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Blog|Exchange|What Is an ICO and How Does It Work: Guide 2022
Published April 26, 2022|9 min read

What Is an ICO and How Does It Work: Guide 2022

Blockchain solutions have already opened so many opportunities for startups and investors, and new possibilities continue to emerge. ICO is one of the most convenient solutions for raising funds required for boosting a new crypto project. In this article, we will cover the basics of creating and participating in an ICO.

What Is an Initial Coin Offering (ICO)

What is an ICO? This abbreviation means initial coin offering. By definition, this is an activity that implies raising funds for a certain project based on blockchain. Naturally, coin offering means that ICO involves gathering digital currency tokens. ICO solutions can be used to kick-start a new cryptocurrency, a crypto application, or any blockchain-related service. Startup projects in the crypto world usually create an ICO to raise assets and make their new tokens possible.

Types

There are two types of ICOs available for investors. Their difference is accessibility to a large public. Here are the main kinds of initial coin offering projects:

·        Private – private ICOs are designed for the limited public that includes specific investors. The creators of such ICO projects can select investors and even choose the minimum amount of funds for investment.

·        Public – this is a solution for the general audience because almost anyone can participate and purchase ICO tokens. This solution is possible mostly in those countries that allow ICOs and do not have straight regulations. Otherwise, private options might be preferable.

Overall, there are numerous public crypto fundraisings available. Even beginner investors can find interesting projects and buy some assets to sell them beneficially afterward without looking for an advisor.

Why Is It so Attractive to Investors

When launching an ICO, creators usually start selling tokens at a considerably lower price. Prices naturally increase after the ICO is over and the crypto is up and running, but there is also a chance of this specific token becoming very successful. Many investors test their luck and analytic skills by determining which ICO will take off in the future and become a successful cryptocurrency. In addition, potential losses are not as big because such tokens are quite affordable in the first place. The first investors participating in ICO might also receive some special perks from the creators of the project.

How Does an ICO Work

To start with your own fundraising project, it is important to understand how does an ICO work. This is a complex process that requires expertise in blockchain technology and finance. Knowing the law is also crucial to ensure that your initial coin offering project is fully legal.

Identification of Investment Targets

It is obvious that ICOs are used for raising funds, but every fundraising initiative needs to have a goal. The creators of a crypto project need to set out specific goals for an ICO. These goals and the future vision of the project need to be described in a white paper so investors could read it and make decisions.

Token Creation

After deciding on the goals and objectives, it is time to create special ICO tokens. These tokens are specific assets used on blockchain platforms. Just like cryptos, they are fungible and can be traded. However, they cannot be considered a separate cryptocurrency as they are used specifically for kickstarting a full crypto project. In addition, such tokens do not act like shares used in initial public offerings and do not provide any ownership of the company. It is possible to create ICO tokens using specialized blockchain solutions. This process is fairly simple as creating tokens does not involve writing a completely new code. Instead, blockchain platforms utilize already existing cryptos like Ethereum to modify their codes slightly and come up with fresh tokens.

Promotion

A promotional campaign is highly important for attracting potential investors. Using crypto-related platforms is the most efficient way of attracting crypto enthusiasts to a new promising project. Some online resources forbid advertising ICOs; so, make sure that you are not infringing any policies. However, crypto community members often use specialized platforms and forums to learn about blockchain-related news.

Initial Offering

When tokens are ready and the promotional campaign is live, it is time to offer initial coins. These tokens can be sold to investors in a few rounds. If the amount of tokens is limited, developers can wait until everything is sold out and use the raised money to create promised apps or software. Investors should be able to use their tokens efficiently via these software solutions or wait until their value increases.

How to Participate in ICO

Not everyone wants to start an ICO project, and many crypto users simply want to become investors. Here is a simple guide on how to participate in ICO.

How to Buy Tokens

Anybody can buy ICO tokens with little preparation. Here is how you can purchase ICO tokens from scratch:

·        Register on a crypto exchange – while some ICO initiatives accept fiat money, they usually require cryptos as well. It is most convenient to acquire digital money via a crypto exchange. Register on a reliable platform to start trading.

·        Purchase crypto – the most popular digital currencies are Bitcoin and Ethereum. Buy some tokens using your fiat money. Various classic currencies are accepted, so you should be able to find a convenient trading option.

·        Open up a digital wallet – a special cryptocurrency wallet is needed to safely store your coins. It is recommended to use ETH wallets as Ethereum is most often used for ICO projects. However, there are many reliable wallets that can hold various crypto and provide high security. Transfer your assets to a separate wallet for more protection.

·        Create a wallet for trading – it is usually advised to store cryptocurrencies in cold wallets for maximum protection and use convenient online wallets for storing only certain amounts of tokens used for trading. MetaMask is one of the most popular solutions when it comes to ETH trading. This wallet is used as a browser plugin and offers convenient solutions for crypto traders.

