An ICO is a form of public crowd sale for new digital currencies or utility tokens. An ICO works by blockchain companies selling their new coin or token at discounted rates for early investors. Tokens and coins sold at ICO are promoted as future functional units of currency, used within the ICOs project.
Throughout 2017 and 2018, the ICO reigned supreme. The most common method used by crypto companies to raise capital for new blockchain enterprises, the ICO has become a well established feature of the early start-up blockchain landscape.
But for those just entering the space, the world of ICOs, down to their very definition, can be overwhelming. Find out what ‘ICO’ means, what their function is, where you can launch one and what the costs involved are here.
What does ICO mean?
The term ‘ICO‘ is an abbreviation for ‘Initial Coin Offering’ – the first public opportunity to purchase coins and tokens of the latest cryptocurrency projects. Token issuers release a predetermined amount of their native coin or token, often at a discount for those who buy in early.
Mastercoin concluded the first ever ICO during July 2013, marking almost six years of funding via initial coin offerings. However, one of the most high profile, and indeed the most successful ICOs to date has been Ethereum’s raise in 2014 – which attracted over $2.3 million in BTC contributions during its first 12 hours.
One of the largest and most well known raises in terms of capital was concluded by Block.one – the development group behind EOS, which raised over $4 billion during their ICO; higher than any traditional IPO funding round during 2018.
With the rise in ERC20 token ICOs, Ethereum has been one of the most popular means of contribution to ICO funding rounds, and the Ethereum platform itself hosts over 80% of all ICOs. Some ICOs which have robust KYC/AML reporting in place, often through the use of an ICO platform, are also able to accept fiat payments as contributions.
How does an ICO work?
An ICO works by offering token buyers the very first opportunity to purchase tokens for the latest cryptocurrency projects – known as ICO ‘contributions’. ICO contributors usually purchase at ICO in the hope that the coin or token price will increase in value after launch, and subsequent listing on new exchanges, therefore ICOs work as investment opportunities.
ICOs are one of the easiest methods for companies to raise capital for their projects. Typically, ICOs will run for a set period of a few weeks or months.
Similarly, token buyers may participate in an ICO for a token which has utility value – i.e. a defined use case, such as accessing a platform or settlement of platform payments. It is then implied that participants who buy tokens may use them at face value for currency or utility purposes in the future should the project meet its goals.
Often, ICOs are carried out during public ‘crowd funding’ events, whereby anyone who passes know your customer (KYC) and anti money laundering (AML) assessment may participate in a sale. Occasionally, and increasingly more often, ICOs may be offered to a small group of private buyers.
Participants can ‘contribute’ to an ongoing ICO in a number of ways. The most common funds accepted are well known and established cryptocurrencies such as Bitcoin (BTC) or Ethereum (ETH), and their purchased tokens are usually either deposited in the wallet they made the contribution from, or in the ICOs own multi-signature wallet.
ICO operators often have a specific fundraising goal in mind, which dictates the price of tokens, and the amount of tokens issued during the ICO. This value is known as the ‘hard-cap’. Reaching the hard-cap is the absolute best case scenario for companies launching an ICO, as it means they have reached their target funding amount, and usually, sold all the tokens available during the ICO.
Likewise, reaching hard-cap allows full funding of the project goals, in addition to some runway for potential set-backs. Most ICO launches also have a ‘soft-cap’, this is usually the minimum which companies are looking to raise, the basic amount of capital which will allow them to realize their project goals. The raise is somewhat dependent on good quality ICO marketing – which ultimately draws contributors to your token sale landing page.
What is an ICO platform?
ICO platforms are an all-in-one Software as a Service (SaaS) solution for ICO launches. ICO platforms are the easiest way for token and coin issuers thinking of launching their token sale to complete the vital steps of an initial coin offering. ICO platforms can distribute coins, take and track payments, onboard customers, manage marketing campaigns and perform KYC/AML.
Due to the inherent complexities involved with issuing and overseeing a public token sale, such as marketing, customer due diligence requirements (KYC/AML), taking payments and issuing coins or tokens, many issuers choose to use the services of a dedicated ICO launch platform.
ICO platforms are best thought of as a command center for ICO operators, a simple interface to manage their ongoing token sale from.
Some ICO launch services go above and beyond, offering custom smart contract development, bounty tracking of affiliates, multi-signature wallets for contributors funds and bank transfer support – facilitating institutional investor participation.
How much does it cost to run an ICO?
Running a successful ICO costs between €100,000 to €200,000 – mainly for the pre-public engagement phase, which includes token creation, legal advisory, whitepaper writing and web design. After launch, exchange listing fees may push these costs higher if issuers choose to list on a major exchange.
Generally, ICO marketing accounts for the majority of ICO start-up costs, often costing around 10 – 20% of a projects funding target, a worthwhile investment considering ICO marketing will drive the majority of your token buyers to your sale.
Likewise, ICO operators using a dedicated ICO legal service can expect to pay somewhere in the region of €20,000 for legal advisory, as opposed to legal costs often totaling in the six figure range for independent legal services.
After launch, and usually once a token has been distributed to ICO participants, ICO operators may opt to list on a major exchange, but listing fees can be astronomically high for ICO start-ups.
Listing on a major cryptocurrency exchange could cost operators between $1 million and $3 million. This fee is highly dependent on the quality of the project, the trading volume and liquidity of the proposed exchange.
Access to payment gateways where ICO operators can sell their tokens without requiring exchange listings offers large cost savings to new ICOs.
Launching an ICO can be a challenging time, but choosing to launch through a full-stack ICO platform offers significant savings in costs and time.