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What does ICO stand for

Auston Bunsen - Posted: July 17, 2018

What is an ICO?

You may have heard the term ICO from a friend who owns tokens. Or you may have heard about an ICO from the news as the new way to raise money or invest your money. This is a short article to help you understand what an ICO is and how it works.

To start, ICO stands for Initial Coin Offering. In most cases, it is a pre-sale of a cryptocurrency coin on a network or blockchain that does not currently exist. What you get in an ICO is called a token. Most ICOs happen on the Ethereum network and thus provide people who buy in with an ERC-20 token. Sometimes the ICO is on a different network than Ethereum - often NEO or OMNI.

If you'd like more info on the difference between tokens and coins - go here.

The tokens you receive by putting your money in an ICO are typically not secured by anything, meaning, you do not own part of the company that is conducting the ICO and there is little to no recourse if you lose your money. So be careful!

Wallet requirements

Since most ICOs are on top of the Ethereum network, they require a wallet that is ERC-20 enabled. We have a list of Ethereum wallets with ERC-20 support, here. By the way, every CBlock ETH address is ERC-20 compatible.

It's VERY important that your wallet is ERC-20 enabled, if it does not support ERC-20 tokens then YOU WILL LOSE tokens. Make sure you double-check that your wallet supports ERC-20 tokens before participating in an ICO.

Soft cap / Hard cap

ICO's are a pre-sale after all, but how do we know whether the ICO is complete or even successful for that matter? The terms used to describe how much money an ICO is raising are "Soft cap" and "Hard cap".

Soft cap - This is typically the minimum amount of money an ICO is going to raise. You should expect the ICO to have a policy about what happens if the soft cap is missed. Do you get your money back? Do they keep it? It needs to be clear and you should put the time into understanding the terms around their soft cap.

Hard cap - This exists if an ICO is wildly popular. When will they stop accepting new money? The hard cap represents the maximum amount of money an ICO is going to raise. Be sure to check this, because it could be a very large number or not even exist at all!

Time limit

Most ICO's set a time period during which they will accept funds in order to meet their "soft cap". This time limit is usually at least 5 days and up to 30 days, but some ICO's can run for months and months like the EOS ICO which ran for a year. These time limits may be shorter than expected if the ICO you're looking at meets it's "hard cap". 

Token distribution

Another important aspect of ICO's is how the tokens will be distributed. The relevant questions to ask are:

  • How many tokens will be issued in the ICO?
  • How many tokens will exist in total?
  • How will tokens be turned into coins if you're intending to run your own network?
  • How many tokens will be set aside for the team? When will they be distributed?

The reason these are important is because you want to know how incentivized the team is to work on their network and coin. If the team is reserving a large portion of existing coins for themselves and releasing those coins to team members immediately after the ICO, then the people that are supposed to be building the network may not be properly incentivized.

You should probably understand the answers to all of the questions above before you ever purchase tokens in an ICO. 

Final words

It is important that if you consider your participation in an ICO an investment, then you do your due diligence. This means researching the team in depth, looking at code, reading white papers and more.

Perhaps the most important bit of advice we'd recommend to you is to never invest more money than you are willing to lose!
Auston Bunsen
Auston is the cofounder of CBlocks & a life long learner, thinker and programmer. You can follow him on twitter here: twitter.com/bunsen

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