If you are reading these few lines, it means that you don’t know what Initial Coin Offering is and that you have probably never participated in a cryptocurrency fundraising 😉
An ICO allows you to collect cryptocurrencies (such as Bitcoin or Ether) to start a project. The operation is effortless, you send a certain number of BTC or ETH, and you get at the end of this collection a corresponding number of Cryptocurrencies.
For example, an ICO offers to exchange one ether for 100 NOVA. You send 1 ETH to a smart contract. In exchange, you get the 100 NOVA tokens at the end of the fundraising. But beware, you have to be careful with this kind of process, scams are legion, and you have to follow some precious advice that we detail in our article.
But first, what is an ICO?
An ICO (Initial Coin Offering) is the equivalent of an IPO (Initial Public Offering) in the world of cryptocurrency. More generally and without comparison with the stock market, an ICO is fundraising in cryptocurrency (possibly in fiat currency) whose counterpart corresponds to tokens or cryptos specific to the project financed. This financing system radically changes the way funds are raised.
The number of these fundraising events literally exploded from 2017 onwards. Indeed, more than 3.5 billion dollars were raised in 2017 through this means! (source: CoinDesk)
These fundraisers can be extremely profitable but can also be completely “phony”. Indeed, let’s take the example of IOTA, if you had participated in ICO (end of 2015) and kept your tokens until the end of 2017, you would have multiplied your initial investment by more than 500. Conversely, if you had participated in the Confido ICO, you would have lost all or almost all of your initial investment.
A little history, one of the first ICO (in terms of amounts collected) to be created is Ethereum and dates from 2014. The founders of this cryptocurrency offered to exchange Bitcoins for Ether in order to finance their development. The number of bitcoin collected exceeds 25,000, propelling Ethereum to 8th place in terms of capitalization, as soon as it was launched, with a valuation of more than 17 million dollars.
Why invest in an ICO?
If you are a (potential) future user of the product that the company wants to design, the redistributed tokens give (in principle) access to the product or advantages in its use.
For the speculative nature, the ICO’s sale reaches a smaller number of investors and is executed at a fixed price. It can be assumed that these investors will offer (sell) the token at a higher price than the price at which they received it. If there is a strong demand, a significant capital gain can be expected. Besides, most ICOs offer discounts for token buyers, with promotions ranging from 5 to 25% and usually decreasing over time.
What are the risks associated with ICO?
The main risk of an ICO is that it is a scam. The organizers of the ICO, if they are not acting in good faith, can leave at any time with the amount raised.
In November 2017, the founders of Confido, a cryptocurrency payment application, disappeared with over $375,000. The website and their accounts on social networks were deleted. While the token was trading at $1.2 on November 14, 2017 it was worth only $0.01 on November 22. Here is a typical example of what is called an exit scam. Feel free to read our article about scams in the world of cryptocurrency to learn more about it.
A Newsbtc study indicates that nearly half of the 902 ICOs identified in 2017 will fail. Indeed, according to TokenData, an ICO tracker, 142 failed during the fundraiser and 276 exit scammed or did not report back. In addition to these failures, 113 ICOs are considered as semi-failure because the development team is no longer involved and/or the community is too inactive/small to move the project forward.
In summary, over the year 2017, 59% of the ICOs were failures, which may give food for thought…
💡 Participating in an ICO is participating in a promise, nothing is guaranteed. Most companies that organize ICOs do not have a finished product and use their business plan and whitepaper as a financial lever to start their project.
What precautions should I take before investing in an ICO?
To avoid the scam here is some advice :
- Get as much information as possible about the project and the team (by reading the whitepaper, searching the Internet, scanning social networks…)
- Read the topic(s) related to this ICO on the specialized forums: Bitcointalk, Reddit…
- Visit sites specialized in ICO analysis and rating: ICObench, ICO Tracker… (be careful. However, the scores are not always representative of the quality of the project)
- Discuss with the team about the different channels available such as Slack, Telegram…
Here are other points on which we advise you to inquire:
- Token allocation
- The product status (alpha, beta, complete, MVP, proof-of-concept…)
- Advisors (advisors who help with project development)
Keep in mind, which is also valid for the investment in a cryptocurrency (excluding ICO). It is important to understand the usefulness of the project, the cryptocurrency, or the token you are investing in. Is blockchain technology necessary, and does it bring a plus to the business?
