Initial Coin Offerings (ICOs) are taking off: while ICOs raised a combined $3.7 billion in 2017, this figure is already $17.5 billion for 2018. While they've been criticised as 'get-rich-quick' schemes, and a lack of regulation has led to incidents of scams, ICOs can be a great way to raise funds and stoke interest in your startup. Here, we lay out everything you need to know about ICOs, and whether or not you should consider one for your business project.
What is an ICO?
ICOs have emerged alongside the developing cryptocurrency economy, with the first one launched in 2013. And as blockchain becomes more widely adopted and altcoins proliferate, they're set to become increasingly common. Put simply, when you launch a cryptocurrency token or blockchain platform, you have to hold an ICO. This means launching a token sale, whereby tokens are released and become available to buy on exchanges for more established cryptocurrencies such as bitcoin or ETH, or fiat money.
Before this point, many decisions have to be made, depending on the nature of your platform or token. Some newly launched cryptocurrencies are built on completely new protocols, meaning the underlying blockchain technology differs from already existing tokens. If you’re looking to launch a decentralised, blockchain-based platform, most of these are built on top of the Ethereum protocol, making it the default option for DApps (decentralised apps).
ICOs resemble IPOs in some ways, in that they provide a means for investors to buy into your project. However, the mechanics vary, although there are some overarching similarities. For example, when you invest in a blockchain company via purchasing tokens in an ICO, it’s similar to buying shares in a company. That is, if the company performs well and becomes more popular, theoretically the demand for these tokens will grow, and their value will increase. Therefore, you could purchase tokens if you believe in a company at its launch, in the hopes of selling the tokens later at a profit.
In some ways, ICOs are seen as more democratic than IPOs, because unlike the latter, you usually don’t have to be an accredited investor or pitch in a minimum amount to contribute. Think of it more like crowdfunding but with tokens.
How does an ICO work?
Before launching a token sale, you have to make important decisions such as how many tokens you'll be releasing and whether or not you'll be reserving a share of the tokens for other purposes. Most founders will hold a share of the tokens back for themselves, meaning that this group will hold the most power in the platform's economy and be able to influence decisions more, as well as providing them the ability to ‘cash in’ and release more funding for the project.
However, some blockchain companies don't want to encourage the hoarding of tokens so have adopted an inflationary, rather than deflationary, model. This means they will release tokens continuously, rather than there only being a set amount available. To illustrate, Bitcoin is an inherently deflationary currency because there is only a set total number that can be mined, but Steem, a blockchain social media platform, has adopted an inflationary model, to encourage people to transact on the site using the tokens.
An ICO will last a set time period, usually between one and three weeks, and can vary in terms of pricing. In some cases, a static price model will be adopted, whereby the price of the tokens will not change, whereas in some cases a dynamic pricing model will be adopted, where the price adjusts in response to demand.
What do you need to launch an ICO?
As may have become clear by now, ICOs are certainly not suitable for every company - they’re only really applicable for companies in the blockchain or crypto sphere. So to consider launching an ICO, you first have to have an idea which would make sense on a decentralised, blockchain platform. Intrinsic to the idea has to be some form of peer-to-peer exchange, as well as being an internet-based service.
But before you decide on an ICO, it's important to consider whether the token can be effectively integrated into your ongoing business in a meaningful way or whether you see it as solely a means to raise fast cash. If it's the latter, the value of your token will likely crash after the initial launch phase.
Intrinsic to the idea of launching a blockchain platform is the lack of central governance and central body taking commission from interactions happening on the site. For example, a decentralised Airbnb (yes, it exists), will not charge people to use the platform. This is one of the most appealing attributes of decentralised platforms, however, it also means that they cannot be monetised to the same extent as centralised platforms which take commission, so that’s something to bear in mind if you are looking to enter this space.
The barriers for launching an ICO are much lower than launching an IPO. To do the latter, you need a team of accountants and lawyers, rafts of paperwork and approval from regulatory bodies, and a white paper that contains information such as revenue so far and projected earnings, as well as a comprehensive business plan for the future.
Not so for ICOs. To launch an ICO you only really need a good idea. This should be laid out clearly in a whitepaper available on your site which will set out the plan for the token sale, i.e. how many tokens will be kept by the founders and other information including how long the ICO campaign will run for among other things. Ideally, this will be clear, concise and not too jargon-heavy.
As the ICO space is far less saturated than the IPO space, it’s currently easier to attract attention with an ICO, especially seeing as people making up crypto communities are extremely engaged.
However, companies will still need to employ awareness raising tactics such as orchestrating sophisticated social media campaigns and getting active on forums such as Bitcointalk and Reddit for example. Another good start is to develop a thriving Telegram community - the messaging tool of choice for most companies in this space - and to invest in a polished web presence.
How are ICOs regulated?
In short, they’re not. And this is what bears some of the attraction for founders to launch ICOs given the lack of red tape surrounding the process. Cryptocurrency as a whole is not currently regulated, leading some to bestow upon it the ‘wild west’ moniker.
If launching a token, you need to be aware of ‘pump and dump’ schemes which aim to artificially inflate the price of a token and then offload at a profit. These can cause wild fluctuations in the initial price of your token but the long-term value should stabilise in response to a truer reflection of supply and demand, as well as other influences.
Although the SEC is going to be investigating some ICOs that turned out to be scams, there is still no regulatory framework for ICOs written into law. This means you have to be discerning about whether a blockchain project is legitimate before investing in it.
For founders too, ICOs can be risky business despite the relatively lower stakes. In 2017, only 48 percent of ICOs launched in 2017 were deemed successful.
In any case, expect ICOs to continue becoming more commonplace as cryptocurrencies become increasingly mainstream.