs?

By issuing its own tokens and exchanging them for popular cryptocurrencies (such as bitcoin or Ethereum) or fiat currencies (dollars or euros), a project raises the funding needed to launch or develop.Typically, ICOs are held at the early stages of projects, before their full infrastructure is in place. The funds raised are used to finance the final stages of development, marketing, or allocated to special development funds to support projects in the long term.

3. What is the legal status of the ICO?

Now ICO can not be called both legal and illegal way to attract investment. Its legal status, procedure and requirements for companies that are going to raise funds in this way are currently not defined in any country in the world.In addition, it is also difficult to determine the legal nature of the relationships arising during the ICO. Because it is difficult to call such relations in their classical sense as financial relations. At the same time, it is safe to say that the reputation of the people behind a cryptocurrency startup and the trust of users (potential investors) form the basis of this process.

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4. Is it possible to compare ICO with IPO?

When a company wants to offer its shares to the general public, it conducts an IPO (Initial Public Offering).The ICO can work on a similar principle: investors, investing funds, receive a “share” in the company in the form of cryptocurrency tokens. At the same time, an ICO also has features in common with crowdfunding: as a rule, funds are raised to implement a certain idea, that is, at the stage when the project does not have a finished product.

At the same time, the IPO is regulated by the national legislation. For example, in the United States for a public offering a company must be incorporated as a public company and registered with the SEC (Securities and Exchange Commission). All this makes the process of attracting investment in the project at an early stage of its development more complicated, but provides certain guarantees to investors.

In the case of an ICO, the process of attracting investment is much easier, but users are not insured.

5. What attracts investors to the ICO?

When purchasing tokens offered in an ICO, investors first of all expect:

  • Benefit from selling them at a higher price in the future (a classic example is Ethereum, whose tokens were worth less than a cent during the ICO in the summer of 2014, but today their price has risen to nearly $400);
  • Use the tokens for their intended purpose, getting the services claimed at a lower price.

6. What are the risks of participating in an ICO?

Perhaps, the biggest risk can be called common fraud, when the creators of the project have only one goal: to collect money from users.Besides, since there are no laws that would regulate cryptocurrency crowdsales at the moment, this transaction is always based on trust from the investor’s perspective. One cannot exclude the possibility that the project may not live up to the stage of product appearance or disappoint an investor with its implementation.

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In addition, in its current form, ICOs are usually held in one round, and they have little chance of obtaining additional funding. This can also be seen as a potential risk in terms of the long-term existence of the project.

7. What should I look out for before participating in an ICO?

The abundance of different ICOs can confuse many inexperienced investors. Therefore, first of all, it is necessary to carefully study the sales agreement (Token Sale Agreement). When reading this document, curious details may surface about which the ICO organizers may not have publicly announced.In addition, there are tacit indicators of good faith intentions of the project:

  • Existence of all necessary agreements and rules published on the website as a public offer.
  • Ready working prototype.
  • Properly drafted whitepaper and other documentation.
  • Escrow (a special escrow account in which property, documents or funds are held until certain circumstances occur or certain obligations are met).
  • Incorporation (registration) of the company itself.
  • The untarnished reputation of the people behind the project.

8. What were the most successful ICOs?

The success of an ICO is a rather relative thing. However, the generally accepted indicator is the amount of funds raised. In this regard, the leadership at the moment (we are talking about dry statistics, setting aside other possibly controversial aspects of campaigns) belongs to the project Bancor, which in June 2017 raised 396,720 ETH in less than three hours.An example of another rapid crowdsale was the campaign of the innovative browser Brave: in about 30 seconds the project managed to reach its financial goal and raise $35 million.

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In May 2017, the list of successful cryptocurrency crowdsales was joined by Storj ($30 million in less than a week) and Aragon – in just 15 minutes from the start of the ICO, the project raised the planned 275,000 ETH (about $25 million).

You may also remember the projects mobileGo ($53 million), Gnosis ($12.5 million in 10 minutes), Blockchain Capital ($10 million in two hours), Aeternity (23.4 CHF) and, finally, Status project that caused Ethereum network failure (about $100 million).

We should also not forget about The DAO project, which has already become part of the history of the cryptocurrency world, as a result of the collapse of which Ethereum Classic appeared in the summer of 2016.

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