Token sales (also known as ICOs or Initial Coin Offerings) are a new way of crowdfunding using cryptocurrencies. During a token sale, a predefined amount of cryptocurrency is allotted to investors in the form of tokens. If the token sale is successful and the company behind it reaches its target, the tokens become functional units of currency.
The first recorded token sale took place in July 2013, when Mastercoin managed to raise almost $500,000 in just under one month. Shortly afterwards, Ethereum showcased the power of token sales to the world and raised approximately $2.3 million dollars in the first 12 hours.
This caused a short burst of interest, but it wasn’t until 2017 when token sales really became popular.
If you have a look at the graph above, you can see that there is a huge spike of interest in June 2017, and interest builds for the rest of the year. The sudden hype surrounding token sales is easily explained with the vastly increasing sums of money which are being raised.
The five biggest token sales, all occurred between between May and December 2017. These are, in chronological order:
- The DAO – $152 million (2017/05/28)
- Bancor – $153 million (2017/06/12)
- EOS (Block One) – +$700 million (2017/06/18)
- Tezos – $232 million (2017/07/14)
- Filecoin – $257 million (2017/09/10)
As you can see, the sums have become astronomical, and it’s not just a few big fish. 235 ICOs managed to raise a combined amount of over $3.7 billion in 2017 alone.
But it’s not just not been rainbows and sunshine for token sellers and buyers. Let’s take a look at some of the greatest ICO successes and failures.
Token sale successes and failures
It’s easy to think that the success or failure of a token sale depends solely on the amount of money raised. Below we will take a different approach, looking at the ICOs which have made significant progress since raising money, or have faltered.
Success – After raising $153 million, there was substantial pressure on the Bancor team to deliver something substantial by the end of the year. To the great relief of its +10,000 investors, Bancor delivered.
The vision behind the platform is impressive, essentially aiming to provide the functionality of Shapeshift but in a completely decentralized manner. This effectively removes the “company” as a central point of weakness, and makes the network much less vulnerable to attack.
Additionally, Bancor wants to give users the possibility of adding their own ERC20 token pairs, opening up the world of smart contracts to users who may not be developers.
With these ambitions in mind, investors breathed a sigh of relief when Bancor launched its first live product, which allows anyone to buy and sell dynamically priced Bancor tokens. This happy news has helped push the value of a Bancor token to just over $6.
Failure – Perhaps the most interesting failure is the Munchee ICO. At the beginning things looked promising. Munchee, a California-based platform, was pitched as “YELP meets Instagram” and promised to revolutionise the way restaurants generate reviews. After raising $15 million dollars however, the Securities and Exchange Commission (SEC) served a cease-and-desist order, which abruptly brought the whole project to a halt.
It’s worth noting that all investors in the Munchee ICO were refunded, so the financial damage is quite small. I’ve still listed it here, because it elegantly showcases the risks associated with such a young niche. The SEC clarified its stance on Initial Coin Offerings in this statement on July 25th 2017, but many are still unfamiliar with what a security actually is. In brief: A security is a tradable financial asset. If you are wondering if your prefered token is a security by this definition, then you can apply the Howy Test here.
Success – Things did not go well for Augur when it launched its token sale in 2015. The price dropped dramatically post-launch and investors began to wonder if the $5.3 million dollars which had been raised, would be enough to invigorate the project.
It’s not hard to see why people are getting so excited about this project, as Augur aims to use the “wisdom of the crowd” to create the most accurate prediction market in the world. Specifically, the idea is that the more people give their opinion, the more likely they are to create an accurate prediction.
Naturally, Augur runs on Ethereum which allows for money to be moved cheaply and quickly. This allows Augur to significantly lower the burden of fees for users of its betting platform. Considering fees on traditional betting sites typically average around 10%, it’s clear why this is an attractive proposition for many punters.
Failure – The most public failure in the ICO space is The DAO (Decentralized Autonomous Organization). Founded in 2016, The DAO aims to provide a new decentralized business model built on the ethereum blockchain.
The central premise of The DAO is very exciting. By using smart contracts people can codify rules, and program the decision making apparatus of an organization. This removes the need for error-prone centralized governance.
With this exciting mission, it’s little surprise that the 28-day token sale launched in April 2016, managed to raise in excess of $150 million dollars. What was more surprising, was that the public code used to build The DAO, contained critical vulnerabilities.
In June 2016, hackers exploited these vulnerabilities and stole almost one third of the $150 million dollars. Obviously, the 11,000 investors who had participated in the token sale began to clamber for solutions and a hard fork was proposed.
On July 20th the hard fork was implemented, which returned approximately $40 million dollars worth of ether to The DAO. Nevertheless The DAO hack has become infamous and offers a stark warning regarding the risks associated with large token sales.
