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You just found out about this hot new tech start up building the next generation technology. The company is raising capital, but there is a catch. The only way for you to participate is through an ICO - an initial coin offering.

But what the hell are ICOs? Where do you even start as a beginner?

This guide is perfect for you. We gathered feedback from beginners like you, who wanted a comprehensive guide on how to maneuver this bold new ICO industry.

This guide will cover everything you need to know to take part in an ICO; from start to finish. After reading this guide, you will confidently participate in an ICO and even, explain it to your friends, family or colleagues.

It will cover 

  • Background of ICOs
  • What the hell are ICOs?
  • How do ICOs work
  • How ICOs work on cryptocurrency blockchains
  • Examples of successful ICOs
  • Where can I participate in ICOs?
  • Types of ICOs
  • Where to keep track of ICOs
  • Regulation of ICOs
  • Step by Step guide to invest in an ICO

Background of ICOs

Before cryptocurrencies, tech companies and startups with great ideas could only raise funds through a handful of ways: private equity, venture capital, bank loans, or Kickstarter. Investment opportunities were also limited to a small number of investors. You had to be an accredited investor, know the right people and have millions of dollars.

Not anymore.

The emergence of blockchain technology and cryptocurrencies have forever changed how companies grow.

Tech start ups are now turning to the blockchain to raise capital for their projects. They bring together teams of competent people from around the world, then market themselves to the public via social media tools. Investors like you, from anywhere in the world, can then invest using cryptocurrency. There is no limit to how much you can invest. It can be as much as $ 100,000 or as little as $50.

Initial Coin Offerings (ICOs) are accessible to all. Anyone can take part in ICOs.

So what are ICOs?

Initial coin offerings are a crowdfunding mechanism for companies that accept cryptocurrencies instead of traditional currency. These crowdfunding events are known as token sales.

During token sales, ICOs distribute digital tokens to investors in exchange for cryptocurrency investment. These tokens represent part ownership in the company, a promise of future profits or pegged to the company’s product or services.

After the token sale, ICO tokens become available to trade on exchanges. Many of these tokens have skyrocketed in value, literally creating overnight millionaires in the past 12 months.

In 2016 and 2017 alone, over $1.5 billion dollars in capital has been raised via ICOs. In fact, the total capital raised in ICOs has exceeded venture capital seed and angel funding for the first time in history.

ICOs are disrupting traditional methods of funding companies. Fred Wilson, a venture capitalist and early investor in Facebook and Twitter, admits ICOs represent a legitimate disruptive threat.

How do ICOs work?

Initial Coin offerings all follow the same process to launch token sales. The standard steps are:

  1. A team comes together and proposes an economically viable blockchain project. But, they need to raise money via ICO to make it a reality
  2. The project produces a white paper describing technical specifications, business model and a roadmap to achieve scale and generate revenues
  3. The projects will have a working prototype as a proof of concept. Sometimes, there is no working prototype
  4. The team conducts a series of intense marketing campaigns via forums, google ads, social media, video bloggers, and reviews. Marketing campaign get people excited about the upcoming ICO
  5. The project then outlines the terms and conditions of their upcoming token sale to the public
    1. the number of tokens available for distribution
    2. the price of each token
    3. the utility of the token
    4. how much the projects are targeting to raise
  6. ICO token sale launches and the coins are distributed to investors taking part in the sale
  7. After that, the tokens become available for trading on exchanges.

ICO token sales are conducted on cryptocurrency blockchains.

How ICOs work on cryptocurrency blockchains

Initial Coin offering first took place on the Bitcoin Blockchain

The earliest Initial Coin offerings took place on the Bitcoin blockchain. Bitcoin was ideal at the time because it was the only blockchain with billions of dollars in cryptocurrency capital.

Here is how it worked

  1. A  team would announce a project and how much they intended to raise.
  2. Potential investors were given ample time to prepare for the ICO.
  3. The project made an offer of a set number of tokens for a specific amount of bitcoin invested.
  4. An address was publicly shared where investors sent their bitcoin.
  5. Investors received tokens proportionate to their bitcoin investment after the ICO

ICOs lasted for a period. These tokens were like receipts or IOUs, which were redeemable when the new blockchain launched.

The Ethereum blockchain was crowdfunded using this ICO model. It ran for four weeks and raised $18 million to build what is today the 2nd most popular cryptocurrency. Others included Mastercoin, Counterparty and Coloured coins.

ICOs lasted for a period. These tokens were like receipts or IOUs, which were redeemable when the new blockchain launched.

The Ethereum blockchain was crowdfunded using this ICO model. It ran for four weeks and raised $18 million to build what is today the 2nd most popular cryptocurrency. Others included Mastercoin, Counterparty and Coloured coins.

95% of all ICOs today take place on the Ethereum Blockchain

The Ethereum blockchain is now the platform of choice for ICOs. The reason is its smart contract features and an ERC-20 token standard.

This standard allows projects to issue tokens with customized characteristics on the Ethereum blockchain. ICO tokens can then be accounted for, transferred and stored all on the Ethereum blockchain.

