What Is a Crypto ICO?
An Initial Coin Offering (ICO) is a common way for new crypto projects to raise funds, but in an unregulated market, there are risks. Learn everything you need to know about crypto ICOs, including what ICOs are, how ICOs work, what to look for when reviewing a cryptocurrency ICO, how to avoid ICO scams, and how ICOs are taxed in this complete ICO guide.
What does ICO stand for?
ICO stands for Initial Coin Offering. It's the crypto equivalent of an Initial Public Offering (IPO). It may also be referred to as an initial coin launch, a token sale, or a coin sale.
There are also Initial Dex Offerings or IDOs. These are similar to ICOs but held exclusively on decentralized platforms.
What is a crypto ICO?
A crypto ICO is a popular fundraising mechanism for new projects in the crypto market. Similar to an IPO, where a company offers shares to the public for the first time, ICOs offer a newly launched token or coin to investors for the first time.
Investors can buy into ICOs to receive a new coin or token issued by a given company. The types of coins and tokens available are vast. Investors may receive a utility token that helps them use a specific product, a governance token that gives them a say in how the new company is run or they may simply receive a new coin and hope that it appreciates in value.
ICO vs. IPO
Although we've compared the two above, there are some key differences between ICOs and IPOs, including:
Tokens vs. Shares: Instead of offering shares in a company, in an ICO, a new cryptocurrency or token is sold to early backers. This token often grants its holders certain benefits, which can range from ownership rights in the project to access to services provided by the platform.
Regulation: Historically, ICOs have been less regulated than IPOs. This has allowed for faster and more open capital raising, but has also led to scams and fraudulent schemes. As a result, various governments around the world have started to implement regulations around ICOs to protect investors.
Investment Purpose: People who invest in ICOs typically seek either a return on investment as the token's value increases or access to a particular utility (like a service or product that can be redeemed using the token).
Accessibility: ICOs can often be accessed by a broader range of people compared to IPOs. Whereas IPOs might be restricted to accredited investors or those with a certain financial status in some jurisdictions, ICOs have often been open to anyone with internet access and cryptocurrency.
How do crypto ICOs work?
The typical ICO process includes:
Whitepaper Release: This is a detailed document that explains the project's vision, the problem it aims to solve, how it will solve it, the team behind the project, tokenomics, and other details.
Token Sale Phases: These might include a private sale (restricted to select investors), a pre-sale (with possibly better terms or bonuses for early participants), and the main sale (open to the general public).
Listing: Once the ICO is completed, the token will usually be listed on cryptocurrency exchanges where it can be bought, sold, or traded.
Due to the rapid rise of ICOs between 2016 and 2018 and the subsequent burst of the "ICO bubble" with many projects failing to deliver on their promises or turning out to be outright scams, the reputation of ICOs suffered. This led to the rise of alternative fundraising mechanisms in the crypto space, such as Security Token Offerings (STOs) and Initial Exchange Offerings (IEOs). These are very similar in nature, but tend to be in partnership with a large centralized third party, like a crypto exchange, who has vetted the project more than the average investor.
Are there different types of crypto ICOs?
Yes. Although the end goal of any crypto ICO is to raise funds and encourage investment, there are a few common ways ICOs can be structured. This means different ICOs work slightly differently, which matters for your investment. These include:
Static supply and static price ICO
A company sets a specific funding goal. Each coin or token sold in the ICO has a set price. The token supply is fixed. So, for example, a company wants to raise $1 million, so they sell 1 million tokens at $1.
Static supply and dynamic price ICO
A company sets a dynamic funding goal. There is a static supply of tokens. The amount of funds received in the ICO determines the overall token price. So, for example, a company launches an ICO and raises $3 million. There is a static supply of 1 million tokens, so each token is worth $3.
Dynamic supply and static price ICO
A company sets a specific funding goal, but no limit to the amount of tokens. The supply of tokens is determined when the fundraising goal is reached. So, for example, a company sets a $1 million fundraising goal and reaches it. At the point they reach it, there are 500,000 tokens in circulation, meaning each token is worth $2.
The structure of a crypto ICO should be laid out in a whitepaper, which is made available to prospective investors via a specific site and through promotions. As well as laying out the structure of the ICO, a reputable whitepaper should also include other details about the project, such as:
The purpose of the project
How long the ICO will run for
The future goals arising from the project
A breakdown of the funds needed to complete the project
What percentage of the coins or tokens are kept by the company or other invested parties
What currencies the company accept as an investment, whether that’s fiat or another cryptocurrency
The terms and conditions of returning funds if the ICO is unsuccessful
Who can launch a crypto ICO?
