What is an ICO? – The ICO Beginners Guide

What is an ICO and Everything You Need to Know (For Beginners)

ICOs & Cryptocurrencies have been a trend in the finance industry last year and it seems we have just seen the beginning of something huge. If you are interested in bying Bitcoin or Ethereum, you may want to give ICOs or Initial Coin Offerings also a try. However, ICOs are full of potential risks although the circumstances are good. There is also a high probability of being scammed as most countries have no regulations in place.

Be aware, the coins you send to an ICO could be lost and there is no way to get them back. *As mentioned in previous articles, this is no investment advice!*

What is an ICO?

You might be wondering what an ICO really is. Try to imagine yourself wanting to build your own cryptocurrency project but you don’t have any money in order to start. Because money is involved, you need people to invest in your new cryptocurrency project. Your first thought would probably be to loan money from a bank or look for investors. If you wanted to gain money without sacrificing ownership of your newfound company, this is the perfect time for an ICO to come into play. In other words, an ICO (Initial Coin Offering) is nothing more but nothing less than a way to fund your new project and let the public taking part of it.

Short: An ICO is a fundraising option that trades cryptocoins in exchange for cryptocurrencies of immediate, liquid value. You give the ICO bitcoin or ethereum, and you get some of the new ICO coins in return.

How does an ICO really work? First, you make a document called white paper that states how your new currency will work and what the story behind your idea is. Let’s call it a specification statement. After that, you setup a customized website which, explains why your currency is beneficial and practical. Then, you request money in the form of Bitcoin or Ether from people, and you give them money in the form of your currency (token) in exchange. From that, they will expect that your currency will be used and circulated resulting in a high value for your currency on the market once the coin offering closed and the coins are released for trading on public exchanges.

You have to remember that an ICO is different from IPO or Initial Public Offering because funding money in a certain company does not give you ownership to it in an ICO. Therefore, you are risking your money with the hopes of increasing its worth later on.

Could I start an ICO myself?

Yes! Virtually anyone can launch an ICO. Because there is almost no regulation of ICO in the US, you can start your own currency and try to get people to invest in it. At the moment, cryptocurrencies are similar to the wild west which has positive but also negative sides. Think of gold in an area with no one regulating it. However, if you tried to gather this gold, two things could happen, either you gain advantage or get cheated. Since no one regulates, it is one of the uncomplicated ways to set up a scam. There are many scammers who will make you think their currency works in order to get your money.

To avoid this kind of situation, always do your research if the ICO you are eyeing on is real. As mentioned, it is really easy to set up an ICO, so checking the website alone might not be enough. You can go the extra mile by searching the ICO’s background. If you cannot find any information about it, it is probably not a good idea to invest money in it.

What should I do to start my own ICO?

Because there is little regulation on ICO, one of the most important things you need to work on is gaining trust. Therefore, you or the people you will employ must have a background or experience in cryptocurrency or blockchain. Anyone can indeed start their own ICO, but that does not mean that everyone is qualified to do it. You or your team should be able to answer queries there and then regarding every aspect of your ICO.

You also need to take into consideration if your business will gain advantages from ICO. It is advisable to seek someone’s advice about your strategy and say whether it is workable for your benefit or not after you read this. If not, do not try to force it. You better opt the other forms of funding that are much safer.

Once you decided to push through with your ICO, you then need a white paper that will state how your currency is different from others and explain why it is better than other currencies. Basically, this document is your way of marketing your currency. Thus, it is important to make it detailed, interesting, and informative. If you want an idea of what a white paper looks like, you can check out the white paper of Ethereum, which is one of the booming ICOs recently.

Similar to other types of businesses, you need to attract people by the time they finish going through the first page. In the white paper of Ethereum, you can see that they explained the concept of blockchain and their plan to connect Satoshi Nakamoto’s idea in order to build something exhilarating. All this information is mentioned until the end of the first page. You do not really need to narrate the history of blockchain. Nevertheless, your white page should make it comprehensible to the readers who do not know anything about how this type of currency works.

After you finalize your white paper, it is time to do advertising. You have to include 2 target audiences in your campaign: The people who are familiar with the concept of cryptocurrencies and ICO and the people who have no background knowledge about it. You have to determine the people who will look forward to your project. It is because they will be more likely to give money once they see that they can get a good deal out of it. You can contact a group of people related to the industry to help you make content to display the opportunities for your currency. They need to include the type of industry you are in when they advertise. For celebrities, according to the SEC, they cannot advertise ICOs on social media unless they disclose the money they will be receiving.

To make your ICO more known on the Internet, you need your team of programmers and experts to respond to questions on social media platforms such as Twitter and Reddit. You can also share information about your ICO to databases that list down their choice of good ICOs. By doing this, you can make people in the cryptocurrency community feel more excited which will gain you more exposure online.

Now, when your ICO is already known, you are ready to decide on the pricing and distribution of your tokens. You may want to consider having a preliminary model so that you can show people that you know what you are doing. Then, you can prepare your website and exchange method. Well, you need dedication and the best of luck in completing this process!

I can see celebrities with ICO endorsements. What is with them?

You have probably seen celebrities such as Jamie Foxx and Ghostface Killah persuade their social media followers to try ICO. Read on to know more about celebrities who did this kind of endorsement.

Floyd Mayweather Jr., who is a famous boxer and DJ Khaled advertised Centra which is an ICO that earned $30 million in 2017. However, there are numerous reports about Centra being in a class action lawsuit because they allegedly sold securities that are unregistered. The lawsuit against them still remains, but some social media posts made by Mayweather and Khaled about ICO are removed.

If I want to invest on an ICO, how can I know which ICOs are reliable?

You can check a list of ICOs online. You also need to take time researching because ICOs have very little regulation. You have to be wary of investing your money to an ICO than an IPO. Read the white paper of your preferred ICO carefully, know its members in the team, and find out if they have a background in cryptocurrencies since this is highly important.

Visiting websites such as Coin Schedule to know the ICOs they have reviewed and considered exciting and real. Of course, you should not completely trust listings like this, but they can help you a lot in finding the right ICO.

Will ICOs be regulated in the future?

In December of 2017, the SEC categorized ICO tokens as securities. According to the chairman of SEC, Jay Clayton, ICO tokens are considered an investment, so it is a form of security that is included in the federal security laws. He also mentioned that this kind of token can be used in enterprises because profits can be gained.

Based on his statement, it means that SEC is preparing to track down ICOs that deceive people to invest. Munchee, a California-based company that made a food review app, was SEC’s first hit on December 11, 2017. This company tried to obtain money by making a currency that can be used with their app to buy food. Munchee is the first company to be issued by SEC with a cease and desist order because of not registering its securities. Will there be stricter regulations in the months to come? We will just have to wait and see.

Final Thoughts

Finally, ICOs are great way to gain more money and invest in awesome projects. It is new, so many people are still getting the hang of it. Familiarize yourself first so that you will not be victimized by fraud ICOs. The rewards are high, but the risks are high as well.

Cryptocurrencies and ICOs are indeed risky. This article is no investment advice. Invest only what you are willing to loose and do your own research!

Thorsten Burger
Thorsten Burger
I am a digitization / Cryptocurrency / NFT enthusiast and author for crypthor.net with a long and extensive experience in the financial and digital transformation industry. I have successfully managed projects around the world, motivated employees to create a variety of beneficial strategic portfolios, digital marketing, e-commerce and platform solutions and supporting the agile transformation.Happy to connect!

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