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What is an ICO and How Does an ICO Work?

How does an ico work

What is an ICO and How Does an ICO Work?

 

Readers and listeners of TBT will know that we are not immune to the current buzz surrounding cryptocurrencies. Understanding what an ICO is and how ICOs work is essential to being a full player in this market.

 

Even the catastrophic tanking of the price of Bitcoin in 2018 hasn’t dampened the enthusiasm of true crypto-bros for virtual currencies, blockchain, smart contracts and the whole wave of new tech.

 

The True Successor to Bitcoin is Out There

 

Perhaps people are finally accepting that just because it was first, doesn’t mean Bitcoin is best.

The blockchain technology of Bitcoin simply isn’t fast enough or cheap enough for Bitcoin to form the backbone of a new digital payment ecosystem.

 

If Bitcoin loses it’s crown as the king of cryptos it could be to one of the existing players or it could be to a coin that doesn’t yet exist. Maybe Ethereum’s smart contracts and the technology foundation of multiple new coins will give it the edge, or maybe Litecoin’s convenience for fast small payments. Or, perhaps it will be a coin that you haven’t heard of because it has not been invented yet. Whether Bitcoin goes the way of Netscape Communicator and AOL and we have yet to see the Google and Facebook of cryptos I don’t know, but the buoyant ICO market suggest that many people do subscribe to this basic idea.

 

Towards the end of December 2017 the market cap of Bitcoin fell below 50% of the total market cap of all cryptocurrencies. Although most cryptos have been hit hard, Bitcoin has been hit harder than many.

 

But, with the changing of the guard comes opportunities.

 

ICO = An Unregulated IPO for Blockchain Tech Startups

 

In the stock market the best way to profit from the growth of successful companies is often to buy them when they have an IPO – an Initial Public Offering. With cryptocurrencies, the way to get the maximum return on investment for a successful coin will be to participate in the ICO – Initial Coin Offering. Of course, this is also the best way to participate in their failure if they go bust!

 

Where IPOs can be hard to access (they are often oversubscribed and the investment banks doing the listing will usually reserve stock for the favourite clients) ICOs are far more democratic and if you are ‘in the know’ there is potentially a lot of money to be made. But, do be warned, there is a lot of money to be lost as well.

 

This piece is not intended to serve as an investment guide to ICOs or indeed as a risk warning – maybe we’ll come to those topics in a later blog. Instead, we are going to go back to basics and ask how does an ICO work and how can you participate?

 

Step 1: Pick an ICO

 

The most important part.

 

If you are determined to try and grab your piece of the crypto pie and you think an ICO may be the way to do it, then just make damn sure that you pick the right one.

 

It is very well documented that many ICOs are total scams. It is equally well documented that many ICOs never actually trade above their offer price. But, on the other hand, basically all successful cryptos since Bitcoin were launched in an ICO and many, many people have made an awful lot of money by getting involved early. Caveat Emptor and all that.

 

Check out https://topicolist.com/ to see an aggregated list of ICOs and use that as a jumping off point. At the same time get yourself on the crypto subreddits and look at https://bitcointalk.org/ to get an idea of what else may be out there.

 

Once you’ve seen something promising then make sure you read the whitepaper and do your research. If it seems dodgy, don’t get involved.

 

Step 2: Get Some Cryptocurrency, probably Ether

 

These days most ICOs are run on the Ethereum blockchain network. The reason is that the Ethereum blockchain allows for the spinning off of new tokens (i.e. cryptocurrencies) from the existing Ethereum blockchain. A by-product of this situations is that many new ICOs primarily take Ether as payment.

 

Not all ICOs take payment in Ether, some use Bitcoin and others just regular fiat currency. But until Ethereum is superseded as the primary platform for new ICOs, it will likely continue to be accepted as payment in most.

 

If you haven’t already done so, then get yourself an account with Coinbase, Kraken or another cryptocurrency exchange and buy yourself some Ether. Then move it to a wallet.

 

It is CRUCIAL that when you send your Ethereum to the public wallet address provided by the ICO team that you do not send it from an exchange but rather from your own personal Ethereum wallet. You will need an “ERC20” compatible wallet, the most commonly used of which is MyEtherWallet.

 

For a full and detailed article that shows the the exact practical steps to take when participating in an Ethereum based ICO, check out this blog on Medium. Sending the money correctly is pretty important, so do read that link!

 

Step 3: Send the Ether to the ICO Team

 

The exact way that the value of the ICO tokens are calculated when you get them can vary, but the general rule is: you send them Ether, they send you an amount of their new token. Or maybe you send the Bitcoin or real fiat currency – either way it is a direct transaction usually at a pre-agreed price. Read the blog mentioned above for the mechanism if it is Ether or another cryptocurrency.

 

Once sent you should receive your token, or at least a date when the tokens will be released and how much you’ll be getting.

 

Step 4: Be Patient

 

What you may not realise is that the reverse part of this transaction is actually the hardest. Turning your shiny new token back into real money isn’t always as simple as buying the thing in the first place.

 

The ICO provider may have a service for you to change your new crypto back into other crypto or fiat currencies, or they may not. If not then you may need to sell them on an exchange.

 

The catch here is that you will need to find an exchange that lists the new coin the ICO created. That will likely take some time, and ultimately if the ICO isn’t particularly successful then there is every chance that it never gets listed on an exchange. Welcome to the slightly ropey world of ICOs!

 

Step 5: Be thankful that you chose well and enjoy your riches. Right?

 

This is the part where you look back and think: “Wow, I am so glad I had the foresight to pick and ICO that was not just a good idea but run by an obviously reputable group of people with a clear plan and facilities for reversing my ICO purchase when I wanted to take profit”.

 

If you are thinking this while sipping a strawberry daiquiri through a bitcoin shaped straw whilst perched on your super yacht watching Lewis Hamilton whizz past in the Monaco grand prix then well done you. If you are thinking something slightly different while drinking Tennents Super and watching another homeless bum push a Tesco trolley past your cardboard box, then I suggest you should have done some more research.

 

Good luck!

 

Two Blokes Trading

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