The world of cryptocurrencies can be pretty daunting for newcomers. From technical vocabulary to memes, it is a whole other language that can be hard to get your head around when you are just entering the space. In this short introductory guide we will cover one of the fundamental building blocks of cryptocurrency markets: initial coin offerings, or ICOs.
What is an ICO?
An ICO is a method by which new cryptocurrency ventures raise capital. It is similar to a more traditional initial public offering (IPO), where a company makes its shares publicly available on the stock market for the first time, but there is currently limited or no regulation. As such, it is more like a combination of crowdfunding and an IPO where barriers to entry for retail investors are removed. Developers can go straight to the community in order to raise funds.
What is KYC Registration in Crypto?
In order to take part in an ICO, you will usually need to register, with more and more ICOs now requiring KYC (Know You Customer) registration. This is a type of financial regulation that requires participants to verify their identity in order to invest or sign up to an exchange. The purpose is prevent illicit money flowing into projects, as well as to verify that investors are legitimate.
How Do I Participate in an ICO?
You will then need to invest some cryptocurrency by sending it to their funding address. In return, you will receive an amount of tokens relative to your initial investment. Sometimes you may receive the tokens instantly, whereas others may be locked until a couple of weeks after the ICO ends. The tokens will then become tradeable on an exchange, again, usually at a later date.
The vast majority of ICOs are launched on the Ethereum network through issuing ERC-20 tokens. This is a standardized protocol that allows new tokens to be launched easily, as well as ensuring different tokens are compatible – something extremely important for an ecosystem of decentralized applications (DAPPs) to integrate seamlessly. The existence of programmable Smart Contracts further streamlines the process, making Ethereum the choice for many. Although, as competitors become more prominent, ICOs are increasingly turning to alternatives such as NEO, QTUM and Stellar.
What’s the Difference Between Utility Tokens & Security Tokens?
Whether a token is classed as a utility token or a security token depends on its intended function. This distinction is extremely important because if security tokens are being issued without abiding by the specific securities regulations, they are technically breaking the law!
Utility tokens are those that are designed to be used within the platform by giving access to the products or services it provides. They are not intended to serve as investments or as shares – although they may still appreciate in value, but rather as ‘digital coupons’ that can be redeemed in the future.
To contrast, Security tokens generate their value from an externally traded asset, with contributors investing in anticipation of the token appreciating, receiving dividends or a share of profits. As such, they are more like shares in a company and should be subject to SEC regulations that govern traditional IPOs.
What is a TGE in Cryptocurrency?
A Token Generation Event, or TGE, is the name given to ICOs for utility tokens. It is a new term that has cropped up, being used by new projects that do not want to be associated with ICOs for regulatory reasons. It is likely that we will see TGEs become more common in the future.
ICO Key Definitions & Components
- Whitepaper – When a new startup wants to hold an ICO, the vast majority will communicate the aims and objectives of the project through a whitepaper. This is a research style document that contains an overview, as well as technical details for developers to delve into. Think of it like a business plan combined with a scientific paper.
- Hard Cap – This is the total amount the ICO is aiming to raise. When this limit is reached, the ICO will be over. If it is not reached, then the funds will be returned to the investors.
- Total Token Supply – This is the total amount of tokens that will ever be released. The whitepaper will outline the total % of token ownership that contributors will receive, as well as other allocations such as the development fund.
- Market Cap – This is the total valuation of the project and it is important to understand when assessing a projects value. In order to calculate the market cap, you need to divide hard cap by the % allocation for contributors. For example, if contributors receive 60% of the supply and the ICO is raising a total of $20 million, the market cap will be $20 million/0.6 = $33.3 million market cap.
- Presale – A presale is when the tokens are available before the public crowdsale, sometimes privately and usually for a lower price. It is used as a method to raise funds to invest in marketing and development before the main ICO.
- Crowdsale – When the tokens are publicly available for anybody who is registered to invest.