Anyone can launch a crypto ICO. There are even dedicated platforms to help investors who may not be as technologically minded launch new tokens.
While this accessibility is a huge benefit of crypto ICOs, it also comes with risks, because not all crypto ICOs are legit.
12 steps to review a crypto ICO
Wondering what to look at when reviewing a cryptocurrency ICO? Well. Here are 12 tips to help you in your research:
Research the team: Verify the founders' and team members' experience and credentials, focusing on blockchain and industry expertise.
Evaluate the whitepaper: Read it thoroughly to assess the problem being solved, the proposed solution, and the technical details provided.
Analyze the use case: Determine if the ICO addresses a real market need and whether blockchain is essential for the solution.
Review tokenomics: Understand the token’s utility, total supply, and how tokens are distributed and allocated.
Assess the roadmap: Check if the project’s milestones are realistic and if past goals have been met on schedule.
Examine the smart contract: Look for audit results and confirm the smart contract is secure and free from vulnerabilities. If you don't have the technical knowledge to do this, look for feedback on the project from those who do.
Assess market potential: Evaluate the size and growth of the target market, and see how the project stands out from competitors.
Check partnerships: Investigate any collaborations to ensure they are with credible and relevant organizations.
Verify legal compliance: Ensure the ICO follows relevant laws and regulations, particularly in the US.
Evaluate community and marketing: Review social media engagement. If a coin is being hyped up endlessly, this can often indicate bots and parties being paid to do so.
Scrutinize fund allocation: Look into how the funds will be distributed and whether the allocation supports the roadmap.
Identify red flags: Be cautious of unrealistic claims, lack of team transparency, or unverifiable information in the project materials.
Read next: ICO Scams
Examples of successful crypto ICOs
Just because crypto ICO scams are prevalent doesn’t mean all crypto ICOs are a scam. Quite the opposite, in fact, some crypto ICOs have been very successful. Some examples of successful crypto ICOs include:
Ethereum ICO
Way back before ETH was one of the most popular cryptocurrencies around, Ethereum launched an ICO to raise funds to develop its smart contracts capabilities. ETH tokens initially sold for $0.31 each during the ICO. At the time of writing, just one ETH is valued at more than $2,400.
Ark ICO
Ark is a decentralized digital currency platform that aims to integrate non-native cryptocurrencies onto its own blockchain. ARK coins were initially priced at $0.04 during the ICO launch and later reached a peak of $11, providing an incredible ROI of more than 35,000% for early investors who sold at the peak.
Cardano ICO
Cardano launched its ICO in January 2017, promising to use the funds raised to develop smart contracts and Dapps capabilities. The ICO raised more than $62 million with each token priced at $0.02. ADA is now priced at $1.33 at the time of writing, with many expecting it to hit new heights in the future.
Read next: What are the best coins to stake?
Crypto ICO tax
If you are one of the lucky ones to invest in an ICO and reap the high returns, we’ve got some bad news for you. In many countries, ICOs are taxed. How they’re taxed depends on whether you’re launching an ICO or whether you’re participating in an ICO as an investor. Let’s break it down.
If you’re launching an ICO, most tax offices will view this as a kind of Income. So you’ll pay Income Tax on all proceeds, regardless of whether you use fiat currencies or cryptocurrencies for funding.
For investors, it’s a little more straightforward. The vast majority of tax offices around the world haven’t yet issued guidance on ICOs; however, we can follow the tax treatment of IPOs as guidance. In most countries, this means you’ll pay no tax at the point you invest in an ICO. It’s only when you later sell, swap, spend, or gift your coins or tokens from an ICO that you’ll pay Capital Gains Tax on any profits.
The amount of tax you’ll pay depends on where you live and how large your gain is. You can calculate your gain or loss from an ICO easily. Just subtract the price of the coin/token when you acquired it from the price of the coin/token when you sold it. If you traded your coin/token for another crypto, use the fair market value of the coin on the day you traded it in your chosen fiat currency to calculate this instead.
Calculate crypto ICO taxes with Koinly
Koinly helps crypto investors around the world do their crypto taxes in no time at all. All you need to do is sync the wallets, exchanges, or blockchains you use with Koinly via API or import your transaction history using CSV files. Once you’ve done this, Koinly will calculate your crypto capital gains, losses, income, and expenses for you and generate a tax summary. You can then download a complete tax report, ready to submit to your local tax office.
When it comes to crypto ICOs, all you need to do once you’ve synced your transactions with Koinly is find the specific ICO transaction and enter your cost basis (how much you bought the coins/tokens for). From here, Koinly can then calculate any subsequent capital gains or losses from selling, swapping, spending, or gifting your coins or tokens. Learn more about how to tag ICO transactions in Koinly.