Together with the smart contract features, ICOs on Ethereum are much more efficient. An ICO project just issues a token using the ERC-20 standard and writes a contract defining terms. The standard sets out a set of functions that can be understood and recognized by the whole Ethereum ecosystem.

  • How a token can be moved by an owner or a custodian
  • How to access data about the token for example name, symbol, supply and balance

Once an ICO smart contract is described using this standard, all the participants of the ethereum blockchain recognize it in the same way. In turn, wallets, exchanges, and miners on Ethereum can manage tokens like they do cryptocurrencies.

In just 18 months, this standard has become the de facto choice for ICOs. Ethereum has become the platform of choice for ICOs. Ethereum's popularity has consequently led to a demand for the cryptocurrency Ether, due to its new found utility.

Examples of successful ICOs on the Ethereum blockchain

In 2016 and 2017 alone, over $1.5  billion dollars have been raised in ICOs. Some of the highest funding rounds include:

  • The DAO $150 million April 2016
  • Gnosis $13 million on April 2017
  • Status $100 million June 2017
  • Bancor $156 million June 2017
  • Tezos $232 million July 2017
  • EOS $185 million ongoing
  • Q tum $15.5 million March 2017
  • Waves $16 million June 2017
  • Maidsafe $7 million 2014
  • Filecoin $250 million in August 2017

To take part in an ICO sale on the Ethereum blockchain, you need to have Ether to invest. There are two ways to participate in ICOs.

Where do I take part in ICOs?

There are two essential places where you can access ICOs, depending on how early you want to get in.

Indirectly by buying tokens through exchanges

All ICOs token distributed by start-ups eventually end up on cryptocurrency exchanges and become available for trading.

If you cannot participate directly in the ICO crowd sale, do not worry. As soon as the ICO is over, the tokens are listed on exchanges for access by buyers and sellers.

Directly through the ICO crowd sale on the Ethereum platform

This method is the preferred method for taking part as one of the earliest investors. It requires an Ethereum wallet and a balance of Ether tokens. The ICO sale is linked to a particular Ethereum address where investors send their Ether to receive the project’s tokens.

As soon as the crowd sale begins, you can send the amount of Ether you want to invest to the specified address. You will then receive your tokens as soon as the sale ends. Usually, ICO lasts for hours to several weeks.

ICOs vary by how the tokens are priced.

Types of ICOs

ICOs are broadly categorized by the pricing methods used in the token sale.

Price increases as more investors participate

In this type, the ICO is divided into several stages. A price is fixed per token in this first stage and is typically the lowest price. As more investors come in, and time elapses, the price increases into the next stages. The earliest investors, who take the most risk, receive the best price per token.

Price decreases over time

This type is also known as a dutch pricing option. The ICO token sale starts at the highest price set by the ICO team. As the period of the auction elapses, price decreases proportionately till the end.

Gnosis was the first ICO to use this dutch auction mechanism. The EOS year long token sale is also using a variation of this method.

Fixed price per token

In this mechanism, tokens are issued at a fixed exchange rate. This method does not discriminate large investors. You can buy as many as you wish without affecting the price of the tokens.

Once the crowd sale ends, the tokens are frozen for a pre defined period. They are not available to trade or transfer until this cool off time expires. After this cool off period, tokens become readily available on the market for trading.

Random price per token

In this approach, the project decides not to allocate tokens at a fixed exchange rate. Instead, they accept funds from investors. After that, they conduct a token sale and distribute tokens to investors as per their funds.

It is important for you to understand the terms and conditions of the ICO. How many tokens will be issued for circulation? What will be the pricing mechanism?

Because ICOs are a radically new fundraising alternative, they are largely unregulated. There is no history to look up to on how to structure ICOs. Therefore, development teams have had free reign in running ICOs.

Where to keep track of ICOs?

You can research or keep track of all the ongoing and upcoming ICOs from this comprehensive list of sources

Regulation

Most governments today are yet to catch up to blockchain technology. Initial Coin offerings are a radically new approach to raising capital for technology projects. There are no regulations on blockchain based tokens and token sales. ICOs mostly operate in an unregulated space because they are not restricted by jurisdiction.

The teams launching ICO projects and investors taking part are typically spread out across the world. Funding is strictly by cryptocurrency which has no identity requirement. Thus, investors can remain anonymous and invest from anywhere in the world. The operations of ICOs are thus not limited by any laws or jurisdiction. It is not feasible to go after the whole world.

The lack of regulatory oversight has created room for development teams to raise capital from the crowd. Lack of regulatory oversight has led to proliferation of ICOs as a new mechanism of funding projects online. Projects are free to set their terms and conditions.

For example, to avoid regulation, ICOs do not promise a stake in the company equity. A majority of ICO tokens do not represent any ownership in the enterprise. Some projects even expressly state that their tokens are worthless and investors are making donations to the project.

This framing of terms is necessary for these projects to avoid falling under securities law or breaching existing regulations.

