What is an ICO?
By: Ofir Beigel | Last updated: 11/13/20
ICO, or Initial Coin Offerings, are a form of fundraising through distribution of cryptographic tokens by a company. This post explains everything you need to know about ICOs.
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What is an ICO Summary
An ICO is a fundraising operation for a project through the sale of cryptographic tokens. The tokens are sold at a discount and later on may be used within the project or sold for a profit. ICOs are unregulated and hold a lot of risk for uneducated investors.
That’s an ICO in a nutshell. For a more detailed explanation keep on reading, here’s what I’ll cover:
- What is an ICO?
- How to Evaluate an ICO?
- ICO vs. STO vs. IEO
- How Do I Start My Own ICO?
- ICO Marketing
- Frequently Asked Questions
ICO stands for initial coin offering. The term derives from the traditional finance term, IPO (or initial public offering).
An IPO is used to describe the launch of a new company on a stock exchange, also known as going public. The purpose of an IPO is to sell stocks of the company in order to raise capital from the public.
ICOs, on the other hand, sell cryptographic coins, also known as tokens, as a way to fund a specific project.
The general idea is that if you believe the project will succeed, you buy the tokens that power the project beforehand at a discount. Once the project launches, you will be able to use the tokens or sell them for a profit.
How an ICO Works
When a cryptocurrency company wants to launch a new project through an ICO, it creates a whitepaper. The whitepaper is a document that describes several important aspects of the project:
- What is the project about?
- What needs will the project fulfill?
- How much money is needed for the project?
- Who is the team behind the project?
- How will the tokens be sold in the ICO be distributed?
ICOs usually use the Ethereum platform to set up the token sale. A smart contract is set up so that when people send Ether (Ethereum’s currency) to the contract, it will dispense back the ICO tokens.
Usually, ICOs have a soft cap and a hard cap. Soft cap is the minimum an ICO needs to raise within a given time-frame, in order for the project to launch. If the soft cap isn’t met, the project is considered a failure and the money is returned to the investors.
A hard cap is the project’s fundraising goal. This is what the team is actually aiming for, and it will not accept any more funds once the hard cap is met.
Once the soft cap is met, the founding team will now get to work and bring the project to life through the use of the funds raised.
To sum it up, ICOs are like Kickstarter for crypto projects.
The best example of a highly lucrative ICO was the pre-sale of Ethereum tokens. In mid-2014, one Ether token (also known as ETH) sold for around $0.40. If you bought $100 of ETH back then, you would have the equivalent of 50,000 dollars in 2019.
The worst example of a disastrous ICO is The DAO. The DAO, or decentralized autonomous organization, project managed to raise $150 million worth of Ethereum. However, shortly after the ICO ended, a hacker managed to drain a third of the amount raised due to a bug in the smart contract’s code.
The different opinions on how to handle this crisis led to a split in the Ethereum network and the creation of both the Ethereum and Ethereum Classic altcoins.
Before investing in any ICO you need to understand what you’re investing in. Don’t ever invest in something you don’t understand.
This means you should take the time to actually read the ICO’s whitepaper, research the project and founders and get involved with the community around it.
Also, make sure you understand how the tokens for the project will be distributed. ICOs which hold a lion’s share of tokens for the founders may end up selling these tokens in order to make a quick profit after the ICO ends.
In fact, over 90% of ICO projects ended in a loss to initial investors.
Another important question to ask is how much money is being raised and for what purpose?
If there is no hard cap, the project may get over-funded. Getting more money than you need can also hinder project development as laziness and no clear focus may arise as a result. Some projects have managed to raise tens of millions of dollars before the first line of code was even written.
ICOs can be considered as high-risk betting on cryptocurrency startup companies. Many people today invest in ICOs, not because they believe in the project, but because they just want to make a quick profit. This, in turn, creates a general hype before the project launches.
But as the buzz fades away, project creators and early investors want to take money off the table, so they start selling massive amounts of tokens. This can cause the price to drop sharply.
Another thing to consider is that the bar for creating an ICO today is pretty low. While conducting an IPO requires complying with a lot of regulations, ICOs skip this entire burdensome procedure by raising money exclusively in cryptocurrency which has yet to be regulated.
As a rule of thumb, if you’re just getting started with cryptocurrencies and ICOs, you probably should do a fair amount of additional research before committing your money to any project, exciting as it may sound.
ICOs, STOs, and IEOs all have the same purpose – they are all ways companies can use to raise funds for their projects.
