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What is an ICO – Initial Coin Offering

What is an ICO?

The hype around cryptocurrencies has spread globally, and extremely fast. With it, ICOs came as well. ICO (initial coin offering) is a form of fundraising for a new blockchain project. Companies can list their projects and make an ICO where they sell their coins or tokens to the investors and general public without actually having a real product. By doing that, they can finance a project based on just an idea, and investors could make money by investing and then selling the coins that they got with a bonus at market price, which can be (if the project is good and successful) much higher than then one during the crowd sale.

ICO stages

ICOs usually have more than one stage. The first stage is mostly private and only available to the big investors and companies that are willing to support the project. They get special deals and bonuses depending on the support they are willing to provide, and the amount of money they are willing to invest. The second stage is generally the Pre-ICO. At this stage, early investors get a chance to earn big bonuses when they invest. After that, the regular ICO can be divided into a few stages, with each one giving different bonuses depending on the time of investment (the earlier, the bigger the bonus), and/or based on the amount invested (which is rarely the case).

ICO caps

ICOs have soft and hard caps to measure the amount of funds required for their project. Soft cap is the minimum amount of investment required to start a project. If the ICO doesn’t manage to get enough starting capital, they shut down the project and return the money to the investors. Hard cap is the polar opposite of the soft cap, and is the maximum amount of money an ICO needs. If reached before the time of ICO, the ICO stops because they do not need more funds to finish the project. The best project ideas tend to sell in a matter of minutes.

What happens after an ICO?

After an ICO finishes, the second stage of a project starts. The acquired funds are used to pay for project development or improvement (if the project had a use before the ICO), marketing, and branding the idea that the ICO was based on in the first place.

The first move is (usually) to list the coin or token that was sold in the ICO on many exchanges. That makes the invested funds grow in market value, turning profits for the investors and making them happy as well as making a profit to the project managers and developers so they can have more funds to work with. Buying into an ICO is much like investing in a company through a stock market.

Most ICOs have a roadmap for the project. The roadmap includes their schedule of improvements, public and official launching of the product, and major exchange listings of their coin or token. If the project wants to be successful, they have to keep up with the set up timeline or the investors will not be satisfied, therefor reducing the market price of the coin or token they bought.

ICO regulation

With 2017 being the year of ICO craze, many countries have decided to look into ICOs and start regulating them, due to their shifty nature. Many of the ICOs are simple money grabs or scams, and many are decent projects with good visions, but without regulation they are not being able to fulfill their task and vision properly. Even though the whole idea of crypto is based on decentralization, regulation can be a good thing especially in the ICO sphere. Some countries, like China and the USA have made strict regulatory actions towards ICOs, with China shutting most of them down and the USA making ICOs have to file the ICO for approval to the SEC.

KYC – know your customer

KYC is the USA way of regulating ICOs, but it was not created for them specifically. It was made in 2001 in the Patriot Act, and its goal was to reduce and deter terrorist behavior. It was passed right after 9/11.

As far as ICOs are concerned, there are many reasons to invest in them. However, there is the illegal part of investing: Money laundering. The lack of regulation before KYC was introduced made it easy to launder money through these projects. Ultimately, KYC saves regular investors who support the project from the disruptors (money launderers).

This is why KYC system is what all of the ICO investors usually have to go through to be able to invest in an ICO. Since almost no ICOs have been registered and approved under SEC laws, KYC means that US citizens are not allowed to invest in the ICOs.

KYC is completed by submitting your information (name, address, country of origin and such) and then providing one document to prove your identity, and another one to prove your address. In the ICO world, it is usually just to prove you are not from the US. This might change though because there have been some interesting filings for ICOs with the SEC in 2018.

Returns on the ICO investment

ICO can be a great option for investing because of the ridiculously high reward potential. If properly invested, some projects can return tens of thousands in percentage of the initial investment. To name a few, if 1 dollar was invested into the NXT ICO, you would have bought it at $0.0000168.

One next token, at the time of writing, is standing at $0.148981, which would make the investor more than 800,000%. For every 1$, the investor would get more than $8,000 in return. Same $1 invested in IOTA ICO would have net the investor more than $3,000 and Ethereum investors would be proud of making more than $1,500 on their 1$ if they invested into the ICO. Even though this is a high risk area of investment it can be highly lucrative and that’s why so many people are willing to invest and support these projects.

Final word

Investing in ICOs is highly lucrative but only if the investment is well thought out and the project is successful. After an ICO is done, there are many months and years ahead of projects to become big and great in their field of work. This requires a lot of patience. The roadmap is the holy grail of investors, and should be considered as such by the developers too for the sheer positive thinking in the times of waiting for the project to come to life.

Thanks for reading and don’t miss our next article!

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