WHAT IS ICO IN 2020?

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13 January 2020
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What is ICO

The cryptocurrency market includes a lot of phenomena that were not known to us before, and one of them is ICO. Most likely you heard this term, but don’t fully understand its meaning. In that case, this article is for you.

Terminology and History

ICO - (abbr. Initial Coin Offering) - a campaign for the initial token sale before the official launching of the project. Simply put, ICO is the action meant to attract investments.

Setting the era of decentralization, Bitcoin cryptocurrency didn’t carry out any preliminary investment collection. Ethereum rather held it: in 42 days, the project managed to get $18.5 million invested.

Project founders conduct ICO for several reasons:

1) In order to attract investment. Developing crypto project requires a lot of financial and human resources. Pre-sales allow to raise investments. In theory this sum of money is aimed at further development;

2) Advertising. It follows from the first paragraph and is closely related to it. The project is declaring itself during the campaign, that is why it attracts not only investors, but also prospective users of its services.

ICO is often compared to IPO — initial public offering of company’s shares — but there are many differences between them, ranging from material value to legal status. Only the essence and process are alike.

Within the context of ICOs and cryptocurrencies, one can come across several terms.

White Paper (WP). This is a document that provides the investor with comprehensive information about the project: its conception, technical features, volume of currency issue, distribution of investments.

Road map. Another WP’s aspect is the roadmap. This is the name of the plan (often in infographics), which sets out founder’s sequence of actions.

Usually the Road map is divided into quarters and describes the future of the project within two or three years.

dApps. It stands for decentralized applications developed on the basis of the blockchain.

Crowdsale. The stage preceding the ICO. Founders still collect money at the preliminary mass trading sessions to allocate them to the initial offering organization.

Token. Token is often used as the name for cryptocurrency, but it is rather a unit of accounting, the equivalent of securities in the traditional financial market.

ICO Stages

Each ICO consists of 14-15 stages. Let’s divide them into categories.

Preliminary part or preparation. During this period, founders prepare White Paper, conduct advertising campaigns, introduce e-mail newsletters, launch the website, and so on. It is important to declare themselves and make a good impression on potential investors. It is then determined whether pre-sale will be conducted.

Bounty. The bounty ICO is held for promotional purposes. The conditions for cooperation are formulated: subscription and publications on social networks, mailout, distribution of referral links, etc. Users are supposed to be rewarded with the project tokens (usually it’s a small amount) for these actions.

Main part. Here we mean the initial offering itself, which can last from a couple of weeks to a year. Sometimes ICO is divided into periods within which cryptocurrency is issued at different prices: the closer to the campaign end date, the more expensive the token is.

At this time, the founder usually continues an active advertising campaign through various channels. It takes a great part of funds gathered in the crowdsale.

Tokens are bought on the startup website. By the way, sometimes trading sessions can be closed: those startups don’t even advertise, they simply conduct personal mailing.

The first ICO was conducted in 2013: the Mastercoin project raised $5 million.

Pre-sale and Airdrop

Pre-sale starts simultaneously with the bounty campaign: this stage is aimed at collecting small amount of money that will be spent on advertising. Here the project gets recognition as a nice bonus: thanks to pre-sales the audience will already know about the project by the time of the ICO.

Airdrop is free token distribution. 2-3% of the total output is allocated for airdrop, and these tokens are distributed for free to everyone who wishes.

Legal status and regulation 

The cryptocurrency market began to be regulated just a year and a half ago, moreover, not in every country. ICO is still as clear as mud, although everyone already understands that this is a dangerous industry.

One of the main difficulties is determining the status of tokens. Can they be classified as securities? This is a controversial issue: the tool must meet many criteria.

In some countries, as, for example, in France, collection of investments has already been taxed or is going to be. 

In Korea, regulatory difficulties were fundamentally resolved - they simply banned ICOs. This caused negative public reaction which has been already existing for two years. The last time the refusal to lift the ban came in January 2019.

Russia is preparing an appropriate bill to regulate the issue of cryptocurrencies: Russian Federal Security Service, Ministry of Finance, Central Bank and other bodies are taking part in its development. 

Why do investors put money in this?

Traditional investment in projects supposes founders’ promise of gaining specific benefit, dividends. Purchase of coins at initial offering:

1) Does not give the right to participate in the life and development of the project;

2) It does not give material benefits (if the project does not pass the test of time, there will be no chance even to sell these coins);

3) In fact, coins are not tied to any tangible property.

Usually the emphasis is placed on potential. The organizers use vague wording as “If you invest, then in the future you will be able to use the ecosystem services at a discount” or “After N years, the startup will become popular, the currency can be sold at a higher price.”

Only work with the concept is carried out. If within IPO you buy shares of a company that has already taken place and occupies a specific niche in the market and can give concrete promises, then ICO is a pig in a poke, just an idea. Here a logical question arises: if everything is so deplorable, why do people and companies continue to finance young projects?

The thing is that with a savvy choice of the project, the investment can be really repaid. This happened with Ethereum and EOS.

When a ready-made ecosystem promises to be useful and convenient, an investor buys tokens hoping to use them for subsequent payment of services at a reduced price or selling them on the exchange.

