An initial coin offering, commonly referred to as an ICO, is the fundraising method used to finance new cryptocurrency projects. In an ICO, a company or an individual offers investors several units of their cryptocurrency in exchange for other altcoins or tokens. The ICO is a process that involves the issuance of a white paper and a smart contract to support the project. However, the process does not end there; the selling of the new cryptocurrency is a process in itself, a smaller process within the grander scheme of the ICO.
The Makeup Of An ICO
The selling process of an ICO exists in three phases: the ICO presale, the private sale and the crowdsale. While these three stages share the common thread of selling a startup’s or individual’s cryptocurrencies, they feature pronounced characteristics. These attributes allow participants and observers alike to draw a distinction between the three stages.
It is important to note that not all startups will follow or include these three stages in their ICO. Nonetheless, understanding the difference between them will make for a smoother ICO process and a well-rounded understanding of the industry at large.
Understanding The Three Phases Of An ICO
The ICO Presale
The presale is a token sale arranged prior to the crowdsale, the main sale of an ICO’s tokens. This type of sale is announced and promoted via a startup’s website, social media and advertising methods. The presale is situated as a middle ground for investors who seek a larger discount or a bonus, in comparison to a crowdsale or a private sale which carry higher risks. Bonuses are available, and they depend on how early an investor makes a contribution and the amount of the contribution.
Also called the pre-ICO, the presale is the earliest sale in an ICO, conveying that a company is prepared and serious for its ICO to investors. This token sale event generally uses separate smart contracts from the main sale, i.e., the crowdsale event. It usually targets larger investors as well as several private investors, depending on the structure of the token sale.
The presale is a relatively new phenomenon that has overall positive effects on the ICOs. Although companies do not raise high capital in this token sale, it gives them a window of opportunity to make public the tokens they intend on selling.
The Purpose Of A Presale:
The rationale behind conducting a presale is manifold. Firstly, it provides a means to test the cryptocurrency before the main event. This allows those in charge to get an inkling of how much interest the project is drawing in. Secondly, it can help a startup determine how to continue marketing the project or how to reshape their marketing efforts to reach the ICO’s funding goal. The presale is also a kind of beta launch for the ICO. With less people involved and a smaller sale, it will be much easier to rectify, should something go wrong. This event benefits both the companies and the investors.
|ICO Presale Pros:||ICO Presale Cons:|
|1. The potential for greater discounts on tokens compared to crowdsale.||1. Usually a higher minimum contribution amount compared to a crowdsale.
|2. An assurance of token purchase. (ICOs can cancel a crowdsale if the crypto market is in a bullrun, meaning the ICO hits a fiat hardcap thru appreciation of crypto invested.||2. A higher risk from an immature product or company.
|3. The possibility to purchase more tokens compared to a Crowdsale, as the presale is generally aimed at bigger investors.||3. The risk of cryptocurrency appreciation devaluing the tokens than if they were held or invested in the crowdsale.
|4. The potential for a quick return if discounted tokens are sold at the ICO price when token trading begins.||4. A lack of liquidity of tokens while awaiting token trading.|
|5. Less tokens available as a whole to presale, which makes popular ICOs presale sell out fast.|
The ICO Private Sale
The private sale, or private presale is another token sale conducted prior to the main event, or the crowdsale. Also called the Institutional Round, a private sale is the activity of founders and/or their advisors as they pitch the project to venture capitalists, crypto funds and angel investors. This token sale can generate a significant amount of crypto, which can help fund the pre-ICO campaign.
Most patently, the private sale is the sale of tokens to investors that is not publically announced, therefore, there is no public participation of this sale. In the less common situation in which the private sale is announced, the ICO would typically have stricter participation requirements, allowing the startup to be more selective about who it allows to take part in the private sale. Bonuses or discounts may also be offered, similar to the presale, based on how big the contribution is.
The Private Sale is set in motion when the details of an ICO are laid out via the white paper and the tokenomics. Around this time, the ICO begins to search for its initial investors, typically those with higher capital (VCs, funds, etc.) than the ones in the presale, which includes a larger pool of investors. With a more experienced batch of investors, who may treat the ICO as an alternative to their means of investing, the private sale serves as a kind of portfolio diversification for the investors.
