What is an ICO (Initial Coin Offering) in cryptocurrencies?
What is an ICO? Since the birth of bitcoin, thousands of altcoins, or alternative cryptocurrencies, have been generated. Many of them are born from an Initial Coin Offering, Initial Offering of Coin in English or ICO.
Through this procedure, innovative technologies and numerous blockchain platforms have begun to develop, such as Ethereum. However, it is also a breeding ground for scams or scams. They promise great investment returns and take advantage of their investors' lack of knowledge to sell them something without value.
In this article, you will learn how to differentiate new cryptocurrency ICOs from scams. However, even if the creators of a cryptocurrency may have good intentions, no one can guarantee the success of an ICO.
What does ICO mean in cryptocurrencies?
ICO stands for Initial Offering of Coin or Initial Offering of Cryptocurrencies in Spanish.
It is one of the most popular ways to create cryptocurrencies in recent years.
What is an ICO? Risks and advantages
What is an ICO?
According to the definition of ICO, Initial Coin Offerings are a mechanism of financing for new companies through mass distribution. They are usually used by technology companies that want to develop a new application.
Many of them are related to the development of cryptocurrencies, such as the creation of exchanges or blockchain-based platforms. But other ICOs have also emerged to develop innovative technologies.
For example, one of the most revolutionary digital currencies has been IOTA, focused on the Internet of Things.
The main objective of an ICO is to raise money to finance this project or technology. Its creators usually use the internet to advertise themselves, through specialized websites or advertisements, and are able to reach a large audience.
The interest that cryptocurrencies have aroused, achieving extraordinary profitability for their investors, has attracted many new investors who were never before attracted to the world of finance. This has led to a proliferation of scams within ICOs, so you also need to be very careful with them.
How does an ICO work?
The process of an ICO is similar to a Initial Public Offering (IPO) in the stock market.
Companies organize a marketing system to promote the new currency. Usually, they prepare a website where they explain the project and publish a document called a white paper. These white papers outline the conditions of the cryptocurrency, its technology, business model, and support. They also include a roadmap of the entire creation process.
Instead of obtaining shares, investors acquire coins or tokens. The tokens are typically used in the project's application, although sometimes they also provide voting rights or participation in the company's future earnings.
Companies often organize a pre-ICO, where investors can obtain tokens at significant discounts.
What is a cryptocurrency token?
The meaning of token (or ficha, in its translation from English) is a new financial term that defines a unit of value issued by a private entity.
According to the definition of token, it is something similar to Bitcoin, as it is accepted by a community and uses a blockchain. However, almost all tokens are based on the Ethereum blockchain (thanks to smart contracts).
In numismatics, this term is often used to name objects similar to coins, such as tokens or vouchers, which, although having value, are not issued by any Authority.
How much is a token worth?
The value of a token depends on the project it is associated with and the market's confidence in it.
Token Security
The security of a token depends a lot on the project, its protocol, and the team behind it. There are many tokens that are actually a scam. Read this article carefully to differentiate between scams and serious projects.
When the ICO achieves its funding goal, it stops. At this point, it is normal for the ICO promoters to have the funding to develop the project. After this, the company will keep its investors (the ICO buyers) informed about the project's progress and compliance with the roadmap.
Furthermore, in most cases, the responsible company negotiates with bitcoin exchanges to list their token on these platforms. This way, you can sell your cryptocurrencies if you disagree with the direction your investment is taking.
There are cryptocurrencies that have greatly appreciated since their ICO. Others have collapsed. It all depends on how the market values the project and how its managers handle it.
ICO Characteristics
- Global. They are distributed through the internet, so there are no borders or limitations.
- No investment limit. The only limit is your trust.
- No intermediaries. You don't buy through any broker or platform, but directly from the project owners. This way, you avoid paying commissions.
- Not regulated. This is a clear disadvantage for ICOs, as investors are very unprotected. This has led to ICOs being banned in China and South Korea, and regulated in the United States.
Types of cryptocurrency ICOs
You can make a classification of ICOs according to the way they issue their tokens. Normally, this is explained in their white paper.