What to know before investing in an ICO
Now that we’ve had a chance to look at a few successes and failures, let’s briefly discuss some key points to consider before participating in a token sale.
- The first and most important question to answer, is what your money will be used for and what rights the token gives you. Be wary of vague answers like “coming soon” or “your money will be used to grow the [NAME OF TOKEN] project”. You want to know exactly what they are planning to do with your money, and what their tokens allow you to do. (Check out this Medium post by Skrilla on how to do it the right way)
- Research if the company issuing the token sale is regulated by the SEC or equivalent domestic regulatory body. In the US and numerous other countries, ICOs are regulated as securities, and the company must be registered in order for a token sale to take place. This is the important lesson we have to learn from the Munchee ICO. You can see if a company is registered with the SEC here.
- Find out exactly when you will be able to get your money back. Additionally, learn if you can receive a refund at any time, or can you resell the token? This is of vital importance, because you might alternatively be lumbered with a virtual token that does little and can’t be exchanged for something that does more.
- Be wary of any token which is offered as an investment opportunity with extremely high yield, despite functioning outside of financial services. Fraudsters will often promote their ICO as an investment opportunity promising otherworldly returns. Although the financial rewards of the token are important, the functionality should come first. So ask yourself, what does the token do and why should it be worth so much more later, than it is now.
- If a token claims affiliation with a reputable service, always check if the affiliation is real. It’s very easy these days to set up a website, call it something familiar (like Coinbase Coin for example) and launch a fake ICO. Often these fraudsters can be avoided by asking the trusted platform via Twitter or Email. Always do this before investing.
How to launch your own token sale?
235 ICOs were launched in 2017 and not all of them, but how easy is it to launch one of your own? Below we will look at the seven steps to launching a successful ICO in 2018.
1- Get legal advice
You might think It a tad premature to get legal advice before even having a product, but I believe that having regulatory clarity from the outset is key. You do not want to be in a situation where you’ve created a product which relies on a token, just for the SEC to shut down your ICO.
Thus, make sure to consult a lawyer knowledgeable about ICOs to assess whether your project has a reasonable chance of going ahead.
2 – Create a great product
The point of a token sale is always to raise funds for a product or service. You must be able to show what your product is/will be and how your token can be used with it. Without a product or service, you should not launch your own ICO.
Creating a great product is easier said than done of course, but there are many examples of individuals doing so on a shoestring budget. Just think of Vitalik Buterin who invented ethereum at the age of of 18 and brought it to the world with an exceptional whitepaper.
3 – Create a great token
Once you have built a great product which is improved through the introduction of coins, it’s time to create an ERC20 token on the ethereum blockchain. You can do this in about an hour following this or this guide.
Tokens are typically launched on ethereum which has smart contract functionality coded into its blockchain. By using ethereum, token behaviour is ruled by smart contracts, which tells the coin how to react in certain situations.
4 – Publish a white paper
Ever since Satoshi Nakamoto published his seminal white paper Bitcoin: An Electronic Peer-to-Peer Cash System, white papers have become the accepted standard in the blockchain world.
As a result, you will have to publish one as well for your ICO to be taken seriously. The important thing to consider here, is that it should be written in the manner of a scientific treaties. Your white paper should contain an abstract as well as an outline of the problem and your proposed solution.
By following this advice, you will ensure that readers get a good understanding of your product. This in turn will make them more likely to engage and perhaps buy your tokens.
Done incorrectly, a white paper can cause the downfall of your project. Done correctly, it can be the centerpiece of your ICO.
5 – Educate relevant communities about your token
If you are bootstrapping your token, creating your own community will be very difficult. Instead find relevant forums and Facebook groups which are active in your niche. BitcoinTalk is a good starting point, as well as the Reddit Crypto Community.
If you’ve created an innovative product and a sparkling white paper, interest around your project should start building quite quickly.
6 – List your token on important websites
As the ecosystem around token sales has matured, a number of websites have established themselves as the go-to-places for ICO investors. As part of building awareness, it’s very important to list your token on as many of these websites as possible.
7 – Get your coin listed on exchanges
Once awareness around your token has grown, it’s time to reach out to exchanges and ask them to list your coin. This means that people will be able to buy and sell your token, which consequently inspires further trust in your ICO.
If you remember the point from earlier, it is vitally important for investors to be sure that they can exchange their coins at any point before they invest. Thus, getting a few trusted exchanges to carry your coin is crucial to the success of your token sale.
Conclusion – The ultimate guide to token sales
After reading this guide, I hope that you have a good understand of what a token sale is and what to consider before participating. Always ensure that you understand what a coin does before purchasing it.
Similarly, if you are planning on launching your own token sale, I hope that the 7 step guide provided above was helpful. By now there have been many successful token sales and I recommend you spend some time reverse-engineering some to understand the strategy they used.
Thanks for reading and leave your comments below.
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