Everything You Need to Know About ICOs
Below we walk you through investing 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.
UPDATE: A lot has changed since 2017 when I wrote this. Today you might use Binance Smart Chain and PancakeSwap or use UniSwap and MetaMask instead of EtherDelta MyEtherWallet when doing ICOs (often called presales or IDOs, or Initial DAO Offerings, these days). Nothing much else has changed. These are still sales of cryptocurrency tokens with the same risks they have always had. With that said, the SEC made it pretty clear it considers ICOs as unregistered securities already, so do consider that additional legal risk when doing an ICO. You won’t get in trouble with the law, but people running the sale might, and that likely will drop the token value to zero. The rest of the risks are more obvious, like fake or failed projects, or paying higher prices in late rounds, and then getting dumped on by devs and early investors, etc.
Bottom line: An ICO is similar to 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) at a date set by the issuer of the token.
Warnings: Cryptocurrency trading and use are generally legal. However, China recently banned ICOs, and generally speaking, ICOs are in a murkier territory in terms of legality. One must be extra cautious with ICOs. They could turn out to have different tax implications, and they could get banned 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 is that you can buy ICO tokens after they launch (often at a lower price than are offered during the ICO) if you are savvy enough. Many ICO tokens have done well over time, but few have consistently traded above their ICO price during the first few months after launch.
TIP: Ethereum is (as of 2018) one of the leading blockchain platforms for ICOs. About 1/2 of ICOs use Ethereum’s blockchain to create unique cryptocurrency tokens and Ethereum-based “smart contracts” to do things like distributing tokens. The ICOs we discuss below are based on the Ethereum blockchain and are bought with Ethereum’s cryptocurrency/token/coin “ether.” They are “ERC-20 tokens” and can be stored in an ERC-20 wallet like MyEtherWallet.
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, it may help to think of these as public crowdfunding efforts where investments in a new company are 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, while with an ICO, you own digital coins issued by the company. You don’t have equity or voting rights; you just get the new token/cryptocurrency/coin. In some cases, the value of the coin can be affected by the value of the company; for example, if it’s used in the issuing company’s network as 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).
In short: 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.
What is a token? ICOs offer “tokens,” thus it is helpful to understand that terminology. “Token” stands for “cryptocurrency token.” In other words, token=cryptocurrency=coin (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 – 2018 do. When you enter an ICO that uses Ethereum’s blockchain, you are going to be trading “Ether tokens” (the popular cryptocurrency that trades under the symbol ETH) for an ICO’s specific custom 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 blockchain, but they are otherwise a unique cryptocurrency with a unique market value.
How Can I Invest in an Initial Coin Offering?
To buy into an ICO, you’ll need cryptocurrency and a cryptocurrency wallet.
Any combination of coin and wallet may be requested for a given ICO. However, in many cases, you specifically need Ethereum (AKA “ether”) and a MyEtherWallet (or a full Ethereum Wallet). This is because many ICOs are token-based systems built on the Ethereum blockchain. One is essentially exchanging “ether tokens” for rebranded “ether tokens” with unique mechanics.
Meanwhile, all Ethereum-based tokens can live together in the same wallet. Since Ethereum Wallet (the core full node wallet) requires downloading the entire Ethereum blockchain, I suggest you use MyEtherWallet (which doesn’t).
Given that the above 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 blockchain), that is KIK instant messenger KIN.
TIP: Specifically, for Ethereum-based ICOs, you’ll need an “ERC-20 token friendly wallet” (meaning a wallet that can hold the type of tokens you’ll be using). This means you can use MyEther Wallet or Ethereum Wallet. 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.
TIP: One reason the Ethereum platform is used for ICOs is that 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, 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 riskier, then ICOs are even riskier than that. If you invest, please do your homework and be prepared for some ICO investments not to pan out.
General advice on ICOs: Because of the risky nature of launchings, it is a sound 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 before buying it. Some coins spike right away; you may miss out on 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). If you are skilled, you can buy a token early using EtherDelta. If you are of an intermediate level, you can wait until it comes on an exchange. You’ll often miss the very best price offered by the ICO, but you’ll save yourself some headaches and will avoid tying up your funds. In other words, ICOs can be a great choice, but there are some real considerations depending on your skill level.
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.
How to Buy Into an ICO – Using KIN and UnikoinGold as 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 some limitations to 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 an “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. Caution: 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 usually 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 usually 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” (“gas” is ETH paid as a transaction fee when you send ether). To send 1 ether, you need about .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 need a little over 1 ether in the wallet you are sending it from (to cover the gas).
- Once the ICO launches, they will send a token to your Ethereum wallet. Read our instructions for 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 that 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. Usually, 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 lists the exchanges tokens are traded on. 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 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.
TIP: Essentially, you really do have to sign up for the ICO, Coinbase, and MyEtherWallet (as you need to sign up for the ICO to take part, you need to buy Ether to buy the token, and you need to use an ERC-20 wallet to interface with the ICO’s smart contract; there isn’t any skippable step in there unless you choose other methods like MetaMask instead of MyEtherWallet or another method for obtaining Ether other than Coinbase).
NOTE: Here are some important warnings, tips, and tricks.
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 you are taking a gamble.
- There have been some shady ICOs. Not every ICO is as upstanding as the next. It is hard to tell which is which, though.
- China has banned ICOs, and New York and Washington State developed 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 probably can’t participate in an ICO. The state isn’t banning you, but they are banning the ICO, from what I have been able to understand. Otherwise, cryptocurrency trading, ownership, usage, and ICOs have been legal as of September 1, 2017. Since an ICO is simply 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, 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 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 we’re 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. Read 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.
- Cryptocurrency is on shaky ground with regulators. At any moment, all major countries could take down cryptocurrency in any number of ways. Investing in the top coins (Bitcoin, Litecoin, Ethereum) is risky. However, transferring money into new ICO tokens with the hope of appreciation and the further hope of transferring back to Ethereum’s ether and then to USD is obviously even riskier. This is the case whether you are considering KIN called “KIN” or Unikrn called UnikoinGold.
- Some ICOs are rather scammy. It can seem as though everyone and their sister started launching ICOs in 2017. There are a few currencies 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. If you pick the right ICO (as 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, but you also need to be ready to “set a stop loss” on an exchange that 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 tempting upside (potential gains if a coin takes off), but ICOs have significant risks related to them (not all of which we could list here).
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"How to Buy into an ICO (Initial Coin Offering)" contains information about the following Cryptocurrencies: