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How to Invest in an ICO: The Complete Guide

Ultimate Guide for Investing in ICO
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(Last Updated On: April 27, 2022)

ICO is an acronym for Initial Coin Offering, This is a term that is used when a company wants to raise funds for a new cryptocurrency offering.

This method of raising money for a new crypto is similar to what is known as Initial Public Offering which is a method used for raising money when a company wants to join the stock market.

Generally, a company that is looking to raise funds to create a new coin can launch an Initial Coin Offering as a strategy to raise money.

This strategy has been in existence since it was first utilised for the Ethereum Initial Coin Offering back in 2014.

To say the least, ICO’s have been a very effective means for teams and founders to raise capital to build crypto projects; protocols and ecosystems.

Also read: Blockchain Technology Explained

During the Initial Coin Offering, interested investors who meet the requirements of the company can buy into the offer.

The said offer can be in the form of a cryptocurrency token or it could be a specified stake in the crypto project. 

The crypto industry is yet to have good and comprehensive regulations, so it is very easy for investors to lose their money in these deals.

Even  though many investors have reported massive gains, many have also lost millions in fraudulent ICOs.

So, it behoves any one who wants to dive into the world of ICOs to do good research and find out the use cases of whatever coin they want to invest in.

How to participate in ICO

To participate in Initial Coin Offerings you have to have an existing understanding of how cryptocurrencies work.

At least a bare minimum of knowing how crypto wallets and exchanges operate will save you a lot of stress.

Also read: How to Invest in an ICO: The Complete Guide

This is because to get any new token, you must first have to purchase an existing digital currency.

It is these established digital currencies that you will now exchange for the new token that you want to invest in.

How an ICO works

Initial Coin Offerings are quite interesting and need some good backing thoughts to really make it work.

This is why from the on set, the founders or organizers of ICO’s have to decide on what way to structure the offerings.

There are about three ways an ICO can be structured and this includes; 

Types of ICOs

Static Supply and Static Pricing

This model has to do with a company deciding to specify a limit to the number of tokens and also the funding goal that it needs.

With this system every token will be offered at a specific prize and also the total supply of the token will be fixed and can not be further increased later.

Static Supply and Dynamic Pricing

This model of ICO is similar to the initial one in terms of having a fixed supply. However, when it comes to funding, the goal is dynamic. 

With this system the amount of money that is raised from the funding process will be able to further determine the overall price of each token.

Raising more money than initially estimated and targeted will lead to further dilution of the pricing of the tokens.

Dynamic supply and Static Pricing

This model of coin offering is adopted when the number of tokens are not capped, meaning that the number of tokens will remain dynamic in terms of quantity.

However, the pricing will always remain static regardless of any change in the supplied amount.

With this system the amount of money raised during the offerings, will determine the supply quantity of the token.

Thus, the more money raised will also mean the more tokens that will be supplied at the same price.

What is an ICO white paper

Initial Coin Offerings as we already know now can be structured into three different ways.

But how exactly can an organiser get this information out to the investors? This is where the White Paper comes in.

An ICO white paper which is also referred to as a Woof Paper is an information bundle designed to convey the necessary information of a crypto project to potential investors.

The white paper is usually put up on a simple website with a domain name that is for the token and it will have all the information about the offerings.

Example of a ICO white paper;

Bitcoin White Paper
Bitcoin White Paper

Ethereum ICO White Paper
Ethereum White Paper

The white paper provides a deeper explanation of the ideology and future plans of the crypto projects and also the proposed and expected us cases of the project.

Also read: 9 Ways How to Promote Affiliate Products and Services

The information on the whitepaper is expected to detail more on:

  • The monetary policy of the token.
  • What payment methods (coins) will be acceptable, 
  • What exchange it will be launched on in due course, 
  • How the investors will receive their tokens upon exchanging their coins with it
  • What will be the duration of the ICO period and of course
  • How much the project needs.

The guiding principle of an ICO launch

In principle during an ICO, if the projected financial requirement for the project is met by the investors. Then the project will proceed further.

However, if the fund raised falls short of the projection, then the investors will be refunded and the ICO will be deemed unsuccessful.

***but a lot of times this principle is not adhered to because of poor regulations in the cryptocurrency space.

This might cause you to ask; so who should run an ICO?

Who can launch an ICO?

