Initial Coin Offerings: ICOs Explained – Everything You Need to Know about Crypto Presales

ICOs have revolutionized the way capital can be raised. Similar to a traditional IPO, ICOs offer a way for crypto companies to raise capital from investors by granting them claim to a new token or coin in exchange for the new cryptocurrency. But what is behind this method of raising capital?

In this article, we will take an in-depth look at ICOs. We will explore how ICOs work, what opportunities and risks they offer, how they are regulated, and what successful projects have emerged from such presales. We will also take a look at the future prospects of ICOs.

What are ICOs? Crypto Presales Explained

The Initial Coin Offering, or ICO for short, is a capital raising measure for crypto companies. They are similar to an Initial Public Offering (IPO), but are carried out on the blockchain.

The reason for ICOs lies in the spread of cryptocurrencies. It is about raising capital from crypto investors by offering them in advance the right to a new token or coin in exchange for other cryptocurrencies. Depending on what you acquire, FINMA distinguishes between a crypto presale, a pre-financing or the receipt of a token at the time of fundraising.

Correctly, a distinction is made between ICO (Initial Coin Offering) and ITO (Initial Token Offering). The difference lies in whether a coin or a token is offered.

Would you like to know exactly what the difference is between a coin and a token? Then read the article next: Coin Token Comparison.

The first ICO took place in 2013 with Mastercoin (now Omni). Well-known ICOs followed with the cryptocurrencies Ethereum (ETH), Cardano (ADA) or Polkadot (DOT).

How Do ICOs Work?

Before an ICO can take place, there needs to be a person or team that writes a concept for a new cryptocurrency project. They then record this in a so-called whitepaper.

In contrast to a business plan, which is a very strategic document, this is usually a more technical document. The most important contents are details on the consensus mechanism, the security, the planned roadmap and the token distribution.

At the same time, the necessary legal approvals must be obtained and regulatory questions clarified. The team now publishes the whitepaper and promotes the upcoming ICO.

Based on the information in the whitepaper, crypto investors now decide whether they want to buy the coins or tokens offered with the start of the presale. However, they usually do not receive these immediately. However, they buy the right to a certain number of coins at the time of Coin Distribution, which was specified in the whitepaper.

Depending on the ICO, the acquired claim must be claimed again by a so-called claiming. The coins are then automatically sent to a crypto wallet specified during the purchase. Technically, this distribution is regulated via a so-called smart contract, which runs on the blockchain of the new project.

It may be that despite claiming you still do not see the new coin in your wallet. This is usually because you first have to add the coin to your wallet so that it is displayed correctly. You can find instructions and the necessary information in the whitepaper or on the ICO website.

Opportunities and Risks of ICOs

For companies, the ICO offers the opportunity to raise capital without relying on traditional financial intermediaries. So there is no need for institutions or people to mediate between suppliers and demanders of capital. Normally, banks, brokers, investment funds or insurance companies would take on this task.

In addition, an ICO is usually much faster and cheaper than an IPO, i.e. a listing on the stock exchange.

Early access offers crypto investors the chance to make potentially highly lucrative investments. This is because the coins are often offered at a discount in the presale. With the listing on crypto exchanges after the ICO, there is potential for high liquidity and price developments due to global market access.

ICOs are also clearly in the category of high-risk investments. For example, there may be a price slump immediately after the successful ICO. The reason for this is often that investors sell their coins at the first opportunity. This is because the listed price is often slightly higher than the presale price.

In general, the market reacts nervously in this early phase of the coin, which brings with it high volatility. Panic sales and FOMO (Fear Of Missing Out) are not uncommon.

You should also factor in the risk of becoming a victim of an ICO fraud. For example, there were the crypto projects iFan and Pincoin, which were exposed in 2018. These companies pretended to create a social media platform for celebrities. In addition, they wanted to offer an online platform with an advertising network, auction and investment portal as well as a peer-to-peer marketplace based on blockchain technology. However, the operators of the ICO ran off with around 660 million invested dollars. Both ICOs were classified as multi-level marketing scams.

Regulation and Compliance for ICOs

The Swiss Financial Market Supervisory Authority (FINMA) in Switzerland has the task of supervising and regulating financial markets. This also includes ICOs and cryptocurrencies. To this end, FINMA already published guidelines in 2018 on how it deals with ICOs and cryptocurrencies in Switzerland.

Basically, FINMA divides cryptocurrencies according to their economic function. It distinguishes between:

• Payment tokens: Tokens that are actually intended or, according to the organizer, are intended to serve as a means of payment, or the transfer of money and value
• Usage tokens: Tokens that provide access to a digital use or service
• Investment tokens: Tokens that represent assets

The categories are not mutually exclusive. Thus, there are also hybrid tokens. If you want to delve deeper into the topic, you can find the official guidance for ICOs from FINMA here.

