Over the past few months, there has been an increased focus on cryptocurrency ICOs. These initial coin offerings are a great way for investors to buy into a project at an affordable price. At the same time, the project developers try to raise as much money as possible to finish their creation as soon as possible. It is a well-balanced ecosystem, but a lot of people are still confused about certain ICO aspects. In this series, we will try to address some concerns people still have.
THE BASICS OF ANY CRYPTOCURRENCY ICO
As most people should be familiar with by now, buying into a cryptocurrency ICO is the same as backing a project on Kickstarter or IndieGala. Investors receive a reward for pledging money to the cause, even though not all of these projects may succeed in the end. Unlike traditional crowdfunding campaigns, cryptocurrency ICOs do not accept credit cards or other traditional payment methods. Most projects only accept investments in either Ether or Bitcoin, albeit some projects accept additional currencies and tokens as well.
There is another similarity to cryptocurrency ICOs and crowdfunding projects. It is always of the utmost importance to invest as early as possible. In the case of a cryptocurrency ICO, early investors often received a specific percentage of tokens on top of the regular amount. These bonuses can either be time-based or based on the amount of tokens sold already. As we have seen with a lot of recent ICOs, time to buy in is incredibly limited, though.
Even though these similarities between cryptocurrency ICOs and crowdfunding projects should not be overlooked, that is far as both concepts can be compared. With a crowdfunding project, backers can often get a refund of their money if the project fails to deliver. That is not necessarily the case with a cryptocurrency ICO, although most projects lock funds in a smart contract. By using this technology, it is a lot easier to refund investors if needed, albeit that happens very rarely these days.
Moreover, it is always a good idea to check how many tokens will be generated during a particular cryptocurrency ICO. A lot of projects issue a billion tokens or more, which theoretically makes it impossible for them to gain any major value. That is a common misconception, though, as cryptocurrency ICOs often increase their value a tenfold or more in the first few months. Most of these tokens are quickly listed on exchanges, which means there will be plenty of liquidity as well.
Speaking of the number of tokens being issued, there are two creation models projects can make use of. First of all, there is the static supply option with a predetermined value. This means a fixed number of tokens will be issued which will always be sold at the exact same price. This levels the playing field for both early and “late” investors alike. It is possible this method will be considered less attractive by speculators, since there is no option to buy cheaper coins. Then again, these tokens often see their value appreciate over time just as well as other projects.
The second option revolves around a static supply with a dynamic funding goal. The distribution of cryptocurrency ICO tokens is made based on how much money has been raised to date. More funds raised will result in a higher price per token. This also means early investors will see the value of their token increase during the remainder of the ICO. These are often the most popular types of ICOs, although they often reach their funding goal in minutes or hours.