We advise you not to invest all your savings in the same ICO because it is hazardous. If you want more advice on thinking before investing in a Cryptocurrency, I advise you to read the following guide: Fundamental Analysis.
You should also know that your investment can be frozen for a more or less long period of time! Some projects send the tokens immediately after the ICO is over. Other projects may take several months before releasing the tokens. This is the case of the Tezos project, for which the ICO took place in early July 2017. The investors had still not received their tokens by the beginning of March 2018 (i.e., more than 8 months of waiting).
Another essential precaution to avoid wasting ethers or bitcoins is to never participate in an ICO by providing one’s Ethereum or Bitcoin address from an exchange. Indeed, if you do that, you will never be able to get your tokens back after the ICO. We will explain this in more detail in the rest of this guide.
What does the law say about ICO?
Some countries have banned or restricted access to ICOs:
- China (ban)
- United States (opportunity to participate in certain SEC-approved ICOs)
- South Korea (banishment)
- Australia (highly regulated)
Other countries reported sorting on a case-by-case basis (e.g. Canada).
For the time being, the majority of other countries around the world allow their citizens to participate in CIOs, while seriously considering the implementation of regulations to protect consumers/investors, particularly from scams.
How to participate in an ICO?
Signing up for an ICO
To register for an ICO you must go to the site of the ICO in question and register. Usually, the place to register is indicated by a Join Whitelist or Token Sale Registration button.
Depending on the ICO, you will be asked for different information:
- First name
- Your public address ⚠ of ERC20 wallet(and not your private key) if the token works with the Ethereum protocol.
- Number of ETH (or BTC) that you plan to invest
- Identity documents (passport, identity card, permits)
- Proof of address of less than 3 months old
- Additional information (e.g. a statement)
Some ICOs will not ask for much information about you while others may ask for many more details.
⚠ Your ERC20 portfolio address must be an Ethereum address different from that of an exchange. Never give your Ethereum address generated on a platform like Coinbase, Kraken, Binance, Bittrex, KuCoin…!
You can use different tools to create a valid Ethereum address to participate in an ICO :
- Tutorial Ledger Nano X
Some ICOs are not realized from the Ethereum protocol, in this case the developers provide a specific module for buying tokens or a wallet dedicated to the project. In this situation, you will not be asked for your public Ethereum address when you register to the ICO.
Participate in an ICO
Once your registration has been validated and your ERC-20 compatible Ethereum public address is ready to be used, all you have to do is to wait for the address of the smart contract on which you have to send your ethers or bitcoins to be announced.
⚠ Never communicate the private key of your wallet or any other means to access it!
To participate in an ICO you will in most cases need to possess bitcoins or ethers. You can buy BTC and ETH for fiat (euros, dollars) on various exchanges such as Coinbase.
As we have seen previously, it is essential to use a wallet for which you have private keys. It is forbidden to use the public address of an exchange platform.
Once the ICO starts you must send your ethers to the address communicated by the ICO. It happens that the site is overloaded or crashes, we advise you to join Discord or Telegram communities related to this ICO to be kept informed in real time. In exchange, you will receive the corresponding number of ICO tokens.
⚠ Beware, many individuals try to scam people during ICOs. They do not hesitate to usurp the identity of the project founders and create false official accounts on social networks. Be very careful with Twitter, Facebook, Telegram and Slack accounts and beware of people who come to talk to you to help you participate in the ICO. They will probably try to provide you with a fake address to misappropriate you funds.
💡 Make sure the address to which you are going to send the funds is the right one. Don’t hesitate to compare your sources: ICO’s official website, Telegram, Twitter, Slack, Facebook and YouTube (sometimes the founders announce the address aloud in front of the camera to avoid scamming attempts).
Once the ICO is complete, the tokens that are owed to you will be sent to your wallet.
For ICOs that are not based on the Ethereum protocol, the tokens will be available on a dedicated wallet.
You just have to wait until the token you bought is available on exchanges to be able to trade, or not 🙂.