Initial Coin Offering (ICO): briefly about the main points

The last decade saw the emergence of the crypto industry spread across the world with the technology being widely adopted by a large part of the global population. The successes of Bitcoin and Ethereum encouraged thousands of developers to start their own crypto projects. This required some sort of funding in order for said projects to kickstart and that’s where ICOs or initial coin offerings come into play.

What Is an ICO (Initial Coin Offering)?

Imagine that anybody can invent a new fruit. So you managed to invent a new type of fruit. It’s a mixture between tomato and apple. Let’s suppose you called it applomato because you’re so typical. However, no one really knows what’s it gonna taste like nor the side effects it’s going to have on the body.

More importantly, you don’t know how to price it. Now imagine that in order for you to decide how much it’s gonna cost, you decided to write a long academic paper which you called the fruit paper. In this paper, you explained why applomato should be adopted by the masses and how it’s going to change the future of food in the world. Then you decided to use that paper to fund your project. Basically, what you’re going to do is one of three things:

• Produce 100 KG of Applomatos and set them for sale at a fixed price.
• Produce 100 KG of Applomatos but set them for sale without a fixed price.
• Produce an unknown number of Applomotos which you will set for sale at a fixed price.

This is basically what an initial fruit offering is. Now let’s remove fruit and call it an initial coin offering. Anybody can create a coin or a token and then set up an initial coin offering to sell the coin to early investors. This is because it’s highly unregulated compared to traditional finance. The idea behind an ICO is to motivate early investors to buy your token so that you grab the initial fund through which you are going to complete major milestones (hopefully) in your project that will only increase its value over time.

What is the history of the ICO?

You might be wondering who started all of this. Back in 2013, a software engineer called J.R Willer wrote a whitepaper which he named “The second Bitcoin White Paper” where he explained how his Mastercoin is going to work. The project was renamed later to Omni Layer and managed to raise $600k during its ICO which lasted for a month. It was built on the Bitcoin blockchain and sought to create a more decentralized ecosystem on the Bitcoin blockchain.

The project still exists today and the token is listed on Bitfinex. Keep in mind that this was the very first ICO to ever take place in the web3 space. Naturally, this inspired other developers to follow suit and start their own ICOs.

By 2014, 7 projects topped by Ethereum managed to raise about $30 million in their ICOs. Most of these projects relied on investors buying with Bitcoin and that included Ethereum as investors bought Eth with 31,000 BTC which equalled $18.3 million at the time.

In 2015 and 2016 about $260 million were raised by around 50 different projects including Waves, Lisk, Iconami and Golem. However, in 2017 ICOs became really popular and hundreds of ICOs took place during that year. 2017 also marks the widespread of rug-pulls which are ICOs during which developers raise money to complete certain milestones but end up taking the money and disappearing for good.

By 2018, the ICOs hype invaded planet earth and ICOs were being performed everywhere and eventually came under legal scrutiny. Many countries banned ICOs and even Facebook banned ICO advertisements. The word ICO had a negative connotation because of the sheer amount of scams being performed under the name of ICOs.

How an ICO (Initial Coin Offering) Works?

You might be wondering about the process of an ICO. Remember the applomato that you invented because you’re so smart?

This is basically how an ICO works!

• The first thing is a crypto nerd coming up with an idea about creating a project that utilizes a token that will solve x problem.
• Then, they need to figure out how much money exactly they think they need in order to build and fund their startup to solve said problem.
• Afterwards, they need to design a whitepaper. Remember your fruit paper? They need to say why, how and when their token is solving x problem and why should you invest in it.
• Finally, they need to decide on how to structure their coins.

Again, back to applomato. Remember how you had three options to sell it? That’s exactly how a token is sold during an ICO:

• Either the coin will have a static price + a static supply which means it has a fixed price per token and a fixed supply for sale.
• The coin will have a static supply + a dynamic price. This means that there is a fixed supply for sale but the project owners want to see how much investors will pay during the ICO. This will determine the price of the token.
• The final option is when the coin has a static price + dynamic supply. Here the crypto nerd decides that based on much money they receive, they are going to determine the price of the token.

The next step is to calculate how much money was raised during the ICO. If it is equal to the planned or more then the ICO is a success and the project will proceed. Provided it’s not a rug pull. If not, then the money will return to the investors and the ICO will have failed. Most likely, another ICO takes place to achieve the targeted funding. ICOs can also last for either a long or a short time. Some ICOs lasted for a month and some lasted for a year.

