Everything You Need to Know About ICOs
Below we provide a walkthrough of how to invest in an ICO (offering KIK’s KIN and Unikrn’s UnikoinGold as examples), before we get to that, let’s briefly discuss what an ICO is and go over a few important warnings.
Bottomline: An ICO is sort of a mix between an IPO and Online Crowdfunding, but for Cryptocurrency. You contribute X amount of an existing coin/token/cryptocurrency like Ethereum’s Ether, you get Y amount of a new [often Ethereum-based] token like KIN (at a set conversion rate).
Warnings: Where cryptocurrency trading and use is generally legal, China recently banned ICOs and ICOs are generally in more murky territory. One must be extra cautious with ICOs. They could turn out to have different tax implications, and they could get banned completely in the future. READ THE WHITE-PAPER and DO YOUR RESEARCH before buying into an ICO (as the SEC warns, some of these are scams!)
TIP: One thing to keep in mind, if you are savvy enough you can buy ICO tokens after they launch (often at a lower price than offered during the ICO). Many ICO tokens have done well over time, but few have constantly traded above their ICO price in their first few months after launch.
TIP: Ethereum is (as of 2017) one of the leading blockchain platforms for ICOs. About 1/2 of ICOs use Ethereum’s blockchain to create unique cryptocurrency tokesn. The ICOs we offer walkthroughs for below are based on the Ethereum blockchain and are bought with Ethereum’s cryptocurrency/token/coin “ether.”
What is an Initial Coin Offering?
An Initial Coin Offering (ICO) for cryptocurrency is like an Initial Price Offering (IPO) on the stock market, but instead of buying stock in a company you buy digital coins. In both cases, you can think of these as public crowdfunding efforts where investments in a new company is rewarded with assets related to the value of the company (although not always directly with an ICO).
The main difference is that with an IPO you own part of the company as stock, and with an ICO you own digital coins issued by the company (but don’t have things like equity or voting rights; you just get the new token/cryptocurrency/coin that in some cases can be affected by the value of the company; for example if its used in that companies network like with KIN and Unikoin Gold).
In both cases the idea is similar to crowdfunding, to raise money for a new idea, to help give value to a capital asset, and to [ideally] have a capital asset held by investors that appreciates in value if the business is successful (thereby awarding early adopters).
What is a token? ICOs generally offer “tokens,” thus it is helpful to understand that terminology. “Token” is just short for “cryptocurrency token.” In other words, token=cryptocurrency (meaning all cryptocurrencies are tokens). For example, Bitcoin tokens are the cryptocurrency built on the Bitcoin blockchain, and Ether tokens are the cryptocurrency built on the Ethereum blockchain. Interestingly, unique coins can use the Ethereum blockchain and build their own token network off it. This is what about 1/2 of ICOs here in 2017 do. When you enter an ICO that uses Ethereum’s blockchain, you are generally going to be trading “ether tokens” (the popular cryptocurrency that trades under the symbol ETH) for an ICO’s specific branded Ethereum-based cryptocurrency tokens. It is a bit like trading Bitcoin for Bitcoin Cash (a unique token built on the bitcoin blockchain), or Ethereum for Ethereum classic. The new tokens are built off the existing block chain, but they are otherwise a unique cryptocurrency with a unique market value.
TIP: An initial coin offering (ICO) is an unregulated means of crowdfunding that offers a new cryptocurrency at an initial cost. This is an alternative to other more traditional methods of raising capital.
How Can I Invest in an Initial Coin Offering?
To buy into an ICO you’ll need cryptocurrency and a cryptocurrency wallet.
Although any combination of coin and wallet may be requested for a given ICO, in many cases you specifically need Ethereum (AKA “ether”) and a MyEtherWallet (because many ICOs are token-based systems built on the Ethereum blockchain, and thus one is essentially exchanging “ether tokens” for rebranded “ether tokens” with unique mechanics).
Given that this is the case, we will walk you through signing up for an ICO that uses Ethereum and a MyEtherWallet (and… is built on the Ethereum block-chain), that is KIK instant messenger KIN.
TIP: One reason the Ethereum platform is used for ICOs is because Ethereum’s smart contracts can be programmed to distribute tokens. This makes launching an ICO simple and helps ensure the delivery of tokens to user’s wallets. Learn how to add a token from an ICO to your wallet.
Warning: There are many ICOs launching in 2017, and not all of them are reputable. Of the reputable ones, only some will find success. If investing in the coins with the highest market caps is risky, and investing in altcoins with low market caps is even risker, than ICOs are even risker than that. This isn’t to say one shouldn’t invest, but it is to say that one should do their homework and be prepared for some ICO investments not to pan out.
General advice on ICOs: With the above warning in mind, a good idea for the cautious investor is to skip the ICO and wait until the token/cryptocurrency is launched and listed on an exchange or two to buy. Some coins spike right away (and you will miss out of this). However, most ICO-based coins lose value or remain steady for months before anything significant happens. It is rare that an ICO is too good to pass up it (although it does happen).
