Recently the world of Cryptocurrency and ICO are becoming more popular. We can see that these ICOs of projects become a reason for a considerable load to Ethereum network. At present, many projects and teams work with pre-sale of ICO. We can see that the projects of ICO’s became a reason: the teams significantly make money, at the time when investors get tokens at a lower price. So let us consider the difference between a public ICO and an ICO presale.
What Is an Initial Coin Offering (ICO)?
An initial coin offering (ICO) in the cryptocurrency industry equivalent to an initial public offering (IPO). An Individual or a startup or a company whoever is in the need of crowdfunding to raise funds for enhancing their business or to start a business with a perfect idea, scope and creating trust with the project can start an ICO.
Interested investors can participate into an initial coin offering to receive a new cryptocurrency token issued. This token may have some utility related to the product or service that the company is offering, or it may just represent a stake in the company or project.
Types of Initial Coin Offerings
The two types of initial coin offerings are listed below:
- Private ICO
In private initial coin offerings, only a limited number of investors can participate in the process. Generally, only accredited investors (financial institutions and high net-worth individuals) can participate in private ICOs, and a company can choose to set a minimum investment amount.
- Public ICOs
Public initial coin offerings are a form of crowdfunding that targets the general public. The public offering is a democratized form of investing because almost anyone can become an investor. However, due to regulatory concerns, private ICOs are becoming a more viable option relative to public offerings.
The rise of cryptocurrencies and blockchain technology is helping to boost the popularity of ICOs. In 2017, more than $7 billion was raised using ICOs. In 2018, the figure almost doubled. The largest ICO to date was executed by Telegram, an instant messaging services provider. During a private ICO, the UK-registered company raised over $1.7 billion.
How an Initial Coin Offering (ICO) Works
When a cryptocurrency project wants to raise money through ICO, the project organizers’ first step is to determine how they will structure it. ICOs can be structured in a few different ways, including:
Static supply and static price: A company can set a specific funding goal or limit, which means that each token sold in the ICO has a preset price, and the total token supply is fixed.
Static supply and dynamic price: An ICO can have a static supply of tokens and a dynamic funding goal—this means that the amount of funds received in the ICO determines the overall price per token.
Dynamic supply and static price: Some ICOs have a dynamic token supply but a static price, meaning that the amount of funding received determines the supply.
Today we can find a lot of information and documents, which covers the cryptocurrency ICO concept. It is not difficult to find it, however we still need to know a lot, because this industry changes constantly.
If you heard about crowdsourcing events, you should know how a public ICO works: practically any sum is opened for the public. You are not limited to a particular amount of money or a location while a public ICO takes place, you can invest not much money or, on the contrary, a huge amount of it.
It is quite profitable to invest in a cryptocurrency ICO, at the same time these tokens require more time to get on the worthy exchanges. It forces many users to be nervous concerning their investments. And we understand why.
It leads us to know: how they develop an ICO for cryptocurrency today. Collecting of money is much faster as compared with that how much time is required to find out what technical problems, compensation and receipt of quotations on stock exchanges present. It does not make sense for many people, particularly when projects, during their ICO, attract more than 10 million dollars. Truly, they can use this money, in order to speed up a process of the listing and make investors much more satisfied. However, it doesn’t always work in this way.
Let us describe more details about an ICO. People who develop ICO campaigns in this way want to collect money from investors, which in the future will finance their developments. In such a way, money got is directed usually to modification of the infrastructure, development of the company and mainly to a company capital (operational and working). For this purpose, developers should raise a particular amount of money (hard cap).
A participation in a company ICO is available almost for everyone. You should only have to find the right platform, create an account, invest a particular sum, which you want, and simply to wait. The initial proposal of coins is offered usually between winding of the project infrastructure and launch of an app or a software engineering. Participating in ICO, you support the project you like and find it attractive. As a result, a company presents you its tokens which subsequently you can sell at much more high cost. Therefore, next time, when you meet with a new blockchain, which is going to start its activity, you will know the main terms of ICO.
In order to get on the stock exchange it takes much more effort and time in addition to the commission payment. Particularly, if it is a question about tokens of ERC20, where a smart contract should be checked by a third party. It results in some delays, which means that some investors will have a panic and merchandise their tokens on small stock exchanges to have an opportunity to reduce their losses. If this tendency is going to develop, many ICO projects will be far below they deserved to be on any exchange. It is a very unsuccessful way.