The answer is anyone! Literally anyone who (lives in the US) has access to the required technology and skills can start developing their own token and go on to launch an ICO.

Like is mentioned earlier, the crypto space still has a poor regulatory framework.

Side note; one youtuber that I am subscribed to just recently launched a cryptocurrency. That is how easy it is to get into space.

Also read: How To Start An Email Marketing Campaign In 5 Minutes

There is nothing really bad about him launching one, but there is something fundamentally wrong when anyone can simply create their own coin without any proper regulation.

Because, if they are not honest people, they can decide to pull the rug any day after people might have invested in the coin.

And this is why an ICO which is considered to be the easiest way to raise funding, is also considered to be the easiest funding strategy proned to scam.

How to detect and avoid ICO scam

If you are into ICOs, it will save you a lot to know how to move in this space.

This is why before you invest in any bubble campaign of a new coin offering, you should always do your research by checking the background of those heading the project.

If the heads of the team do not have  any previous portfolio related to cryptocurrency or blockchain then you better hold your money.

These team members most as a matter of importance have verifiable expertise and genuine status as is depicted or written on their bios (it’s your duty to find out).

Sometimes famous celebrities are brought onto the scene to promote the ICO, let that not stop you from making further research.

 Also read: How to detect and avoid Ponzi Schemes

There are certain celebrities that have promoted some ICOs in the past and they came out quite good.

But also some others have been taken to court and they had to pay settlements after the organizers of the projects where indicted for ICO frauds.

A good example of this is the case of the Centra Tech co-founder Sohrab Sharma who was sentenced to 8 years in prison for ICO fraud to the tune of $25m.

Make sure that the project team is transparent about the goals and are committed to the process of achieving them as is written on the whitepaper.

Look out for any legal clause on the white paper and make sure to have a clear understanding before proceeding with the purchase.

Furthermore, check to find out if the funds raised are stored in an escrow wallet. 

Escrow wallets usually require multiple access keys, This is meant to provide an additional layer of protection against scams.

TopICOlist is a site that provides more info about the available ICOs on their website, so that you can compare and make decisions.

What is the difference between ICO and IPO

The major difference between an ICO and an IPO is the fact that an ICO is usually organised with the aim of raising money to fund a new crypto project.

An IPO is organized by an existing company that wants to go public and offer its share on the stock market.

More importantly like i have mentioned earlier, ICOs have less to no regulations while IPOs are well regulated by the financial agencies of the government.

Due to these poor regulations, some countries do  not allow companies to run ICOs, while other countries do, 

As a mandatory requirement, any company that wants to issue its stock on the stock market must register with the regulatory authorities and also create a legal document known as a prospectus.

What is an IPO Prospectus?

A prospectus is also a document just like a whitepaper but in this case it is issued by a company that wants to go public.

This is a mandatory document that is required from the company by the security and exchange commission (SEC).

It is meant to contain a description of the company and the terms and conditions bordering the IPO offering and any other information that a prospective investor needs to know before investing in the company. 

While on the other hand, ICOs are required to meet regulatory requirements only if they have been issued as a security token and not  utility token.

Furthermore, another big difference between an ICO and IPo is that, investing in an ICO does not give one an ownership stake in the project or the company.

Also there is no guarantee that the project will succeed and that the tokens will become useful in the future.

While for an IPO, the company is offering shares of the company and you get to buy and own a stake in the company, and by the way the company is already in operation.

What are the different types of tokens

Crypto tokens have been classified in different way and following different patterns, but in this post I will be focusing on the most popular classification, which are utility and security tokens.

Utility Tokens

Utility tokens are the type of tokens that gives anyone holding them a possible future access into a service or product.

These tokens are usually created by new ventures to get capital for fund their projects.

They can also be regarded as user tokens and are the type of token that are concerned with the Initial coin offering that have been described above.

Security Tokens

Security tokens are linked to the values of an assisting tradable asset like a company’s stock.

Thus, the value can easily increase based on the activities of others other than the issuing company.

And this type of token is therefore subject to regulations by the SEC.

If well classified and executed following all the regulatory requirements, a company can issue a security token that can represent the shares of the company’s stock.

Finally, like I have explained in this article, ICOs are cool and much easier to organise than an IPO

Also more prone to scam, so depending on what your investment goals are, always do your due diligence before investing in any offering.

Good Luck!