Each year a rapidly evolving digital economy generates more and more cryptocurrencies and tools associated with them. How to make everything clear? How to seize the opportunities? How to invest in an ICO and how to enter the cryptocurrency exchange? Ambisafe Software provides a complete guide to an ICO.
What is an ICO?
An ICO is an analog of IPO in the cryptocurrency economy. If IPO is known to us as the initial public offering of shares on the stock exchange in the traditional economy, an ICO (Initial Coin Offering) is the process of release of the company’s own tokens (an analogue of shares on the traditional financial market with a number of unique properties) and their accommodation on the cryptocurrency exchange.
Due to innovations, provided by the blockchain technology, the cost of this process with the use of cryptocurrency exchanges is ten times cheaper than the cost of the traditional IPO on the financial exchanges. If the typical IPO price for the European stock exchange is within $1-2mm range, the cost of an ICO process with access to the cryptocurrency exchange ranges within $100-200k. At the same time, the result is the same in both cases (the size of possibly attracted investment is many times greater than the cost of the process of release), that is, spending about $100,000, a company may raise up to $50,000,000 of investments.
Here are some examples of successful ICOs run in 2016-17 (the dollar equivalent of the funds raised is counted as of the dates of an ICO campaign):
Iconomi is an open fund management platform. The ICO was held on 25/08/2016–29/09/2016 and brought 17,274 BTC, which is equivalent to approximately $12,000,000;
FirstBlood is an infrastructure for gamers, a decentralized eSports platform based on smart contracts. The ICO started on 25/09/2016 11:55:33 PM and lasted for 8 minutes 48 seconds bringing 465,313 ETH, which is equivalent to approximately $5,500,000;
Golem is a decentralized worldwide supercomputer that can be used by anyone to sell the computer's computing time over the internet. The ICO started on 11/09/2016 and was completed on the same day, as it attracted the necessary amount of investments and fulfilled the plan in one evening. The project brought 820,002 ETH, which is equivalent to approximately $8,000,000;
Filecoin is a decentralized file storage network where people earn Filecoin for hosting files: people who have extra space available provide it for those who need storage. The project raised $257,000,000 in 2017;
Tezos is a brand-new blockchain that provides the ability for network-wide changes to be decided upon at the protocol level by stakeholders. It raised 65,627 BTC and 361,122 ETH ($232,000,000 million).
Usually, an already known company with a stable financial history enters the financial exchange. An ICO is mainly used for crowdfunding projects, i.e., for companies that just start their history. New entrants cannot predict the reaction of the market to the full. Therefore, the first step to start an ICO is a pre-announcement of the project.
Stage 1. Pre-announcement
Pre-announcement is the announcement of the future project in the communities of cryptocurrency investors, such as Bitcoin Talk, Reddit, and others. The founders of the project write an executive summary – a small presentation for investors, in which they explain the essence and purpose of the ICO project. After the executive summary, the company receives the first feedback which can be analyzed to see whether the project could interest investors or not.
The pre-announcement may raise many questions about the business model of the project and unperceived risks. Taking into account all incoming comments, the business model receives proper adjustments. This feedback process with subsequent adjustments is repeated for several cycles, as long as there is no agreement between the founders and prospective investors. The first stage ends with making the final business model of the project and writing the detailed offer.
Stage 2. Offer
An offer is a proposal which sets out the essential terms of a contract addressed to a particular person, a limited or unlimited number of people. The offer is made on behalf of a listed company which enters an ICO. The offer covers all the nuances of the project, specifies the desired amount of investments, and project deadlines. The offer specifies what kind of financial instrument is to be sold on the stock exchange. As a rule, these are tokens.
Tokens in blockchain are the cryptocurrency which is the equivalent to a financial instrument that is represented on the cryptocurrency exchange. One token can be equal, for example, to $1.00 of debt, 1 share of the company, 10 shares of the company, the right to vote anywhere else, and so on. Now, there are no established standards on what the token would be in a particular project, so it is specified individually in each offer. After selecting a financial instrument, the offer covers all the rights possessed by the token. For example, DGD token, in addition to being backed by foreign exchange reserves, also gives the holder the right to put forward proposals for the management of the company to the other shareholders.
After signing the offer, the start date of the sale of tokens is announced, and the issuing company carries out an active PR-campaign.
Stage 3. PR-campaign
Since an ICO is often carried out for young and little-known companies, an essential role in the success of the project belongs to a competent PR-strategy. To this end, the specialized agencies are involved, and presentations are organized at various conferences, and so on.
On the financial market before starting IPO, a similar campaign is held as well, called Road Show – a practical training element of the issuer in releasing its securities. If in the financial economy Road Show is a series of meetings with prospective major investors and analysts in key cities around the world, in a case of ICO the PR-campaign lasts on an average for one month and is focused not on institutionalized investors (banks, funds, etc.), but on a broad segment of smaller investors.
In this case, the target audience is the participants of crowdfunding programs, so-called “business angels.” Such investors are more willing to support projects where they can apply their own experience. Personal involvement and expertise are the fundamental differences between business angels and other private investors. There are many entrepreneurs among the active business angels that are attracting external funding to their projects. The investments received from this group are known as “angels’ investments.”
After the end of the PR-campaign, the process of selling and buying tokens begins. On the date of an ICO start, the company provides investors with a way to purchase the tokens alleged by the offer. As a rule, there are two such methods.
Stage 4. Start of sales in the framework of ICO
There are two ways to release tokens on a blockchain:
You can first collect a minimum amount of money specified by the offer and then release the tokens and divide them among investors in proportion. For this purpose, usually, a special site with the investor’s office is organized (for example, chronobank.io);
You can also sell the token on the cryptocurrency exchanges (for example orderbook.io). To this end, it is necessary to release it in advance. It allows trading tokens on one or several exchanges simultaneously. In this case, the ICO process becomes identical to IPO traditional process.
After the completion of the token sale, the issuing company begins to implement the declared commitments to investors.
Today, the rapidly developing blockchain economy and growing ICO market repeat the history of the formation and development of the traditional stock exchange market. But it happens at high cutting speeds.
Some of the projects that are currently carrying out ICOs can reach an enormous size. Many investors still remember the time when such companies as Apple, Amazon, and Google were entering IPO. It is not a great pleasure to evaluate the capital they could have earned if they had invested in these companies at that time. Nowadays, the ICO market provides another chance to become a part of the success stories of the new economy projects, both for investors and for companies.
We see our goal in facilitating and supporting investors and projects in their aims. We help to run ICOs securely and efficiently by reducing risks, maximizing the potential profits, increasing the market transparency and stability.