ICOs were the first to come about. They are considered to be the wild west of fundraising. They have no oversight, no regulation, and in some cases are complete scams. There are no rules for an ICO: as long as you manage to get investors on board – you’re good to go.
After receiving a lot of backlash from regulators (mainly the SEC), the ICO hype calmed down and ICOs became much more investor friendly.
STOs are regulated ICOs. STOs are compliant with government regulations and are usually only offered to accredited investors.
STOs deal only with security tokens, meaning the tokens being sold represent a financial asset. ICOs, on the other hand, can also sell utility tokens that are meant to be used in order to power a specific platform.
You can read my complete STO guide here.
Finally, we have IEOs.
IEOs are ICOs managed by a cryptocurrency exchange. So instead of a company selling tokens directly to the public, in an IEO everything is done through an already existing trading platform.
The company conducting the IEO pays a listing fee and gives some of its tokens to the exchange. In return, the exchange takes on the responsibility of making the IEO succeed, by taking care of the various aspects such as marketing, securing funds and vetting investors.
You can read my complete IEO guide here.
Note: The next two chapters of this post (4 & 5) are only relevant if you plan to launch your own ICO.
There are several steps in order to launch your own ICO:
Step 1 – Find a Need
Make sure your project solves an actual problem and you’re not just jumping on the ICO hype. Furthermore, make sure that your solution actually requires the use of a dedicated token. Many projects have a lot of potential but the use of a dedicated token feels forced and unnecessary.
Step 2 – Build a Great Team
Make sure you have a team of people who have experience in both the cryptocurrency space and business and marketing. Many teams have highly qualified crypto experts, but can’t manage the business side of the ICO and vice versa.
Step 3 – Publish a Whitepaper / Build a Website
Once your team and project are ready, publish a detailed whitepaper describing your project.
Do not duplicate content from other white papers. This is one of the most harmful things you can do to your ICO, as it will cause your ICO to be considered a scam!
It’s best to also set up a website to support your marketing efforts. The website should be well designed, be modern in its look, and be clear and easy to navigate.
A professionally-made short explanatory video is a great way to attract attention and get your message across. Consider the following elements as well:
- The website requires a clear call to action (CTA) that will entice potential investors.
- The website needs a transparent and attractive email sign-up. Be it newsletters, updates, or special offers, opted-in emails are a great way to target an interested audience.
- To build trust, it’s highly recommended that you list all your key team members and links to their LinkedIn profiles. The more transparent your project, the more trust you’ll build.
- Make sure the website features your vision, a road map, and a schedule of events.
Step 4- Market Your ICO
Marketing the ICO should start before the ICO itself. This is a very broad topic so I’ve dedicated a whole chapter to it in this post.
Step 5 – Run Your ICO
It’s time to set up the smart contract for your fundraising operations and start the ICO. If you did a good job in the first four steps this should be the easy part, since people will be actively looking to invest in your project.
SEO (Search Engine Optimization) is an often overlooked part of an ICO marketing strategy, but if it’s ignored, it can doom your ICO project to failure.
- When SEO is performed correctly, you are ensuring a cost-effective long-term source of targeted and interested traffic.
- An ongoing SEO strategy involves ORM (Online Reputation Management), which ensures negativity or attacks by rivals are minimized.
- Having an SEO strategy in place tells potential investors that you’re in it for the long term and not just a “here today, gone tomorrow” ICO. Without a visible SEO strategy, alarm bells may ring for investors and scare them away due to fears of a fly-by-night scam ICO.
As regulations on ICO advertising become stricter and marketing channels narrow, a well-thought-out and professional SEO strategy should be the bedrock of all ICO marketing strategies.
All too often ignored in the immediacy of ICOs, a targeted, carefully planned, and expertly executed SEO strategy is the key to long-term ICO success and must not be ignored.
Media Outreach and PR
Press releases are a tried-and-true method of getting your message out there. The press release should be professionally written and added to the websites that matter.
This can, of course, be done in-house, but an ICO marketing agency offers expertise, experience, and relationships that truly optimize this conventional but effective marketing channel.
There are some free sites that will publish your press release, but if you want the top-tier sites with the highest exposure and the greatest reach, be prepared to pay a premium.
Guest Posts and Articles
Having your articles published on relevant and popular websites is a great way to reach your target audience.
A well-written, interesting and informative article published on a top-tier site being read by your targeted audience can be priceless. Sites can be free or paid, and there are many top-tier sites that will publish an article for free.
This is where the relationships and experience that ICO marketing firms possess come to the forefront, as quality content generation and the right places to publish them aren’t easy to find.
