Initial Coin Offerings (ICOs) have become a popular way for blockchain startups to find the initial capital they need for the development of the project. For investors, an ICO offers a great place to get their hands on potentially lucrative cryptocurrencies early.
So, it can be a win-win situation for both the creators of the project and the investors. With careful planning and enough research, investing in ICOs can be beneficial for your portfolio. Let this article be a guide to participating in ICOs.
What are Initial Coin Offerings?
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When a company needs to raise capital for its blockchain project, it seeks investment for early access to its native cryptocurrency. This procedure gives the investors the ability to buy the new cryptocurrency of the platform, this fundraising process is called initial coin offerings.
Usually, the crypto token offered at the ICO will have utilities related to the project. So, when the project launches, the value of these tokens can go high, which is the incentive for early investors. Some projects also provide other exclusive rewards for early investors. To explain it simply, ICOs are the crypto equivalent of the initial public offering (IPO) in the stock market.
Types of Initial Coin Offerings
While the basic aim of the ICO remains the same, the structure may vary depending on the goals of the project. Here are some of the popular structures of ICOs:
Static supply and static price
Here, the company will identify its specific funding goal and set a static price for a set number of coins to attain this funding goal. For example, if a company needs to raise $1 Million, they can list 1 million coins at $1.
Static supply and varying price
ICOs can also have varying prices and static supply. Here, the supply will be predetermined and the price varies according to the funds received. For example, if a company raises three million, and the supply is fixed at 1 million, each coin is worth $3.
Varying prices and static supply
Here, the number of token supply will be static, but the price changes according to the supply left. One of the famous examples of ICO with this strategy is the Ethereum ICO in 2014. The creators listed 60 million ETH tokens and the price varied depending on the total money raised.
Why Invest in ICOs?
Blockchain startups use ICOs to raise the capital needed for the development of their product/services. Let’s see how this fundraising event can be beneficial for the investors:
High Rewards Potential
The major thing that attracts investors to ICOs is their high return potential. Historically, the price of cryptocurrencies has skyrocketed after the token launch. For example, the initial price of ETH in its ICO was roughly $0.31.
But in 2024, the token is worth $2688.27. The initial investors have got astronomical profits. However, as with the rewards, the risk is also high in ICOs. The projects don’t always become a success after their launch.
Early Exclusive Access
While the early-stage investments were only reserved for venture capitalists and accredited investors, ICO investment allows individuals to participate in it. Thus, the investing field is more democratized and it has become a level playing field for retail investors and venture capitalists.
Support the Growth of Blockchain Technology
Blockchain technology is a booming industry that has a big future ahead of it. Investing in budding blockchain projects can help the growth of the ecosystem. The continuous growth of the blockchain ecosystem is crucial especially if your portfolio has cryptocurrencies in it.
Portfolio Diversification
One of the obvious advantages of investing in an ICO is that you can diversify your portfolio. Statistically speaking, ICOs offer crypto tokens at a lower price range. So, it can be your gateway into the big ocean of cryptocurrencies.
Also Read: How To Spot And Avoid Cryptocurrency Scams?
Risks of ICO Investments
We have mentioned some of the great aspects of initial coin offerings. However, ICOs have more risks than traditional investments. So, before you decide to participate in an ICO read the below risks you should be aware of:
No Adequate Regulations
Unlike IPOs in the stock market, ICOs don’t have strict regulations. The investors do not have any sort of security or protection in case fraudulence or misconduct happens. This means that some ICOs can be scams aimed at looting your cryptocurrency.
Price Swings
One of the major attractions of ICOs is its price fluctuation. But it is a double-edged sword. The price can rise or plummet within days or hours potentially resulting in a significant loss.
Difficulty to Understand
While it is not a deal breaker or a major risk, it is worth noting that ICOs and the crypto market as a whole can be confusing and intimidating to newcomers. If you are new to crypto, it is best to spend some time learning things before considering investing.
How to Participate in Initial Coin Offerings (ICOs)?
The first step of buying into an ICO is to do a background check on it to confirm its legitimacy. After you have done your research and have considered the risks and possible risk management options, you can follow the below steps for participating in ICO:
Step 1: Find a Legitimate ICO
You can find various ICOs on different online platforms. You can also find upcoming ICOs on cryptocurrency forums and websites including ours. Do thorough research about promising icos, read through its whitepaper, and finalize your decision.
Step 2: Complete the Registration Process
Once you have found a legitimate upcoming ICO, the next process is registration. Usually, the registration process varies according to the ICO. It is best to use the official social media profiles of the projects to learn about the registration process.
Step 3: Allocate Funds for Investing
Typically, ICOs accept payments in other popular cryptocurrencies including BTC, and ETH. Find what payment option is accepted in the selected ICO and fund your crypto wallet with that token. Some modern ICOs will also accept payments by selected fiat currencies such as the US Dollar. In addition to the funds you need for investing, you may need extra standby funds in your wallet to facilitate the trade.
Step 4: Authorize the Exchange
You need to choose an exchange platform that the ICO is listed in. Find the ICO on the exchange, type in the amount you are investing, and authorize the transaction.
Step 5: Store Your Tokens in a Safe Wallet
After completing the exchange, transfer the tokens you have purchased to a secure cryptocurrency wallet. If you are holding the cryptocurrency for a long time, use cold wallets that can be bought from online and retail stores.
How to Know if a Crypto ICO is Legitimate?
To make sure that the ICOs you find on the internet are legitimate, you can consider the following factors:
- Read the whitepaper: The whitepaper is a documentation of the project published for public reading. It will usually contain all the information an investor would like to know such as the aim of the project, roadmap, tokenomics, utilities of the token, etc. Make sure that the whitepaper is well-crafted and has adequate details.
- Know the team behind the project: Check if the creators behind the project have enough experience and expertise in blockchain and cryptocurrency projects.
- Confidence-inducing roadmap: A roadmap of blockchain projects outlines completed, ongoing, and upcoming processes with a timeline. Make sure that the roadmap of the project is a realistic and future-proof plan.
- Technology use-case: One of the major things to consider is the proposed use-case of the new technology being developed. Look at how the project can contribute to society and ensure that the vision is scalable.
- Community support: This is the easiest and one of the most effective ways to ensure the legitimacy of an upcoming blockchain project. Find the official social media profiles and forums of the project and look at engagements. Credible projects usually have a good number of audience engagements.
- Check for partnerships: Some projects would have partnerships or collaborations with other big companies or celebrities. Projects with solid partnerships are more likely to succeed than the ones without.
- Understand the tokenomics: Tokenomics is an analysis of the economic aspects of a cryptocurrency or blockchain project. The tokenomics will give you an idea of what the tokens are used for, how the supply is distributed, if there are incentives for holding tokens what they are, etc.
- Compliance with regulations: While there are no unified legal regulations in the cryptocurrency market, some government bodies such as the US government have enforced regulations to protect US citizens from exploitation. Check if the project is compliant with the regulations.
Considering the above factors before investing in an ICO can help you mitigate a lot of risks associated with it. However, you should know that the cryptocurrency market as a whole is volatile and there are equal possibilities for making a profit and losing your investment.
Read More: Best Practices For Securing Your Crypto Assets
Conclusion
Initial coin offerings (ICOs) are fundraising events used by upcoming crypto/blockchain projects. The investors get to buy new crypto tokens before they become live to the general public.
By being an early investor, ICO holders can make a huge profit and get exclusive perks. You can participate in the ICO with the given instructions in the article. But before jumping into the ICO, do your research and make sure you are investing in a legitimate project.