The Purpose Of A Private Sale:
The grounds behind the private sale is typically to prepare the ICO for its presale, with a considerable amount of raised capital and gained awareness through the collaboration with larger and more experienced investors. The private sale brings a startup’s founders or managers in direct contact with investors, which can help make the ICO and startup more auspicious through their network. It also gains a portion of the ICO’s fund target, which is critical to its success.
|ICO Private Sale Pros:||ICO Private Sale Cons:|
|1. Has the largest discount or bonus compared to the presale or crowdsale.||1. A higher risk since startups cannot gauge how successful the presale or crowdsale will be.
Possibility of a locking period for tokens or bonuses in private sale.
Higher risk since most likely the ICOs product is not near MVP at this point.
Least liquidity of tokens due to token release usually being farthest way.
|2. The possibility of a quick return if discounted tokens are sold at ICO price when token trading begins.||2. A greater risk of cryptocurrency volatility that can wipe out or negate bonuses or discounts compared to a crowdsale.|
|3. An assured supply of tokens should the ICO hit a hardcap during the private sale or presale. (Hugely possible in very popular ICOs.)||3. The possibility of no funds being refunded if the ICO does not hit its softcap in the crowdsale or presale.|
|4. The possibility to purchase more tokens compared to crowdsale or presale, as the private sale is aimed at institutional level investors.
|4. A higher minimum contribution than in the presale or crowdsale.|
|5. The potential for a stricter KYC and background checks, so not everyone will be accepted. A spot is not guaranteed even if investors comply with minimum purchase amounts or accredited investor status.|
The ICO Crowdsale
An ICO crowdsale is the main tokensale of the ICO and always the final stage of the ICO selling process. It can take several other names such as a Token Generation Event (TGE) and an Initial Token Offering (ITO). The ICO crowdsale is much more widely promoted than the presale, offering the least risk out of the 3 ICO stages.
The crowdsale is an event in which a company with a cryptocurrency project sells a portion of its tokens in exchange for other cryptocurrencies. This procedure raises smaller amounts in funding, which, when consolidated, will reach a much higher investment and usually will approach or close out the ICO’s hard cap. Despite its lower risks, the crowdsale is typically presented with lesser bonuses or discounts comparably to its counterparts. The bonuses or discounts that are offered are done so according to how early investors contribute and the size of their contribution.
Unlike a presale or private sale, which are both targeted towards higher contributing parties, anyone can participate in the crowdsale. To do so, investors would have to create an account on the startup’s website and enter the deposit they wish to invest into their wallet address. As long as these instructions are followed, virtually any crypto holder can invest in a crowdsale and be recognized as an investor.
The Purpose Of A Crowdsale:
The crowdsale is the very core of both the ICO selling process and the ICO itself. This tokensale nets the largest amount of attention and awareness towards the project, given that anyone can participate and it has a broader advertising strategy. It is aimed at generating funds to help pay for software developers, marketing budgets, operational tools and all the other things necessary for a startup. The crowdsale is also the right stage to gauge the public interest in the overall project. This tokensale is another way to lure early adopters. Lastly, its success will owe to the growth of value of the tokens.
|ICO Crowdsale Pros:||ICO Crowdsale Cons:|
|1. A usually lower risk due to a more mature product or availability of MVP.||1. A typically lower discount compared to the presale or the private sale.|
|2. The capability to measure the success of ICO based on presale and private sale success.||2. A possibly lower maximum cap per person compared to the presale or private sale, very common for ICOs that are oversubscribed.|
|3. A lesser chance of increasing crypto volatility, which affects the price of the cryptocurrency invested in the ICO.||3. The crowdsale can sometimes be cancelled due to ICO selling out during the presale. (Highly possible during a bull market if the crypto contributed to the ICO during the presale appreciates and the ICO hits hardcap.)
|4. A typically easier KYC; most crowdsales do not require investors to be accredited.||4. The possibility of private sale or presale buyers dumping tokens acquired at a discount on crowdsale buyers.|
|5. A usually lower minimum purchase amount compared to the presale/ private sale.|
|6. More liquidity for the tokens, as there is less time left until the token is tradeable.|
In an ICO, cryptocurrency gets exchanged for other altcoins or tokens to raise capital, in order to bring the newly created coins into the crypto market and to popularize them. Most notably, it is executed to fund a blockchain or crypto project, thus streamlining innovation. Choosing which ICO sales to participate in can sometimes be challenging, since investors must know the risks and their own investments to pick the most appropriate ICO sale to participate in.
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