What Are ICOs? How Token Sales Work and How to Be Safe

Though the idea of crowdfunding isn’t exactly anything new, in the context of crypto , it can come with a fair amount of risks. 

Decentralized forms of public support, commonly known as ICOs (Initial Coin Offerings), can still be worth participating in, especially as they allow everyday investors to earn some new utility tokens for their involvement. 

However, you need to know the ins and outs of ICOs to avoid scams or fraudulent projects. Here’s a full breakdown of how ICOs work, where you can find them, and how to ensure they are safe to join.

What Is an ICO?

ICO stands for initial coin offering, and as the name implies, it is a fundraising mechanism that companies and groups will use to launch a new project. 

But what exactly are these projects? In simple terms, they primarily take the form of apps, services, or even entire blockchain networks ; there really is no limit to their size and scale. 

Everyday investors can, therefore, choose to support the project with either fiat or cryptocurrency. 

In return, they will be rewarded with tokens (utility tokens) that can be used for the project’s services. Think of it like an exciting science project in school that everyone is eager to see, but those who chip in to support can use the project for themselves. 

However, it’s crucial to emphasize that ICOs aren’t guaranteed to succeed. Therefore, they are considered high-risk since there’s always a chance the rewarded tokens can be worth little to nothing if the project crumbles. 

When deciding to invest, it is of utmost importance to firmly believe in the ICO’s longevity, verify its team members and project goals, and have transparency with the community. 

How Do ICOs Work? 

While an ICO starts as simply a fundraising method, the end goal is always to create a brand-new project with the support of investors. 

Here’s a step-by-step walkthrough of how an ICO grows from an idea to the eventual offering itself:

1. Establish a Whitepaper: Before creating a token though, the team will need to set out their aims and goals within a publicly available whitepaper. Whitepapers include crucial information like the project’s origins and purpose, along with how much it will roughly need to become a reality. 
2. Choose an ICO Platform/Launchpads: ICO platforms and launchpads enable developers to send and receive support by giving them a foundation to build on. 
3. Creating a Token: Next comes the token itself, which can be created using a smart contract – small pieces of data which essentially act as digital agreements. 
4. Marketing: Now, it’s time to market the project to get people talking. Social media and popular crypto forums are the best places to promote it and reach potential investors.
5. Initial Offering Begins: It’s up to the investors to do their part. Anyone wanting to support the project financially will now be free to gain a specific sum of tokens. However, it must be mentioned that the exact offering itself can be structured in a few different ways. 

ICO Price Structures

For example, the exact price measurement of how much an ICO will need to be deemed successful can vary depending on its size and scope. 

• Static supply and price: The ICO developers will set a static funding limit, and each token sold to the supporters will have a pre-set price. 
• Static supply but undetermined price: The tokens’ value can change depending on how much support is received since the funding goal isn’t set in stone. 
• Dynamic supply but static price: The funding received would determine the supply.

Private and Public ICOs 

Another important factor is whether an ICO is planning to be public or private. 

Private ICOs only permit specific types of investors to contribute, usually accredited investors involved in financial institutions or high net-worth individuals. 

Public ICOs are open to everyone. There are no restrictions on who can and cannot pledge support for the project. This is seen as a very democratic protocol since virtually anyone can become an investor, giving power to the crypto community to determine which projects they think would benefit them. 

How ICOs Differ from Similar Fundraising Systems

ICOs can sometimes be mistaken for other popular methods of funding and supporting a project within the crypto ecosphere, so let’s quickly review what distinguishes them. 

ICO vs IPO

IPOs (initial public offerings) can easily be confused with ICOs, since they both work largely the same. 

The main difference is that IPOs are more involved with the stock market than crypto. They also tend to ask for support in the middle of a project to facilitate its growth, not right at the beginning like ICOs. 

Another important distinction is that IPOs face heavy regulation, while ICOs do not, making the latter a much more risky investment. 

ICO vs Pre-Sale

A pre-sale is a token sale that can occur before an ICO officially kicks off. It allows early investors to purchase some new tokens at a discounted price and is a popular way of gauging interest before going all-in with the project. 

ICO vs Airdrop 

Airdrops incentivise people to test out new networks and projects by randomly ‘dropping’ a sum of coins into their crypto wallet.

However, many risks are associated with airdrops, such as the possibility that many people will use them as part of a pump-and-dump scheme, selling off a large portion of the tokens once they start trading to crash the price. 

ICOs, on the other hand, while still harboring risks, are more up-front and verifiable, especially since it’s easier for users to use on-chain data to reveal whether the company is truthfully sending tokens to supporters. 

How to Support an ICO Project

If all of this has got you intrigued about supporting an ICO project, it’s luckily pretty straightforward. 

ICO projects are viewable on cryptocurrency exchanges and aggregators like Coinbase and CoinGecko , where new and upcoming tokens will be listed. They are also viewable on ICO list platforms, of which there are several to choose from. 

Once you have one, or multiple ICOs in your sights, here’s how to begin supporting. 

