ICO For Beginners
The success and popularity of initial coin offerings (ICO) have become very adamant in 2017. Over the last few years, many and varied projects have sought to raise funds through ICO and the progress isn’t slowing down any time soon. Note that, the total amount raised through successful sales has been boosted. A good example is Aragon which raised $25 million in a week but had to be closed since the maximum funding limit was reached.
Additionally, investors have profited a lot from the increase in the price of ICO after the sale. There is no way to guarantee future returns with the past success so you can’t risk a huge amount of money hoping that the same trend will continue. However, it has generated a lot of interest, especially from investors who are not enthusiasts of cryptocurrencies. If you have come across ICO but have no clue about it, here’s what you need to know. From this article, you will learn everything about ICO.
Defining An ICO
ICO (initial coin offering) has been named after the IPO (initial public offering), a term commonly used in the stock markets. IPO refers to launching a company’s shares in the stock market and when they are traded publicly. These currencies were named coins since they were first used as distribution methods for alternative digital currencies. Currently, most of the ICOs don’t sell coins designed to be used for general purposes. Rather, they are tokens associated with specific businesses, apps or projects. There’s also the initial token offering (ITO) always used interchangeably with ICO.
What’s The Legality Of ICOs?
If an ICO is properly formatted then it is not legal. An ICO is legal if the company behind it doesn’t misrepresent the coin or token as a financial security. Also, all the investors should follow the local laws in the country when reporting the income. Cryptocurrency is unregulated ( and in some cases lightly regulated). As a result, there are very few legal requirements for the company and the buyer has few legal protections as well. There are some advantages in complexity and cost of the company’s fundraising.
It can also open up the possibility for ordinary investors to finance start-up companies which ordinarily can only accept financing from angel investors, VCs or private individuals. For some instances, especially with legal guarantees, some percentage of the company attributed to the shareholders can be replaced with cryptographic guarantees. In such cases, there are smart contracts where any revenue share is distributed to the token holders before the money even gets into the company’s accounts. Of course, legal recourse isn’t available if anything goes wrong, just like the same situation for an investor in the regulated stock markets.
What Are You Buying In An ICO?
With ICO crowdsales, you’re bound to come across a lot of variety with the coins and tokens available. Some of these differences can be noted in exactly what the tokens represent, the rights or benefits that can be accrued and the economic principles that determine their value. You will notice this is completely different from the traditional IPOs in stock markets because investors purchase the same thing and that’s the ownership share of a company. Therefore, if you’re buying anything in an ICO, you need to have a clear understanding of what you’re actually buying.
Here is a list of examples from different economic models applies to tokens that have been sold in ICOs. It is not a comprehensive list since it is a very volatile market with novel strategies created frequently. Also, some projects are likely to be covered in multiple categories. However, you will get an idea on what to look for and how to understand the principle behind valuing any token.
1. App TokenThese are designed to be used within specific apps, on particular websites or in specific games. There’s always a mechanism in place to guarantee that the value of the token is tied to the app, website or game where it’s being used. There are different ways of achieving this and the particular model chosen should effortlessly determine the value of the token. The 2 commonly used methods include the following.
First, the requirements for payments for services found in the app, such as premium services, advertising fees and in-app purchases, should always be validated using the app token. Therefore, the demand for these services boosts the demand for tokens and such their value increases dramatically. Take an example of KoCurrency, a price prediction platform for cryptocurrencies, where users should pledge intelligence on intelligence contracts using the internal tokens available on the platform.
Therefore, the algorithm used on the prediction platform becomes smarter thus adding value. On that note, any new users looking to access the more accurate data from the predictions platform should pay more for the tokens, especially when the value of the data continues increasing. There are cases where a small percentage of the tokens used to pay for services or products are burned. As a result, the supply decreases and the value of the remaining tokens increase.
Secondly, you can choose to distribute a percentage of profits of revenue to people who own the tokens depending on the amount of tokens they own. There are some decentralized apps that have been created using blockchain technology that apply smart contracts to distribute the revenue. It can be done in such a strategy where the company can go behind the app to withhold payment since the dividends can be paid even before the company receives funds.
2. Pseudo Shares And DAO Tokens In some instances, a token will represent a share in the success of a larger project, fund or business especially with multiple products, interests and services that are not limited to a specific app. Often, it involves the company or another organization committing to share a specific percentage of profit or revenue to the token holders. As a result, the token represents a pseudo-share in the organization but it doesn’t signify real ownership, just like real company stocks would.
Here, some organizations might employ the use of smart contract to manage the finances automatically. Therefore, there is enough security for token owners since the funds are distributed automatically according to set rules that are usually enforced using the blockchain technology. The smart contracts also provide token holders with additional rights and benefits. For instance, they can vote on the organization’s future and any changes to the smart contracts in control.
As a result, the organization basically transitions from a conventional business to a decentralized autonomous organization which is controlled by the token holder. It’s actually similar to how shareholders in a company own and control a company. Of course, there is direct and comprehensive participation in the case of the token holders. These rights are usually enforced by the blockchain network and the cryptography and not the laws or courts. There are some advantages and disadvantages associated with these strategies.
3. Coins And Platform Tokens Most of the DAOs, app and revenue share tokens mentioned above don’t necessarily require their own blockchain network. However, in some cases, new blockchains will be launched with different features that require their own coins. Well, in that case, the coins will get their value, just like Bitcoin but they often have a fixed or limited supply growth. The value will increase if there are more people who own some of the coins and use the network.
If you’re looking to value these coins, you should pay more attention to the inflation or deflation dynamics. To begin with, coins often require inflation to pay the minters or miners who keep the network secure. Here, token holders are able to participate and earn good rewards. Of course, there is a chance that the tokens already taken might be destroyed as lock up tokens or fees for cases of specific uses. Note that, the pattern through which coins exit or enter the current supply has a large impact on the overall value of an individual token.
4. Asset Backed Tokens There are some tokens that represent the value of an underlying asset. It’s tough to create a hard connection between a digital and physical asset, you need to trust the company behind the deal or ensure proper legal regulations and protection first. That way, you can guarantee that the token is actually backed by the full value mentioned when the deal is crafted.
Where Are ICO Tokens Stored?
If you have used wallets for storing cryptocurrency such as Bitcoin, you can also use the same to store your tokens. Of course, depending on the blockchains where the tokens are issued, you will have various wallets to choose from. For instance, for tokens launched on Ethereum, you should consider using an Ethereum wallet. Additionally, it can use protocols that mimic the Bitcoin network such as Counterparty or Omni.
Here, the web wallets are easy to use and operate on very comprehensive node software. If you’re concerned about being hacked, you can also store the tokens in an offline paper wallet. Of course, it’s advisable to follow all the instructions availed by the organizer of the ICO. You can also make the necessary inquiries to make sure you have the best wallet for buying or storing tokens.
Now that you understand ICOs, there are a few things you need to know. First, you must always do a lot of research before participating in any of these offerings. Just because lots of people are doing it, you shouldn’t be blind to the facts of the transactions. Find out more about what you’re transacting and how you can benefit from it. Additionally, don’t forget to look out for the legal regulations in place, in the event that something goes wrong. For instance, if payments are not distributed as required, you should find out the legal recourse in place for the best results.
Secondly, you can always contact the ICO organizers to find out more about it. They are always willing and ready to provide the best information to the token holders. You can always connect with the ICO organizers through social media, email, phone or live chat on the website. Find out the features, benefits and profits you’re bound to get from participating in the ICO. Since they have become quite popular, there is always a wealth of information on the right way of doing things.