Depending on the type of coin or token offered in the ICO, various regulatory steps may be required. While only a limited number of regulations apply to usage tokens, investment tokens are considered financial instruments. This means that stricter regulations such as AML (Anti-Money Laundering) and KYC (Know-Your-Customer) regulations apply. In addition, companies must ensure that they comply with applicable tax laws. A comprehensive documentation of all transactions is therefore an important aspect to ensure compliance with Swiss ICO regulations.

The category of economic function that applies to the respective coin or token is also used for tax assessment. The decisive factor is then the respective civil law relationship between the provider of the ICO and the investor. This is because all contractual obligations to the investor must be assessed under tax law.

Depending on the case, a profit tax, withholding tax, stamp duty, wealth tax or income tax may be incurred. You can read more details in the official working paper of the Federal Tax Administration ESTV.

Always remember that regulations and compliance can change. Therefore, depending on the situation, it may be useful to consult a tax advisor or obtain information from the relevant tax authority in your canton.

The Best Crypto Presales: Successful Examples of ICOs

ICOs have been both successful and risky in the past. The performance of the respective cryptocurrency varies greatly. Here are three ICOs that are considered particularly successful in retrospect.

Ethereum (ETH) conducted an ICO in 2014 and raised several million US dollars. The Ethereum network was developed with the help of these funds and later expanded to include smart contracts and decentralized applications (Dapps). Today it is the second largest cryptocurrency by market capitalization.

Cardano (ADA) based in Switzerland had its ICO in 2017. The project aims to provide a secure and scalable platform for smart contracts and Dapps. This puts it in competition with Ethereum.

Ripple (XRP) conducted its ICO in 2013 to finance the Ripple network and the associated cryptocurrency XRP. Although Ripple later fell into a legal dispute with the SEC, the American stock exchange supervisory authority, the ICO was considered successful and contributed to the development of Ripple.

Bitcoin, the first and best-known cryptocurrency, incidentally never had a previous public financing round or an ICO. The person or group with the pseudonym Satoshi Nakamoto first published the Bitcoin protocol in 2009. Since then, new bitcoins have been created continuously through mining.

Tips for Investors in ICOs

As with any investment, it is advisable to read up thoroughly on the topic and the project before investing in ICOs. Understand what problem is to be solved, the technology and the benefit of the coin. You can find information on this in the whitepaper, among other things. It is also worth researching processes and functionalities on platforms such as CoinPro. This allows you to check the information in the whitepaper.

The team behind the project should ideally have proven successes in related areas or projects

A good ICO always includes a roadmap. The planned steps should be clearly defined and realistic. Regular updates and transparency regarding development progress are also confidence-building.

Also, get involved in the community and read critical comments or concerns about the project. And with the information above, you can check whether it is a utility (usage), security token (investment token) or payment token.

And last but not least, always remember: Only invest the money that you can afford to lose. Diversify your crypto portfolio and manage acquired cryptocurrencies in a secure hardware wallet.

ICO vs. STO: Differences and Similarities

The Initial Coin Offering (ICO) and the Security Token Offering (STO) both have the common goal of raising funds for a blockchain or cryptocurrency project. The difference lies in the purpose of the coin or token that is issued.

While an ICO token must be classified differently, it is clear with an STO that the issued token should represent a digital value. This is therefore an investment token.

This means that, as already described above, stricter regulatory requirements and security regulations apply. This offers the investor more transparency and legal certainty, as the classification of the cryptocurrency has already been clarified.

Future Prospects for ICOs: are Cryptos Worthwhile in the Presale?

On the one hand, ICOs continue to offer an attractive opportunity for crypto projects to raise capital without relying on traditional financial intermediaries. This aspect will remain important in an increasingly decentralized economy. On the other hand, the risks associated with ICOs, such as fraud and inadequate regulation, have led many investors to become more cautious.

The trend towards greater regulation of ICOs is expected to continue, potentially leading to more trust and security for investors. At the same time, alternative financing methods such as Security Token Offerings (STOs) and Initial Exchange Offerings (IEOs) are developing, which offer certain advantages in terms of compliance and investor protection.

The future of ICOs will likely be heavily influenced by the development of the cryptocurrency industry as a whole. If innovative projects continue to emerge and can gain the trust of investors, ICOs could continue to play a relevant role. However, it is also possible that the focus will shift to other financing methods that meet stricter regulatory requirements.

Frequently Asked Questions about ICOs and Crypto Presales?