ICO starter pack:

Should you feel the need to take your applomato skills into crypto and create a new coin/token, here is what you’re going to need to have:

• A white paper explaining why your project is important and what problem is it solving and how will it solve said problem.
• A detailed and realistic roadmap that is covering both long-term goals and short-term goals.
• A decent study that is explaining the best practices and lessons learned from the other ICOs
• A well-designed website that promotes your crypto project and shows professionalism. Extra points if the website is free of grammatical and spelling errors!
• Marketing experts who are passionate about web3 and understand how to design a good marketing strategy.
• A social media campaign that aims at nurturing and growing a healthy community with clear and realistic expectations.
• Make sure that the crypto project won’t face scrutiny in the future because of your token being considered a security

If you manage to ace all of these points, most likely your crypto project isn’t a scam and it solves a problem.

How are ICOs regulated?

You now have your ICO starter pack and it’s time to ask, is any of this legal? For the longest time it wasn’t as legal as it was unregulated, this of course led to disastrous events where millions of dollars were lost because developers took the money and disappeared. Further, many projects collapsed due to other factors and that led to investors losing all of their funds too.

Regulation of ICOs started taking place in late 2017 and early 2018 with many countries completely banning ICOs for good like China, South Korea, Nepal, Macedonia, Bangladesh, Ecuador and Bolivia. Other countries like Thailand took a softer approach where they posed a temporary ban until a framework to regulate ICOs is finalized. The United States allows ICOs to take place provided they are not being considered securities. Should they be considered securities in the USA, they will fall under the jurisdiction of the SEC which is the Securities and Exchanges Commission.

According to the SEC, a token can be considered a security if it offers the following:

• It’s fungible which means it can be exchanged for other goods and assets.
• It represents ownership in the stock of a publicly trading company. So, if you own 100% of applomatos and decide to sell me 10% of that ownership, I’d be owning 10% and you would be owning 90%. This is considered a security in the form of equity.
• Securities aim to raise funds for a company through public sales and offerings.

As you can see, these are very general points and it means that every ICO should be checked by the SEC to determine whether the token will be a security or not. This is mostly related to the fact that cryptocurrencies are a new technology that appeared about a decade ago so the current regulations and laws aren’t really fitting them. But for the most part, there are no unified laws to regulate ICOs globally yet.

This of course poses a threat to investors who want to invest money in ICOs.

What are the risks of investing in ICOs?

We have just agreed that ICOs are mostly unregulated. This explains the large number of scams taking place in the space under the name of ICOs. There are no rules to regulate or control ICOs and this means anyone can create a coin/token and offer it for sale in a public offering. This means that you as an investor stand at risk of losing your money to fraud with no guarantee that your money would be returned to you if it’s lost.

In 2018, it was estimated by Statis that about 80% of ICOs are scams and seek to rob investors blind. Hence why investors are always advised to exercise extreme caution when deciding to invest in new crypto projects.

Also, the unregulated environment could lead to fines and penalties imposed on both investors and the project team. This was the case with Telegram when it raised about $1.7 billion in 2018 but then discontinued the project when the SEC sued Telegram. The SEC claimed that Telegram was bankrupt and trying to fund itself by creating a security wearing the utility token robe. Eventually, Telegram had to pay about $18.5 million in fines and return the money to the investors. This is, of course, a best-case scenario, in many cases, the investors did not receive any of their funds at all.

That is why it’s always important to keep the “ICO starter pack” written above in the back of your mind as it can be used to determine whether a crypto project is a scam or not. More importantly, if it’s legit it might face legal scrutiny.

One way to mitigate the risks of ICOs is to invest in projects sponsored by big names in the space such as Binance, FTX and Coinbase. These are known as IEOs or Initial Exchange Offerings and are usually offered by big exchanges.

On Binance, investors can utilize the launchpad to invest in newly formed crypto projects during their IEOs. These are projects that are already vetted and checked by the Binance team. This doesn’t eliminate the risk but it highly reduces it as Binance is a reputable exchange that has a lot of experience and resources to commit to spot scam projects.

Another safe way to mitigate the risk is to invest in IPOs instead of ICOs.