1. Set up a crypto wallet: For investors, gaining a new batch of tokens is the most exciting part of an ICO. Therefore, you’ll need to ensure you have a safe and well-secured wallet to store them. Non-custodial wallets and forms of cold storage are often viewed as the most safe and secure from hackers. 
2. Decide on an ICO: Remember, ICOs are never guaranteed to succeed, so conducting thorough research on your options is highly advised. Read through the whitepaper, check the roadmap to see if it looks realistic, and research the individual team members to understand why they would be interested in promoting a project. 
3. Buy funding tokens: Though some ICOs accept fiat funding, most will only accept crypto, usually Bitcoin or Ether. Find out the type of payment the ICO requires and set a budget of how much you’re willing to invest after buying some on an exchange. 
4. Send the Funds: Once the ICO is live, you can send your funds to the ICO’s crypto wallet address in exchange for some tokens. Check your wallet immediately to double-check that your digital assets have been delivered as promised. 

Examples of Successful ICOs

After years of Bitcoin (BTC) struggling to uphold user demands, Ethereum (ETH) kicked off its ICO in 2014. Ethereum proposed to be a fresh new blockchain network that was fast, efficient, and, most importantly, smart contract friendly. 

Smart contracts allow developers to create dApps that Ethereum investors could use to manage their crypto in unique ways. This was certainly an exciting prospect, with the ICO raising $18 million in just two days. 

Today, Ethereum is the second most popular blockchain network, with a market cap of over 317 billion, making its ICO the most successful cryptocurrency project in history.  

Filecoin, a decentralized storage network where users can rent out unused storage space, also garnered considerable support in 2017, raising over $257 million. 

However, EOS blew away the competition with a staggering $4 billion year-long ICO. EOS gained immense support due to its promise of containing no transaction fees and being easy to build Dapps on top of.  

Though it’s always exciting to see a new project reach such heights, unfortunately, we don’t see as many success stories as we used to, primarily due to legal issues. 

Do ICOs Fall Under Regulation? 

Despite being a new development in the crypto world, ICOs have proven to work—capable of raking in millions of dollars at a time. However, legal authorities have skepticism about them, and varying degrees of regulation around the globe have resulted. 

However, ICOs are largely unregulated, save for a few regions. This has led to two major problems. 

First, institutions like the U.S. Securities and Exchange Commission (SEC) can randomly shut a project down if they view it as defying securities laws. This was the case with Munchee, a fast-food Dapp launched after a successful ICO, which was then removed after receiving a cease-and-desist letter from the SEC, which regarded it as an unregistered security. 

The second issue is that the ICO field has become a breeding ground for scammers without any big and powerful overlookers to ensure the safety of ICOs and their supporters. To highlight the severity of this issue, a 2018 Stasis report found that 80% of all ICOs in the last few years were scams by fraudsters.

How to Avoid ICO Scams

Whitepapers are the biggest giveaways about whether an ICO is truthful or not. An ICO without a whitepaper is an immediate red flag, but if the writing in the document is vague, rushed, and blunt, it can also be wise to steer clear of the project. 

Additionally, you should investigate the developers’ history—their background, what they’ve worked on before, and why they would want to participate in an ICO. 

Also, take a glance at the roadmap. These tend to be easy to create, but ICO teams that use them responsibly will set out realistic and believable goals, not just ambitious ideas in quick succession that will take longer to implement. 

Finally, try to uncover whether the project has any partnerships with other companies to help verify its reliability. 

Advantages and Drawbacks of ICOs

As we’ve seen, ICOs can be hugely beneficial in creating projects that can complement the everyday investor, but considering they are still in their infancy, they are far from perfect. 

Pros 

• Investor Accessibility: Individuals don’t need to have established a portfolio or reputation to support an ICO, allowing anyone from the crypto community to have their say. 
• Quick Startups: ICOs allow developers to create new projects at a breakneck pace, facilitating experimentation and innovation in the crypto ecosystem. 
• Diversifying a Portfolio: If you’re outside the crypto bubble, ICOs can act as an easy gateway that will even provide you with new cryptocurrency tokens. 
• Ambitious Projects: ICO projects vary wildly in scale, with some, such as Ethereum, being hugely ambitious. These projects provide many benefits for the average crypto enthusiast, such as a whole new blockchain platform or the introduction of smart contracts, which have since become commonplace. 

Cons

• Regulatory Complications: ICOs are in a legal gray area regarding regulation, creating a sense of unpredictability regarding whether authorities will clamp down on them.
• Scams: Additionally, the lack of regulation means scammers can easily create an ICO to hoard money, so conducting careful research beforehand is vitally important. 
• Not Guaranteed to Succeed: More ICOs fail than succeed, primarily because their funding goals are too high. Therefore, try not to expect every single ICO you invest in to flourish in the future. This is why it is better to diversify ICO investments rather than putting all eggs in one basket. 

On the Flipside 

• ICOs often require a staggering amount of community support to get off the ground, which isn’t always realistic.
• The Institution of Risk Management recorded that 90% of all ICOs fail due to a lack of funding and regulatory issues.

Why This Matters

Though ICOs do come with some risks, they also provide a gateway for developers and investors to create and use new projects that benefit from blockchain technology.

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