- Fixed token supply and price
The ICO establishes a fixed number of tokens to be sold at a determined price. Therefore, the prices remain constant throughout the process.
- Fixed token supply and variable price
A determined number of tokens is established. Their purchase price increases according to the fundraising. Lower prices at the beginning try to attract more investors in order to reach the minimum goal.
- Variable token supply and fixed price
This type of ICO does not have a fundraising limit. All the coins that are purchased will be created at a fixed price. The Ethereum project was funded in this way.
How to invest in an ICO?
Each ICO has completely different characteristics, but their acquisition is usually similar. To buy tokens in an ICO, it is important to carefully read its conditions.
Once you have thoroughly studied its white paper, take into account the following questions:
- Pay attention to deadlines. There are some ICOs that achieve their goal in a few hours or even minutes. Others have a roadmap lasting several weeks or months.
- Find out what coins you need. Nowadays there are ICOs that allow you to purchase with FIAT money. However, for most of them, you will need bitcoin or ethereum. Buy the necessary cryptocurrency in advance.
- Have a compatible wallet ready. ICOs usually publish the wallets that are compatible with their token in their white paper. Make sure your coins are deposited in one of them.
Nevertheless, to avoid scams, it is important to search for information about the ICO. Investigate the market's trust in the project, as that is where the potential success of the ICO lies.
How to analyze an ICO
In order to avoid scams, frauds or fake ICOs, it is important to pay attention to some details. Below are essential issues that Initial Coin Offerings must meet.
- Have a serious white paper published, with clear details and ideas. Avoid ICOs that are not very specific in this document. This point is very important: without a very detailed white paper, do not even think about buying.
- If it is a token based on the Ethereum platform, it is very important that their smart contract has been published in a repository like Github or etherscan. Be cautious if they haven't done so.
- Have a competent team. Investigate each of the people who appear on the team. Look for their Linkedin and verify their experience in similar jobs. Pay special attention. Many ICOs create fake Linkedin profiles solely to support the ICO. Other times, they have used profiles of people who are not actually involved in the project. If you have any suspicion, mistrust completely.
- Make sure they respond to your questions. Verify that they have a contact email or even a Telegram group where they answer community questions. If in a public group you ask your doubts about the project and instead of answering correctly, they ignore you or even ban you, you are probably facing a scam.
- Avoid ICOs that do not limit their fundraising. It is just a symptom of greed on the part of its creators.
- Most importantly: Use Google. Surely, many people have the same doubts as you and have raised them in some forum. Investigate if any user has published any proof of the ICO being a scam. This way you can also verify the sentiment of the community about the ICO.
Even doing thorough research, sometimes ICOs that apparently are serious projects can be scams or even not have the success they expected.
ICOs are a high-risk financial asset. Keep in mind that you can lose 100% of your invested money. Therefore, it is very important to always keep the following premise in mind:
Never invest in an ICO money that you need.
Success Stories
Although we strongly emphasize avoiding scams, ICOs are not the devil. There have been projects that have become authentic successes. Below, we present some of the best cryptocurrency ICOs.
The Ethereum ICO
Ethereum was one of the most successful ICOs. It raised 31,531 bitcoins (15 million dollars at that time) in its mid-2014 launch. As stated in the white paper, investors did not have access to their ether until one year later. Currently, it is the second largest currency by market capitalization.
The ICO of ZCash
The Z-Cash project promised a 100% anonymous cryptocurrency. It received support from over 30 investors. It managed to raise 3 million dollars for its development. It is a deflationary currency, which, like Bitcoin, will put 21 million ZEC into circulation. Investors and developers will own 10%.
Conclusion
Choosing a successful ICO is really difficult. Spending time analyzing its characteristics and differentiating it from a scam is absolutely necessary. If you fall for the ads you see on the internet that promise high profitability, you will likely lose your money.
If you still have any doubts, you can watch the following video on how an ICO works.
Did you find the ICOs interesting? Learn much more about cryptocurrencies in our Blockchain Manual.