It is important to understand the main aspects of cryptocurrency if one is trading. In this article, you will learn what an ICO is, how it differs from the classic IPO, its pitfalls, and most importantly, why most of the modern cryptocurrencies are based on ERC-20.
ICO (Initial coin offering) is an initial coin placement. Companies conduct an ICO to provide funding for their own projects for further development, and in the case of financial services, to add value and stability.
What are the benefits of an ICO? As with IPO, when held during after launch, it attracts more interest, leading to a significant increase in value and capitalisation growth.
Interesting fact for investors — There is a separate stage of the closed crowdsale. Usually, it is called “Pre-ico”. It includes the sale of tokens at a reduced price or free distribution for specific actions (airDrops).
There are several differences between ICO and IPO, some are as follows:
Any participant of the market is able to buy assets.
Unlike securities, cryptocurrencies do not offer dividends and allow holders to have a say in the decisions a company makes. There are no reports made available to shareholders, and the owners of tokens are not allowed to vote in the project.
Apart from the financial value, cryptocurrencies often have a utilitarian function — they provide decentralised network’s performance and offer a unique toolkit.
The main feature is that the cryptocurrency market is not regulated. Therefore, no legal authorities can limit capitalisation growth.
To date, there are several main types of cryptocurrencies which include the following:
Utility tokens, also called “App Coins”. These are tools which allow you to use the services of a company or program functions.
The most common example is VPN. If there is a participant who wants to become a VPN point through a crypto service, when the other person connects to the point and uses it as a communication node, they pay for the service, not with fiat money, but with cryptocurrency.
CoinShares. Technically, they are no different from securities. This is a medium of exchange, whose price is determined by general demand and on occasions, based on the capitalisation of the company.
PoS tokens (Proof of Stake). The emission of such tokens occurs due to the hold, which forms the principle of additional emission and “dividends”. The size of the award is determined in proportion to the amount of coins owned by the user. Usually, this is between 10-100% per stage of token emission.
The shareholder has several options for profiting:
Holding the tokens in anticipation of price increases. In actual fact, the hold is a direct benefit.
Suitable for both users and a service provider. For example, there have been separate products aimed at the use of capacities not via cryptocurrency mining, but through distributed computing, for which users are given rewards in the form of emission coins.
Scaling up for PoS. In this case, even if the price of a single coin does not change, the investor will receive a profit by increasing their number.
Thus, the benefit from ICO is either the use of the service or profit-making.
Anyone can launch their own project. It’s not worth talking about the quality, objectives, and feasibility of such an ICO. For the most part, such projects are “scams” and can be used to profit off potential investors.
The developer is unable to guarantee a profit. Investing during the initial offerings of securities, you need to be aware of risks and invest only with funds that you can afford to lose.
At an early stage, there are several factors which reduce the risk of purchasing “low-quality coins”.
To reduce the risk of purchasing “low-quality coins”, traders should attempt to more learn about the following aspects:
WP (White paper). The white paper determines the technical aspects of implementation, highlights functionality, provides details about the utility function of the token, and highlights development prospects. The document also describes the main functions, the coin generator principle, and their distribution among holders.
Marketing kit. This is a more comprehensive paper with an advertising focus. However, paired with the WP, it allows the assessment of future prospects.
Roadmap. It helps you evaluate prospects after project implementation. It is helpful if you’re going to hold the cryptocurrency for a long period of time after its distribution.
GitHub code. It is more suitable for analysis by people who are well-versed in programming. If you have a basic understanding of the code and can “read it”, it is easier to monitor the changes by observing program dynamics. If they have been absent for a long time, or they are decorative (code refactoring without significant progression), it is likely that the project will stall or turn out to be a scam.
Before investing in any “security” in the cryptocurrency world, answer a number of questions, which will allow you to determine the prospects of a potential target very quickly.
What is the goal of the company?
Are decentralisation and cryptocurrency approach necessary for a solution?
Are there existing solutions in the “fiat” sector?
Does the goal under consideration have any advantages over the “fiat counterparts”?
Is there a problem that can be solved by the token?
This allows traders to weed out most scams. However, the risk of running into scammers remains because following the crypto boom of 2017 and 2018, the developers and marketers became smarter and started to close most issues in White Paper or Marketing kit.
And of course, you shouldn’t forget about specialized forums such as Reddit, where the entire community discusses certain projects being launched, the inner workings and help determine whether a project is a scam.
While choosing the best ICOs, you should understand that a service developer, the main investor, and a “shareholder” have a very different understanding of a good ICO.
For the owner of the service, it allows the launch of the product and provides hope of further development.
For the large investor, stable growth of the token and its continued development after the startup phase is vital.
For the “speculator”, a good ICO is a place where they can manage to earn money and catch the “Xs”, i.e., profit multiple times of the amount they have invested.
Ethereum, which received over 31,000 Bitcoins at the start, has definitely deserved first place. Later on, it increased capitalisation by more than 1000 times (peak quotes) and built an amazing infrastructure, which forms the basis of all modern smart contracts.
Formally, Bitcoin’s development occurred according to the Nakamoto scheme, with the preliminary appearance of a white paper, a marketing kit, and advertising materials, but unlike followers, the holder was not a specific company, but an entire community, and of course a mysterious “developer” himself, who has managed to mine over million coins before the official release of Bitcoin.
Brave and its browser can be called a good ICO. They are much more realistic USD $35 million and a workable product at the launch stage, in terms of amounts.
If you look at the list, you can find several hundred more small enterprises, who successfully completed the offering, gave Xs to the investors, then got blown away, but then created unique services which work to this day.
On the one hand, this is a good opportunity to earn money due to the difference between the demand at the Pre-ico stage and the subsequent price increase, although the crypto boom has already passed. And on the other hand, a number of scams can lead to the collapse of prices and loss of money.
Considering any cryptocurrency services as a profit generating instrument, its potential is much higher than that of fiat which are largely limited by both issue and quotes that must be confirmed by fundamental factors and state regulation.
Anyone can invest in cryptocurrency. Its main advantage is presenting an opportunity to become “a shareholder” with any amount because X amount of cryptocurrencies is divided into very small sums.
No matter how profitable an asset will become in the future, one thing cannot be denied — ICOs have allowed developers of specific services to obtain funding for development and progress their projects.