Initial coin offering (ICO) is an unregulated means of crowdfunding via use of cryptocurrency like BTC and ETH. It is one of the easiest method of capital-raising process required by venture capitalists, banks, or stock exchanges. In an ICO a percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin and Eather and it is called as ‘token sale’ or crowdsale.
The First Token Sale,
The first token sale (also known as an ICO) was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014. An ICO was held by Karmacoin in April 2014 for its Karmashares project.ICOs and token sales are now extremely popular. As of May 2017 there were currently around 20 offerings a month, and a new web browser Brave’s ICO generated about $35 million in under 30 seconds. There are at least 18 websites that track ICOs.By the end of August 2017, 89 ICO coin sales worth $1.1 billion had been conducted during the year, ten times as much as in all of 2016.
ICO Structures & Mechanics
The first ICO’s were open to all who understood how to use Bitcoin. When the ICO craze of 2017 begin ICO promoters began to develop the complexity of the ICOs.
Before there is an ICO there may be a pre-ICO, a pre-sale, a private placement, or pre-commitments. Whatever the label the goal of the pre-ICO period is to collect as much money from “whales” as possible. That money is typically added into the ICO or token generation contract, it acts as validation for smaller fish that “big money” is backing the project and can lead to “FOMO” (fear of missing out) that leads to an ICO hitting its cap.
ICO Caps and their types
The very first ICOs did not have any sort of minimum or maximum caps. ICO promoters quickly realized that by putting in what is called a “hard cap” they could drive group psychology through artificial scarcity. Other caps include the “soft cap” which essentially is a minimum raise amount of the project typically returns the funds collected, and the “hidden cap” which is unknown to participants adding even more mystery and psychological anguish to those wishing to participate in an over hyped ICO. There is a triggered time based cap, which is triggered when a certain threshold is met and then sets off a timer which closes off the ICO in some number of hours or days.
ICO Discounts & Bonuses
The very first ICOs like Ethereum offered a bonus for early participation which was accessible to anyone. However, early in the development if ICOs “whales” (people with too many bitcoins) started to demand hidden bonuses for dropping large amounts into an ICO. For example, $1 million in BTC might receive anywhere from a 50% to 100% bonus allotment of coins. It is normal now for a pre-ICO (or private sale) to offer a higher discount or bonus to those willing to take the risk of giving money to an immature project.
ICO KYC & AML
Some jurisdictions are beginning to demand KYC of the funds received. Some view ICOs as financial offerings, while others believe they are sales of product or service, and hence exempt from KYC required of financial services. Currently, it is the case that in Switzerland and Estonia KYC of ICO revenues is not required, while in other places such as Gibraltar require KYC after certain thresholds.
ICO Pricing & Valuation
ICOs bear a resemblance to IPOs, however many ICOs are for organizations which lack any users and hence have no economy. It is very difficult to gauge the potential of such ICOs, and for founding teams to set appropriate prices and caps. Much of this remains a dark art based on how much money the team believes they can get, and the advice of so-called, self-styled “crytpo-economists” who take large advisor fees. In general, it is accepted that an ICO should have at least 25% of the ICO capital committed in the pre-ICO phase in order to hit a hard cap which is 4X of the amount pre-committed.
Marketing an ICO comes down to providing social validation. Social proofs can come from several sources according to Kissmetrics.
Celebrity Social Proof
The first well known celebrity to endorse an ICO is a boxer named Floyd Mayweather for the Stox ICO, the ICO quickly sold out at over $30 Million. Previously, Mike Tyson endorsed a line of Bitcoin ATMs, however this was not an ICO. Paris Hilton has also endorsed an ICO, which some believe is a sign of a bubble.
Advisors & Experts
Many ICOs add famous industry experts such as Vitalik Buterin, which guarantees that people will fund the coin no matter what.
Wisdom of Friends (referrals)
Many ICOs offer social media engagement bounties through automated systems that let people collect some allocation of coins for tasks like connecting their twitter account, connecting their facebook account, bitcointalk signatures, or liking or retweeting tweets. In the early days most of this was handled via google sheets. WINGS was the first to develop a bounty management application which has been used by several sold-out ICOs. Many ICOs also offer referral bonuses for signing up people.
Wisdom of the Crowd
Perhaps the most important psychologically impactful social proof for an ICO is to develop FOMO in potential funders that an anonymous, global crowd of ICO punters will fund the ICO in seconds. Thus, many ICOs attempt to show the popularity of the ICO either by showing that they have a large amount of projects signed up for their alpha demo (StatusIM and Aragon, for example), or that they have so much demand that they must do a special address “white list” for early adopters in their telegram and slack community chats, or by using 3rd party forms that show a large amount of users validating their ICO as legit.
User Social Proof
Many ICO bounties also include compensation for user generated content such as videos, articles and translations into local language.
Text credit: Wikipedia
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