FACT: Ether itself was an ICO. Ethereum’s Ether is probably the best example of a successful ICO. However, even that took a while to go from ICO price to big profits. In other words, you could have skipped the initial offering and bought in early and still done rather well.
TIP: Specifically, for ethereum-based ICOs, you’ll generally need a “ERC-20 token friendly wallet” (meaning a wallet that can hold the type of tokens you’ll be using). In simple terms, it means do use MyEther Wallet or Ethereum Wallet, but do not use Coinbase’s Ethereum wallet to buy into the ICO (transfer from Coinbase to MyEther or Ethereum Wallet first). Coinbase isn’t ERC-20 friendly, meaning it can hold Ether, but not other Ethereum-based tokens.
How to Buy Into an ICO – Using KIN and UnikoinGold as an Examples (KIN Walkthrough / UnikoinGold Walkthrough)
Here is a simple version of the steps you’ll need to take to go from zero to taking part in the KIN ICO or UnikoinGold ICO, below that will be some important details:
NOTES: Not every ICO uses the ethereum blockchain, but KIK’s KIN and Unikrn’s UnikoinGold do, this walkthrough assumes you are buying into an ICO that uses the ethereum blockchain. Not every state or country will allow ICOs to run in their region (generally the region will “ban ICOs” not ban users from buying into ICOs).
- Make sure you have the official page of the official ICO. With KIN it was this page //kin.kik.com/register/. For UnikoinGold it is //unikoingold.com/. When you are ready, you’ll “enter the token sale” or “participate now” (you generally will also want to sign up for a new account with the entity).
- Sign up for a coinbase account so you can buy/sell/send/receive digital currency (it isn’t the only option, but it is the most popular one in the U.S. and it pairs with MyEtherWallet). Learn about how to trade cryptocurrency using coinbase. TIP: You may also want to sign up for Coinbase’s GDAX to avoid fees.
- Buy Ethereum via coinbase or GDAX if you want to go the extra step (there are a number of limitations on what you can buy out of the gate). Go to the “buy screen” on coinbase and buy some Ethereum (and then wait while the transaction happens; which can be over a week) or set a limit order in GDAX and then transfer your coins back to coinbase.
- Set up a MyEtherWallet. See: How to use MyEtherWallet. TIP: You generally MUST use a “ERC-20 Token Friendly Wallet/Exchange.” MyEtherWallet is a simple and smart choice for an “ERC-20 Token Friendly Wallet,” but Ethereum Wallet will also work. Don’t use coinbase to send coins to the ICO (read the next step carefully)!
- Transfer Ethereum from coinbase to MyEtherWallet (or another ERC-20 friendly wallet accepted by the ICO) using your public keys (your “wallet address,” not your private key) to “send” between wallets. TIP: Go to the accounts tab in coinbase, pick your Ethereum Wallet, click send (the QR code button on mobile), put in your MyEther Address, the transaction generally happens in minutes… but during ICOs it can take hours. See how to send/receive on coinbase FAQ.
- Now register for the ICO, to do this you’ll need to enter your public wallet address along with other information. You’ll need to follow the directions on the site. TIP: Make sure you read the “white paper” of the ICO before you sign up.
- Wait for launch day and follow the instructions (you’ll get instructions for the next step after the new registration closes). This will generally involve transferring ethereum’s “ether” (the token/cryptocurrency) from MyEtherWallet to the ICO’s public address in exchange for tokens AKA the ICO’s cryptocurrency. TIP: To send ether from MyEtherWallet you need to pay for “gas” (ether paid as a transaction fee). To send 1 ether you need at least .01 ether set aside for gas (gas is way cheaper than that, but you have to make sure you set aside enough, so .01 is a good rule of thumb). In other words, if you want to send 1 ether you’ll actually need at least 1.01 ether in your wallet (to cover the gas).
- Once the ICO launches, they will send a token to your Ethereum wallet. Read our instructions of how to add the token to your wallet so you can send/receive the new token.
- When you are ready to turn your new ICO-based tokens/cryptocurrency back into USD, things can get tricky. The company who offered the ICO may offer a service to transfer it back to ether, or you may have to trade the token on a token-to-token exchange that lists the token. The specifics differ per ICO. Generally though, you are going to have to sit on your token until it gets listed on an exchange that operates in your region. As a resource, CoinMarketCap.com generally lists the exchanges tokens are traded on (so look up your token there and then choose an exchange; See Kin as an example). TIP: EtherDelta.com tends to deal in ICOs, so they are generally a good first stop.
That is the gist of it. It can be a little intimidating to go through all those steps and pump your info in along the way, but such is the nature of trading cryptocurrency and buying into an ICO.