Guest posts and articles with do-follow backlinks (links that pass on the site’s “authority” to your site) can also provide a massive boost to your SEO strategy.
Getting your ICO listed on top-tier specialized sites should form an integral part of all ICO marketing strategies. Prior to the actual offering, ICO listings are an essential method of getting credibility and visibility to your project.
Top tier sites will, of course, cost a premium, but they should be factored into any ICO marketing budget. There are some free sites, but they simply don’t offer the reach or exposure the premium sites do.
PPC (Pay per Click) ads are probably the most challenging method of marketing your ICO. High profile bans on ICO advertising by Facebook, LinkedIn, and Twitter have ended most of what was an effective method of ICO marketing.
To make matters more difficult, Google banned ICO advertising as well. There are still a wealth of specialized crypto sites and blogs, news sites, and networks that offer banner advertising, but the market is shrinking.
Email marketing is another, more conventional, marketing channel that can still reap great rewards, but like PPC, it’s more difficult due to bans and restrictions. MailChimp, one of the largest email service providers, has banned ICO mailing, but there are other providers out there.
When it comes to email marketing, the best approach is to build your own opted-in email list, but that takes time and isn’t the quickest ICO marketing solution.
Social Media and Communities
An essential part of any successful ICO marketing plan is social media and community management.
The crypto community is incredibly knowledgeable and can make or break an ICO. Therefore, getting the trust of the community should be considered a priority.
How the ICO is presented and to whom will determine the ICO’s success. The best free ICO marketing channels that tap into the rich veins of interested parties include:
Reddit – The Reddit community is a well-informed and unforgiving audience. Win its trust and you can go a long way to making your ICO a success. Creating subreddits and/or commenting on existing threads can generate a surprisingly high level of exposure.
Facebook groups – There’s no ICO advertising allowed on Facebook, but there are plenty of popular groups with an interest in all things ICO, cryptocurrencies, and blockchain. Also, Facebook offers a strong opportunity to build your own interested community.
Twitter – Like Facebook in that there’s no advertising, Twitter is still a very popular platform for the crypto community, and influencers with hundreds of thousands of followers can be targeted for ICO marketing.
Telegram – The fastest-growing social media platform and an outlet that must be marketed to, Telegram was very lovingly embraced by the crypto community from its inception, and the popularity keeps on growing.
Specialized Forums – Bitcointalk.org and some other specialized forums are widely read by the crypto community and carry a fair degree of influence.
Quora Discussions – Popular and continually updated threads (example) offer high-level exposure and a great opportunity to communicate your ICO’s message.
LinkedIn Groups – LinkedIn groups (example) have thousands of members, are free, and tap into a very targeted and knowledgeable audience.
Providing ‘bounties’- incentives and rewards – have been proven to be an effective way to garner investor interest pre-ICO and to keep stakeholders engaged after the offering.
Additionally, airdropping (the giving away of free tokens) is an ICO marketing method that must be handled with care:
Don’t give away any tokens at all or give away too few, and you risk not optimizing a popular method of marketing. On the other hand, give away too many tokens and you run the risk of your project being seen as a scam or impacting your project’s viability.
In person marketing
When it comes to closing deals, there’s no better situation than face-to-face. Attending blockchain and crypto events, conferences, and roadshows offer the perfect opportunity to communicate your project pre and post offering.
It’s strongly recommended that the CEO or founders attend as many of these events as financially and physically possible. There really is no better way to establish trust and actually close deals.
Attending or sponsoring these events can be costly, especially if there is travel involved, but they offer a tremendous ROI and should be factored into every ICO marketing budget.
What is an ICO Whitepaper?
An ICO whitepaper is a document that describes important details about the ICO project including the team behind the project, the idea and technology, token distribution methods and the roadmap for the project.
What is a Pre ICO?
A Pre ICO, also known as Presale or private ICO, is a token sale conducted before the public ICO only to specific investors.
Pre ICOs are usually aimed at strategic partners and investors, giving them better deals than the rest of the public, in order to bring them onboard and increase the chances of success once the public ICO starts.
ICOs are a new and exciting form of fundraising, but as such can also be very risky and dangerous. If you’re thinking about investing in an ICO, ask yourself first how much you really understand about this project, and avoid investing in something just because of the hype.
Finally, never invest any amount of money that you aren’t willing to lose since the overwhelming majority of ICO tokens end up in the crypto graveyard.
Have you had any experience with ICOs? I’d love to hear about it in the comment section below.