However if we consider investors, most of them are not professional players of this market. Sometimes they do not have an experience at all. In most cases, ICO has no rules and is not regulated by any state or bank. There we can talk about the risks of losing everything if an ICO was a fraud activity. Therefore, any investor should be careful before his participation in an ICO. It is important to study a project, its team and a whitepaper. In addition, an opportunity to participate in each ICO nowadays is not opened for every person. If we talk about the Ethereum network, sometimes an ICO lasts only 30 minutes. As an investor, you should offer a very fight price to become a leader in this chain of blocks. It is a big drawback for not very rich investors.
A big limitation has USA investors, as the United States Securities and Exchange Commission installs very strict rules, when an ICO issues token securities.
In general, most companies hold public ICO. However, some of them prefer to make a private preliminary sale to attract investors.
2.ICO – PRESALE
Today we should talk about new appearance, which is called a pre-ICO token sale. In the case of a pre-ICO investors have an opportunity to purchase tokens before an official coin offering. However we can see that this pre-ICO receives a far less amount of funds as well as it offers a low price tokens with some profitability. Sometimes it is possible to see a bonus of 40% higher with a pre-ICO in comparison with a public ICO.
Therefore, a lot of companies run Presale of ICO before an official coin offering to give investors an opportunity to buy coins at much more lower price.
To be careful, teams use separate smart contracts for an ICO Presale and for a Public ICO.
For some platforms, a pre-sale is an opportunity to accumulate the means for the expenses for the main ICO. Some charges include paid advertisements, operative staff recruitment and expenses to meet the interests of investors.
It is done for division of the means and supplies of their absence. However, it can cause as well some ambiguity with regard to that how much money was raised at all. As numbers of a pre-ICO are not included in the numbers of an ICO, we can see some imbalance. Besides, it means that the issuance of tokens can be much more than people are ready to buy.
A due diligence is an important part of a pre-ICO token sale. It is very valuable to be transparent about funds, which a pre-ICO raises. A disadvantage is the fact that frequently early investors sell tokens at the prices of ICO, as soon as these tokens get to a stock exchange. At the same time, they still receive a very big profit and the costs of the marker of the project decrease subsequently. An ICO presale is a surprising investment potential for a fast growth, but it can damage a project attractiveness and confidence, when plenty of tokens are merchandised on reduced prices.
In such a manner, developers with a help of preliminary ICO collect means for their new project. This new phenomenon becomes popular very fast. New companies actively use this method in their activity.
ICO presale is intended to attract business angles to its activity as well. It does not bring a lot of funds, and this kind of investors frequently not even make more than 10% of the desired amount, but they offer very necessary maintenance charges for a team, at the time when the last ones still develop their whitepaper and road map.
A month or two before an ICO, a presale of Initial Coin Offering takes place. Very often a presale is organized for a particular group of people. In this way, it is almost impossible to become a part of pre-ICO if you are not a close friend or a family member. Besides preliminary sale usually has a minimum and maximum amount of money which can be bought by one person.
Preliminary sale, as a rule, presents bonuses for contribution during a period, as your means will be blocked earlier and, as an investor you are subject to the greater risk, because you did an early investment.
One more reason, which explains why companies do a preliminary sale of an ICO, is to receive private money of venture capital with a greater discount, than a public fund.
Therefore, we can see that preliminary sale has usually taken much more main advantages than that of the public sale. The first is that the prices of tokens are lower than during the Public ICO. The second is that the earlier investors have an opportunity to get free bonuses while a preliminary ICO takes place. The kind of bonuses varies depending on a particular project. This criterion is absent when a team does a public initial coin offering.
The initial coin offering is a completely new phenomenon in the world of finance and technology. The introduction of ICO’s made a significant impact on capital-raising processes in recent years. However, regulatory authorities around the world were not prepared for the introduction of the new fundraising model in finance. Even though the ICO’s with their actual value of the tokens and how easy it is for the issuer to get rich. Ultimately, time will tell whether this becomes the future of funding businesses or merely a “get rich” scheme by issuers.