To raise capital, a startup may sell a brand-new cryptocurrency through an initial coin offering (ICO). The cryptocurrency is given to investors in exchange for their funds.
In many ways, an ICO is similar to an initial public offering (IPO) in the stock market. However, although initial coin offerings offer the potential for significant profits, they are very risky due to the lack of regulation. In this guide, you will learn everything you need to know about ICOs, including how they work and how you can participate.
How ICOs work
An ICO is a type of crowdfunding method. During an ICO, investors buy coins or tokens of a project, while in an IPO, they buy shares of a company.
Below is an example of a typical ICO process from beginning to end:
1. A startup develops a concept for a blockchain-based product or service.
2. A whitepaper or other similar document details the ICO's plans. This includes the amount of funding needed, the number of tokens created, who can contribute, token distribution, and more.
3. To increase the visibility of the ICO and public interest, the company website and relevant social media channels will promote the project.
4. Investors who want to buy tokens pay money on or after the ICO's launch date.
5. The funds will be used to expand the company's operations, develop new products, or improve existing ones.
Advantages and Disadvantages of ICOs
Like other fundraising methods, initial coin offerings have advantages and disadvantages. The advantages they offer are as follows:
They offer huge profit opportunities if you can find a crypto that is a good investment. Of course, as the first buyers, investors will enjoy low prices on the tokens.
Tokens are sold internationally
It's a fast, effective approach for startups to generate money, unlike certain IPOs with restrictions on who can invest.
Below are some disadvantages of ICOs:
Due to the volatility of cryptocurrency projects, the token is highly likely to lose value or eventually collapse.
The lack of regulation leads to an increase in fraud and low-quality initiatives.
Investing in initial coin offerings usually requires some understanding of crypto wallets, and finding a solid project can feel like looking for a needle in a haystack. For beginners, it is sometimes easier to stick to publicly traded cryptocurrencies.
What is an IDO and IEO?
IDOs and IEOs are two other popular fundraising methods. For context, let’s get a quick overview of each one:
IDO
Initial DEX Offerings (IDOs) are offered to the general public via a decentralized exchange launchpad.
With this method, the tokens are immediately posted on DEX, and the entire process is thoroughly vetted to meet the requirements of the DEX platform. Furthermore, since the tokens are available immediately or after a short lock-up period, launching companies can immediately wait for the tokens to be listed.
In addition, companies can either partner with a DEX to jointly market the IDO campaign or leave it up to them.
IEO
When a project or company offers its token through a centralized exchange platform (CEX), it is called an Initial Exchange Offering (IEO). This is because funds are raised through the CEX platforms, which also list the tokens immediately on the CEX.
This method also involves a comprehensive verification process to confirm the legitimacy of the fundraiser. However, the tokens are not immediately available for trading. The CEX platform also handles IEO advertising and marketing.
How to Invest in an ICO
Investing in an initial coin offering ICO allows you to participate in the development of a potentially groundbreaking new technology. The three main steps for investing in an ICO are as follows
1. Register
When investing in coin offerings, research the ICO, go through the required documentation, and watch for signs of fraud. Then, sign up for an ICO to participate in the currency launch after verifying it is valid.
You can discover listings for initial coin offerings on websites like ICOBench, CoinMarketCap, and others. Since registration procedures often vary, be sure to follow all instructions to ensure accuracy.
2. Have your money ready
Fiat cash or cryptocurrencies can both be used to back the investment. Also, you must have some money in your digital wallet in order to complete a deal. Finally, you must sign up with the appropriate cryptocurrency platform that is using the ICO. Make sure that the ICO token is listed on the exchange you are using so that you can easily buy it.
3. Buy and hold the tokens
Make the purchase in accordance with the ICO procedures. After the purchase, the new tokens will be available on your cryptocurrency exchange. You can now sell your coins or hold them and wait for their value to increase over time.
How to Profit From an ICO
There are several ways to profit from a good ICO if you are lucky enough to find one. However, it should be noted that the chosen strategy depends on the individual goals of either selling the coins immediately or holding them for a longer period.
Sell the tokens
The simplest tactic is to buy the tokens offered during the ICO and then sell them when the price rises. Unfortunately, only a few people can take advantage of this opportunity, as only a small amount of tokens will be released to the market during the ICO.
When the tokens are made available on the market, the demand from those who missed out on them drives the price up. So this is a fantastic opportunity to sell and get back money for your investment.
Trade the tokens on the markets
To profit from an ICO, think about trading the tokens on the markets instead of selling them as soon as they are launched. Depending on the market movements, trading cryptocurrencies means taking short-term or long-term positions.
It is important to know that the cryptocurrency market can be very unpredictable. In order to minimize the risks involved, traders should take time to learn how to read market trends and use important tools like stop loss.
How to Buy Tokens After an ICO
The cryptocurrency will eventually be listed on an exchange if the ICO is successful once the token sales complete. The chosen exchange will depend on the project. You can follow the project's announcements directly or check online forums about the token in question to find out which exchange will list it.
CoinMarketCap also displays circulating cryptocurrencies, as well as the cryptocurrency exchanges where they can be traded. It is also worth noting that when a token is listed on an exchange, it will be traded against Bitcoin and Ether.
Proceed with Caution
Although ICOs are an excellent fundraising method, they also have the potential to be abused. However, this does not mean that all ICOs are bad. In fact, some of the most popular cryptocurrencies available today have been launched through an ICO and, in turn, generated massive profits for investors.
Before participating in an ICO, make sure you fully understand how an ICO works, do your own due diligence, and only invest in reputable projects.
