Understanding the Process of ICO (Initial Coin Offering)

An ICO (initial coin offering) is the cryptocurrency world’s version of crowdfunding. However, in this case, blockchain startups focus on launching ICOs instead of pitching their ideas to venture capitalists. Basically, you sell your digital tokens to early supporters to fund your crypto project. 

The owners can use these coins – 

• To get access to another platform  
• For providing governance rights to products  
• As an investment vehicle, which may grow in value over time 

But why do ICOs matter? For blockchain-based startups, they provide a secure, decentralized way to earn more capital without relying on stock markets or banks. Investors can use them to invent early-stage opportunities, which were limited to Silicon Valley insiders. 

However, like any other investment, ICOs have some risks of their own – market volatility, regulatory concerns, and the threat of scams. 

What is Initial Coin Offering? 

With ICO, you’ll have to provide digital tokens of your cryptocurrency (just like shares in case of fundraising). These tokens can represent almost anything – offering access to a platform, a stake in your project’s future success, or governance rights.  

But how does an investor know if your ICO is worth the investment or not? 

Through an ICO whitepaper – it’s a document that highlights your project’s technical details, vision, tokenomics, roadmaps, and the other parts of your business plan. A well-written whitepaper can build trust and help investors decide whether your crypto has the potential to be great in the future or not. 

Filecoin – An Example of ICO Success (Source: CCN) 

The popularity of ICOs began rising in 2017, thanks to promising projects like Filecoin (which raised almost $200 million). However, the hype regarding them had started settling down in 2021. 

How Does the ICO Process Work? 

While it’s like creating a Kickstarter plan, ICOs have unique requirements of their own. So, let’s break down how the process works –  

Step – 1: Laying the Foundation 

Before your ICO goes live, you need a solid strategy to create it. This begins with you or the developer writing an ICO whitepaper, which should outline your project’s – 

• Usage of technology 
• Vision 
• Future roadmap and tokenomics 

Once it’s done, a developer will begin creating the crypto coin by following an established token standard. Your choices may include –  

• Binance Smart Chain (BEP-20) 
• Ethereum (ERC-20) 

This will ensure that your project is compatible with different crypto exchanges and wallets. 

After this, you need to start marketing your project.  

Usually, a strong crowd-sale strategy should include using – social media, influencer marketing, and crypto forums – to let your audience know of your project’s existence.  

You can also distribute free tokens to some people to generate interest in your crypto and use referral programs to incentivize existing users when they invite new participants. 

Step – 2: Selling Your Tokens  

Once you’ve set everything up, it’s time to move to the fundraising phase. This should happen in multiple rounds, including –  

• Private Sale: Venture capitalists and early investors of your project will get exclusive access to your token at a discounted price. 
• Pre-Sale: A limited batch of cryptos will be sold to retail investors before you make the official launch. 
• Public Sale: Now, the public can buy your tokens, typically by using other cryptocurrencies, such as Ethereum, Bitcoin, or stablecoins. 

Note: Investors should receive your crypto coins in their wallets during the token issuance process. However, it’s important to lock these tokens from using to prevent sudden selloffs. 

Step – 3: Post-ICO Shenanigans 

Once the tokens are sold, your team will begin using the raised fund to develop the product, integrate it into the blockchain ecosystem, and list the tokens on exchanges. In the meantime, you can ask your investors to track their holdings and their value. 

Remember, a successful ICO should never be just about raising money for your project – you must deliver on your promises, too. Whether implementing new technology or integrating better wallet security, be transparent to your audience and let them know your roadmap beforehand. 

Key Factors for a Successful ICO 

Failure of Bee Token (Source: X) 

While some ICO projects skyrocket from the get-go, like Filecoin, others also fade into oblivion for several reasons. For example, Bee Token raised almost $15 million through an ICO project. However, they failed to deliver a home-sharing sharing platform to materialize it – which affected their online credibility massively. Many people are also considering it to be a complete failure. So, if you don’t want it to happen to your project too, here are some factors you need to consider in this regard –  

1: Market Demand 

Having a groundbreaking idea won’t be enough. Your ICO or cryptocurrency needs to solve an actual problem as well. Investors will always look for projects that have – 

• Strong blockchain funding 
• Real-world use cases  
• Clear utilitarian objectives 

If the current market doesn’t really need another NFT or payment token, like Bitcoin, why would someone invest in it, right? 

2: Whitepaper 

The ICO whitepaper of your project will make your ideas and visions more transparent to your audience. And the more they can understand and relate to it, the more interested they’ll be in making an investment. Here are some tips that can help you with creating a good ICO whitepaper – 

• It should have a classic structure, which will include the problems the current market is facing and how your crypto coin can solve it  
• A disclaimer must be put within the whitepaper (consult with a lawyer to use correct terminologies and structure) 
• Provide competition analysis to showcase your business knowledge and precision in executing the project  

3: The Team 

Creating a cryptocurrency from scratch requires technical excellence, years of knowledge, and experience. So, it’s important to have at least two veteran developers in your team with a proven track record. 

Also, you’ll need to a good marketing team to create hype around your ICO. So, you may have to hire people who have worked in community building projects before. 

Bonus: Legal Considerations 

ICOs, like cryptocurrencies, exist in a rather grey area of financial regulation. Some countries, such as the USA, classify ICOs as security. So, they must comply with strict laws to get launched. If your project doesn’t follow the legal regulations in your country, it’ll be shut down by the government. 

Benefits of ICOs for Investors 

IPO vs. ICO – A Comparison (Source: SlideShare) 

As an investor, putting your funds in an ICO can give your portfolio new wings. Apart from this, you can also get the following benefits from your investment – 

1: Early Access to Potentially High-Growth Projects 

Investing in an ICO can be potentially as beneficial as buying Bitcoin in 2010. If everything fits into place, it can turn an investor’s few hundred dollars into millions within a few years. While the chance of this happening isn’t that high, it’s still a major draw for most investors. 

2: High Liquidity and Flexibility 

Unlike traditional startup equity, you can trade your ICO tokens as soon as the offering is complete. So, there’s no need for an investor to wait for the company to get acquired or go public. 

3: Democratizing Investment Opportunities 

Thanks to the decentralized approach of ICOs, investors can access high-potential projects without the barriers of a conventional finance system. If you have a working internet connection and some cryptocurrencies in your pocket, you can invest in an ICO. 

Risks of ICOs 

Like any other form of investment, ICOs have certain uncertainties associated with them. Here’s what you need to know about it –  

1: Scams and Fraudulent Activities 

As there’s no strict regulation yet, for governing ICOs, it has become a paradise for scammers. Many fraud projects like these tend to exploit the hype around their projects to raise millions of dollars and then disappear overnight. So, if an investor sees a project lacking a clear roadmap, a working product, or a good development team, it’s best to avoid it. 

2: Volatility 

The crypto market has always been infamous for how volatile it is. And this can affect even the most legitimate ICOs, as they can experience a severe drop in value after launch. So, it’s important to remember for an investor that timing and market sentiment plays a crucial role in an ICO’s success. 

3: Failure to Deliver 

Many tech entrepreneurs begin working on their projects without a proper plan or strategy. So, in most cases, they end up failing to deliver everything they promised. In some cases, a lack of demand or commitment from the project leader’s end can also doom a project. 

Summing It Up! 

When creating an ICO project or investing in it, having proper knowledge about the processes is important. The project leaders should always focus on creating an initial plan and stick by it, while the in investors must research and analyze the whitepaper first before making a blockchain investment.