Initial Coin Offering (ICO) vs. Initial Public Offering (IPO)

Initial public offerings or IPOs are offerings where a company is selling a part of its ownership in the form of equity as securities. These are highly regulated offerings that are subjected to a lot of laws and are supervised by governmental bodies and investment banks. IPOs hugely reduce the risk of fraud and scams but don’t entirely eliminate the risk of getting liquidated. “Getting liquated” means losing all your money but in financial slang, now you know how to show off in front of your friend!

Even though an IPO is regulated, it is by no means a guarantee that the company will succeed. For instance, many of the investors who invested in IPOs right before the pandemic lost their money because the companies had to close during the pandemic. Another example is the company failing to win over its competition or being replaced by another company that offers better or more competitive service. This means that IPOs still are risky investments but they are less risky than ICOs.

Below is a table pointing out the similarities and differences between ICOs and IPOs:

Initial Coin Offering (ICO)	Initial Public Offering (IPO)
Performed in the crypto space	Nowadays mostly performed in the tech space
Anyone can make a project and then create an ICO	Only registered companies can create an IPO after following all the regulations stated by the government
Extremely risky	Relatively lower in risk
When profitable yields crazy gains	Yields Moderate gains
Very high probability of fraud	Very low probability of fraud
Much easier to participate in ICOs globally	Mostly restricted to IPOs taking place where you live
Funds can be raised in either crypto or fiat currency (USD and Euro are called fiat currencies)	Funds can be raised in fiat currency only so far.
Both are sought after by venture capitalists and angel investors for their high returns
Relatively easier for retail investors (people like you and me are called retail investors) to invest in ICOs	Very hard for retail investors to participate in IPOs
Doesn’t secure ownership or stake in the crypto project	Secures an ownership or stake in the company through equity. Hence why it’s considered a security
Lost funds may never be recovered	Slightly higher chance to recover lost funds because of regulations

The above table can be summed up in one simple sentence; ICOs are high-risk high rewards investments. While IPOs are low-risk low reward investments.

What are the Advantages and Disadvantages of ICO?

You can sum up the advantages of ICOs in the following points:

• Extremely rewarding when projects are successful. Many investors received more than 1000% return on their initial investment which means they had the initial investment increase by 10 times!
• Participation can be done easily via the internet especially if you’re investing with cryptos like Bitcoin or Ethereum.
• Offers privacy and anonymity for investors.
• Gives investors a chance to invest in an avant-garde technology that is still in its early stages; so much room for growth in the future.
• Allows normal people like you and me to invest in many crypto projects although some restricted their ICOs to venture capitalists and private investors only like Solana.

Despite all of that, they come with huge risks that many may not be able to tolerate such as

• High risk of losing funds due to scams, fraud and rug pulls.
• The project collapsing due to the immaturity of the space and hence losing all of your money.
• The project attracting legal scrutiny and failing because of that due to the agnosticism surrounding regulations and ICOs.

What ICO Examples?

You might be wondering about all the hype surrounding ICOs. Below are some examples of ICOs that managed to yield crazy gains to early investors.

Ethereum’s ICO in 2014

We talked about Ethereum raising $18.5 million in BTC in 2014 but what I didn’t tell you was that Ethereum’s early investors bought Eth tokens for $0.1311. Ethereum reached an all-time high of $4500 plus last year.

If you want to know how much is that, it means that for every $1 you paid you would receive more than $12,000 as a return on investment!

Cardano’s ICO

Cardano’s coin ADA had its ICO over stages between September 2015 and January 2017

The coin was sold at $0.0024 per token and raised $62.2 million. The coin reached an all-time high of $3.1 which would have yielded around $1291 per $1 invested.

BNB’s ICO in 2017

Binance launched its token in 2017 and initiated the ICO to fund the project. 100 million tokens were sold at $0.15 to investors for $15 million. BNB surpassed $690 per token last year yielding $4600 plus per $1 invested.

Solana’s ICO in 2018

Solana’s fundraising took place over various private investing rounds with the ICO taking place on March 2020 and raising $5.3 million. Half a billion Sol tokens were sold at the price of $0.22 per token yielding almost $1160 per each $1 invested when Sol reached its all-time-high last year of $255 plus per token.

As you can see, the hype around ICOs is for good reason. With coins offering extremely high returns on investments, it’s only natural that investors pursue crypto ICOs all around the globe in hopes of discovering the next coin that will go to the moon!