With that said there are a number of important warnings and tips and tricks that we should now cover.
TIP: KIN and Unikoingold are hardly the only ICOs. Ethereum was an early ICO, and since then there have been many more. When looking for an ICO, do your homework and make sure the company is legit.
TIP: Never share your wallet password or private key and never enter your password or private key anywhere (unless you are accessing your wallet via private key and password). To send coins and receive coins you only need to share your public wallet address (your “public key”). You can share your public address with anyone, but again, never share your private key or password. Learn more about cryptocurrency wallets.
What to Watch Out for With ICOS
Below are some vital warnings you should keep in mind with ICOs:
- ICOs create new cryptos, there are already thousands of cryptos… yet there are only so many crypto users and only so much money. There can’t be infinite winners, there will be losers. ICOs are a bit like IPOs for penny stocks (they are “penny cryptos“). It could work out well, but know you are taking a gamble.
- There have been some clearly scammy ICOs. Not every ICO is as upstanding as the next. Hard to tell which is which though.
- China has banned ICOs, and New York and Washington state have rules against ICOs (as of early September 2017). This could be the start of a trend, or it could not. If you live in China, New York, or Washington you likely can’t participate in an ICO (the state isn’t banning you, they are banning the ICO from what I have been able to understand). Otherwise cryptocurrency trading, ownership, usage, and ICOs are legal as of September 1 2017 (and since all an ICO is the “minting” of a new coin/token/cryptocurrency owning it isn’t an issue, even if participating in the ICO is due to region-based restrictions).
- If you make money on cryptocurrency you have to report it as capital gains. If you make lots of money one year, then lose it the next year, you’ll still owe taxes on the gains. If you don’t understand the tax implications, tread lightly. Learn about cryptocurrency and taxes.
- If ICOs are banned after you have invested in one, you should be owed a refund… but that isn’t an ideal situation. One has to imagine not everyone in China is going to get their money back.
- Not all ICOs are meant to be investments. For example, Unikrn’s CEO Rahul Sood specifically said on a YouTube AMA, “Buying a token is buying a product that were selling that can be used on the Unikrn platform. People should not be looking at this as an investment. If they are looking at this as an investment, they’re making a mistake. Tokens are not investments.” Is that jargon to scare off those who would pump and dump UnikoinGold? Maybe, maybe not. Ready an analysis of UnikoinGold and make your own choice.
- Assuming you are a new user who chooses the Coinbase/GDAX route: Coinbase takes time to set up, buying ethereum can take over a week (about 8 days, sometimes longer) with Coinbase. This means, if you are new to all this, you need to start the process of obtaining Ether early. NOTE: GDAX is a Coinbase product. If you have Coinbase, you are only a few clicks away from having GDAX too. It is worth the time to figure out and read about.
- When you sign up for an ICO or coinbase they will want more information from you than the average person likely feels comfortable giving. Giving that information is the only way in the door. Thus, everyone has to make a personal choice regarding what ICOs and companies they want to give their info to (this is why we have only suggested major ICOs from existing companies with existing token-based systems).
- Cryptocurrency wallets aren’t protected by any regulation. If you lose your wallet or keys, you lose all your coins.
- Generally cryptocurrency is on shaky ground with regulators. At any moment all major countries could take down cryptocurrency in a number of ways. So investing in the top coins (bitcoin, litecoin, ethereum) is risky, but transferring money into new ICO tokens (in the case of KIN called “KIN” or in the Case of Unikrn called UnikoinGold) with the hope of appreciation and then (if all goes well) transferring back to ethereum’s ether and then to USD is… obviously even more risky.
- Some ICOs are rather scammy. It can seem like everyone and their sister started launching ICOs in 2017, there are a few by major companies that could turn out to be really great investments, but investors should be very careful. There are lots of ways to go wrong here, but if you pick the right ICO (like those who bought into the original Ethereum ICO did), then there is lots of upside as a reward.
- Be prepared to sit on your investment for a while. You could take a big loss out of the gate, or you could see no gains for a while and then a sharp quick spike. That sharp spike could be the start of good times, or it could be a pump and dump. Thus, not only do you have to pick the right ICO, you have to also be ready to “set a stop loss” on an exchange who trades in that token to pull your money out.
- Keep in mind, Ether can lose value. That can put you in an odd situation where the ICO does well, but Ethereum’s Ether doesn’t… and this can eat into your gains.
In other words, ICOs have a big upside (potential gains if a coin takes off), but ICOs have a ton of risks related to them (not all of which we could list here).
- Initial coin offering
- Bitcoin, Ethereum, Blockchain, Tokens, ICOs: Why should anyone care?
- Dear SEC: ICOs & ‘Tokens’ are killing innovation
"How to Buy into an ICO (Initial Coin Offering)" contains information about the following Cryptocurrencies:
Ethereum / Ether (ETH)