·        Purchase ICO tokens – go to the website of your preferred ICO project and purchase their tokens. Most projects usually provide a convenient step-by-step guide on how to acquire their tokens. Connect your wallet and follow the guide. Purchase the necessary amount of tokens and wait for them to transfer to your wallet. In some cases, it is necessary to redeem tokens manually.

·        Protect your tokens – after buying ICO tokens and transferring them to an online wallet, it is important to send them to a more secure offline storage or another heavily protected solution.

How to Sell Tokens

To sell ICO tokens, it is necessary to find a crypto exchange that will accept them and make a listing. Such information can be usually found on the developer’s website. Not all cryptocurrency exchanges can list ICO tokens. Sometimes, it is necessary to wait until the fundraising is over. Make sure to monitor the updates on the ICO project of your choice to learn about the ways of selling these tokens.

What Are the Risks for Investors

ICO investors always risk to a certain extent. Here are some of the risks of participating in an ICO:

·        The developing team could be inexperienced, which puts the entire business at risk.

·        ICOs can often be used for various scam schemes.

·        There are no guarantees that tokens will succeed.

·        ICO projects can lack transparency.

How to Do an ICO

Many crypto startups are interested in how to do an ICO to raise funds for development. Here is a quick guide on how to start your own fundraising.

What Do You Need to Launch an ICO

While the process of designing a successful ICO is complex, here is a short step-by-step guide that will help with understanding the basics:

·        Come up with an idea – the first and most important step is understanding whether your project needs an ICO at all. Your project needs to be competitive and offer a solution for a specific problem to be viable.

·        Do your research – in case you have a nice idea for a potentially profitable project, it is time to do research. Examine your competition and legal matters concerning ICOs in your region. In some places, ICOs are forbidden or strictly regulated.

·        Create tokens – creating ICO tokens is quite simple as there are even special blockchain platforms that help with making this type of token. Ethereum code is commonly used for creating ICO tokens, and there are numerous solutions that facilitate the process.

·        Make a white paper – this document should describe your entire project in great detail so all investors can read it and see the potential. This paper is what entices crypto users to make an investment.

·        Launch a marketing campaign – it is crucial to have a powerful marketing strategy that will attract potential investors. It is recommended to launch a designated website for your ICO and use it as a platform for informing visitors about your project and its journey as well as offering the opportunity to purchase tokens.

·        Launch the ICO sale – after creating a buzz around your project, it is time to launch tokens and start selling them to the public.

What Does It Take to Successfully Raise an Investment

A professionally written white paper plays a huge part in the success of the entire project. This is a reflection on the idea of your token and the future product that should attract investors and provide all the necessary info to make them want to invest. Having an experienced team is also important as specialists with experience in crypto should know all the pitfalls and ways to avoid them.

Features of ICO Regulations

There are different attitudes and legal regulations towards ICOs around the globe. In the US, ICOs are legally allowed and considered securities rather than digital currencies. In South Korea and China, cryptos are completely forbidden. In the UK, many tokens are unregulated, while some of them can also be considered securities depending on the case.

Pros and Cons of Initial Coin Offering

Now that you know how to invest in ICOs, it is important to look at some of their pros and cons.

For Investors

Advantages:

·        Higher liquidity for first investors

·        High level of anonymity

·        Potential great return on investment

Disadvantages:

·        ICOs are mostly unregulated

·        High risk of depreciating in value

For Creators

Advantages:

·        Potential to attract investors globally

·        It is possible to raise money quickly

·        This provides a powerful boost for the project from the start

Disadvantages:

·        Potential regulation issues

·        High volatility of funds

Conclusion: What Does ICO Stand for

ICO is a great launchpad for any cryptocurrency project. Opening fundraising for your crypto initiative attracts investors that are already interested in crypto and can see potential in your business. Despite tight regulations in some countries, this is still an incredible solution to raise funds globally. ICOs are also great for investors that can benefit greatly after buying tokens at a lower price.

Frequently Asked Questions

What Is an ICO?

An ICO means an initial coin offering, which is a fundraising activity specific to businesses, startups, and initiatives using blockchain and cryptocurrencies. This is similar to an initial public offering but with crypto instead of shares. However, ICO is mainly used by startups in the cryptocurrency world.

How to Participate in ICO?

To become an investor, it is necessary to find an ICO opportunity online via specialized websites. You will be able to read a white paper about every project and select a reliable one. After that, it is necessary to purchase tokens with fiat money or crypto. The received tokens can then be transferred to a crypto wallet.

How to Do an ICO?

Everyone can start an ICO project, but it requires preparation. To put it shortly, you will need to create a white paper for the project, decide on how your ICO will develop, create a website for this project, attract potential investors, advertise your idea, and finally launch ICO tokens on a special platform that issues such assets on the blockchain so investors can buy them.