Risks

Holding an ICO and participating in it involves many risks. Let’s point out frequently occurring:

  1. The project can turn to be a scam, in other word, a fraud. Due to the profitability of the industry and the lack of legal regulation, cryptocurrency startups have become a gold mine for scammers. Sometimes the organizers of such “soap-bubbles” are brought to justice, but investor’s money is returned in the ideal case in 15% of situations;

  2. The project simply will not succeed. Even a good ICO is not a guarantee of continued success. Startup may collapse due to lack of funding;
  3. Hacks. Hackers are actively attacking sites with potential placement of cryptocurrencies: exchanges, exchangers, applications, personal wallets and ecosystems themselves. Young projects are easy money; they often have insufficiently reliable protection.

The complete or partial absence of legislative regulation of the niche has a negative effect. For 2019, in most countries there are no adopted legal acts regulating the cryptocurrency market.

Initial coin offering and financial pyramid schemes 

Many people think that ICO is just a big fraud act, a pyramid scheme or a scam. Is it so?

Let’s recall the main signs of the pyramid scheme according to the Central Bank of the Russian Federation:

  • Absence of a specific product, service and activity information;
  • Sounding promises of dividends that do not look realistic;
  • Absence of license, unofficial status;
  • New members receive money from old ones.

Meanwhile, in a good ICO:

  • There is comprehensive data about activity and product;
  • The founder doesn’t promise a momentary huge profit;
  • Investors do not interact financially.

The initial offer may really turn to be a scam, there are enough scammers in the field, however not all projects are like that.

New ICOs: where to find

New projects appear regularly. You can track it on specialized resources: Foundico, CoinMarket, BitCryptoNews and others. You will find information about the dates of the ICO, and links to websites.

How to choose a reliable project

To minimize possible risks, you need to carefully choose the object of investment. Please, consider the following recommendations:

  • A clear idea. If the creators cannot explain what they are doing, they are not worth financing; if there is an explanation, but too vague -also no good;

  • Implementation deadlines should be clearly defined. It’s good when the founder sets not extensive time frame - 1-2 years, and the idea can be realized during this time. Sometimes a project sets itself dubious goals (creating an eco-city, designing aт eternal engine, mission to Pluto), which are difficult to achieve in the next 5 years.

  • Reliable White Paper. Usually this is a 15-25 page document, where all information should be clearly indicated: the idea, task, methods for its implementation, budget allocation in numerical terms and so on. If the description is abstract and incomplete, that’s the point to mull over;

  • Team. It is preferable that the project somehow introduce its SEO and directors, but without other criteria this is not an indicator of reliability;

  • Technical aspect. Often, investors are offered regular large databases instead of blockchain. Remember: in a decentralized system, all participants have the same access to data, if someone has more or less capabilities, this is already managed Big Data.

It is important to take into account all these factors together: separately, none of them is an absolute indicator.

Newly launched startups can collapse even after successful ICO

Sometimes a startup is carrying out ICO having all opportunities for success: great concept and interested audience. Then it suddenly closes, leaving the public confused. 

Why does it happen?

There are several factors that influence the success of good ecosystems:

1) Market crisis. When Bitcoin starts to decline in price, it drags down the rest of the cryptocurrencies, the volume of capitalization drops, interest in the industry fades away. In such periods, the minority would like to risk and give money;

2) Poor advertising. The founder is unable to attract the right audience, there are not enough sources of financing and therefore the site is not developed;

3) Over-long development. If you stretch a development of a good project for five years, most likely it will be forgotten. Re-attracting attention in this case is difficult to implement;

4) Vulnerability. A vivid example is DAO: this project raised $11 million in 2016, and within a month it was closed due to a hacker attack. Now the authors of the projects are vigilant in this matter, but accidents still happen.

Two years ago, 46% of companies listed on Tokendata appeared to be a failure; some experts believe that the same stuff will happen with 60-70% of the market sooner or later.

The largest ICOs in the history

Here you can find the projects that managed to attract the largest number of investments.

EOS. Stands out for a long campaign: it took a year. Thanks to this, it was possible to attract an impressive amount of $ 880 million.

FileCoin. Gathered  $135 million within the first hour after the start of ICO, a total number is $205 million.

Tezos. The ICO lasted two weeks and brought the project $232 million.

The Dao. The biggest disappointment in the history of crypto projects, in 2016 it raised $152 million, after which the project was closed due to a hack.

Bancor. The sum of $153 million was gathered within three hours after the start of the campaign.

ICO Prospects

ICOdata found out that in 2018, the industry raised $7.8 billion. What awaits it in 2019?

It is believed that professional investors are skeptical about ICOs and do not consider it when choosing an investment project. FX.Pro analysts say that nothing will save this niche until there are people who know nothing about investments acting in this sphere, and CEO Digital Currency Group in an interview to CNBC said that now this market is dead.

In January 2019, the ICO raised about $3 million.

Factors that worsen prospects:

  • The increase in the number of fraudsters;
  • Lack of clear regulation. Where it exists, the rules are strict and difficult to enforce;
  • Unprofessional investors.

The future of the market is vague. On the one hand, the potential of cryptocurrencies as a payment unit is recognized by many experts. On the other hand, there are numerous difficulties, which were already mentioned above. There is nothing left to do but wait until the situation clears up.





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