In July 2017, the Securities and Exchange Commission, a regulator, issued a statement regarding ICOs. It stated US securities laws might apply to offers, sales, and trading of interests in virtual organization. The report referenced the DAO as an example.

Unfortunately, US laws do not extend to the rest of the world, and this his has done little to drag the momentum of ICOs. Projects are now expressly avoiding the US and US investors in their terms and conditions.

ICOs remain unregulated.

Now that you fully understand ICOs, you are ready to invest in your first ICO.

A guide to directly investing in ICO token sales

We have prepared this step by step guide for you to take part in ICO crowd sale. 

Find an ICO that catches your eye

The first step is to identify an upcoming ICO that appeals to you as an investor.  There are dozens of sites where you can keep track of upcoming and ongoing ICOs.

Once you have identified one, follow up on the project by heading to their website. Read up on their white paper, check out who is part of the team, their road map and plans with the funds.

You also want to see what other people have to say about it. Check out forums such as Bitcoin talk forum and Reddit ICO sub reddit.

Once you are familiar with the project, find out the dates of the ICO sale and how many tokens are available for sale. ICOs tend to sell out within a short window, so you want to be ready before it goes live.

Get yourself an Ethereum wallet

You will need an Ethereum wallet to store your ETH funds. Every ICO will share an ethereum address where investors should send funds. Once received, tokens are sent back to you on your Ethereum wallet.

Therefore, your Ethereum wallet will serve 2 purposes

  • To store and send the funds you intend to invest
  • To receive your token allocation from the ICO.

ICOs are mostly conducted on the Ethereum blockchain platform due to its smart contract features. The ERC-20 ethereum token standard is used by all ICO tokens. So you need a wallet that is compatible with this standard.

These 5 Ethereum wallets are ideal for taking part in any ICO sale

  • Imtoken mobile wallet on Android and iOS
  • Metamask chrome browser extension and firefox browser plugin
  • Parity Wallet
  • Mist desktop wallet
  • MyEtherWallet (MEW)

You want to set up your wallet long before the ICO.

Find a place to Buy Ethereum

The next step is to sign up on a platform where you can buy Ethereum. Taking part in ICOs can only be done using ETH.

Your options include

  • A cryptocurrency exchange like Kraken, Bitstamp or Coinbase
  • A cryptocurrency marketplace like Shapeshift

Depending on the platform you choose, registering to will require Identity verification and several days. Once your account is verified, you can deposit funds from your bank or credit card.

Using your account balance, place an order to buy Ethereum. The exchange will convert your national currency into cryptocurrency. You will see a balance of Ethereum on your account.

You can choose to store your balance on the exchange. However, some exchanges have a strict policy against investing in ICOs directly from your account.

Alternatively, you can transfer this balance to your Ethereum wallet.

Transfer or Deposit some Ether to your wallet

Your empty wallet now needs some Ethereum funds.

  • Go to receive tokens in your wallet
  • Copy one receiving address
  • Go back to your exchange from the previous step
  • Go to send
  • Paste your Ethereum wallet receiving address
  • Click send

Within 1 minutes, your ETH balance will reflect in your wallet. Make sure you send enough ETH to participate in the ICO.

Prepare your ICO Checklist

You now need to familiarize yourself with the specifics of your chosen ICO. The teams behind ICOs will publish a post on ‘how to participate,' some days before the sale. It will cover all the details of the ICO.

This checklist will adequately prepare you for the ICO 

  • ICO Name
  • ICO address
  • ICO start date and time
  • ICO starting block number
  • Data field entry
  • Recommended Gas Limit
  • My Bid
  • ICO guide on how to take part with one of the Ethereum Wallets
  • Your wallet password, private key, and login details

By this time, you should have enough ETH in your wallet. The fees to send ETH for the ICO are known as gas fees. Your funds should be enough to invest in the ICO and pay for the fees of the ICO transaction.

Wait for the countdown

The best resources for information hours before the ICO are the ICO project’s 

  • Blog
  • Slack channels
  • Telegram

When the ICO starts

  • Send the amount of Ethereum you wish to invest to the ICO address shared by the project.
  • Be sure to set an appropriate gas limit for your transaction to go through

Claim your ICO tokens 

Once the ICO token sale is over, you are now entitled to claim your tokens.

  • You could receive your tokens as soon as the ICO sale is over
  • You might have to wait some days to receive your tokens
  • You might have to wait to redeem your tokens manually.

Typically, the group backing the ICO will make these tokens available to redeem anywhere from a couple of weeks to a month. It may last longer depending on the type of ICO.

Once you have claimed your tokens,

  • You can opt to hold your ICO tokens on your ethereum wallet.
  • Alternatively, the start-up conducting the ICO will have its own wallet and a blockchain.
  • Sometimes, ICOs will partner with wallet companies and exchanges to support their tokens.

Nearly all wallets that support Ethereum also support ICO tokens launched on Ethereum blockchain. In all cases, you can transfer your tokens from your ethereum wallet to another secure wallet or exchange.

Congratulations! You have successfully invested in an Initial Coin Offering.