Understanding Cryptocurrency Fundraising
Key topics: 1. Understand cryptocurrency fundraising methods, including ICOs, IEOs, IDOs, and STOs. 2. Recognise the importance of reliable information sources when making investment decisions regarding new cryptocurrencies.
Foreword
With the vigorous development of blockchain technology, cryptocurrency investment has become a hot topic in today’s financial markets. For cryptocurrency projects, obtaining sufficient funding is crucial for their successful development, and investors also hope to obtain exceptional returns on investment in this emerging industry.
This course will introduce you to various fundraising methods for cryptocurrencies. You will learn about angel investments (venture capital) in the context of cryptocurrencies and how the fundraising process has changed in the traditional finance industry with the advent of cryptocurrency. You will explore the characteristics and advantages of cryptocurrency issuance by startup teams and how they leverage cryptocurrency fundraising to meet the demands of investors and the market.
Next, we will explain various terms related to cryptocurrency fundraising, including ICOs, IEOs, IDOs, and STOs, highlighting different fundraising methods and their details, while analyzing their pros and cons.
Additionally, we will share some well-known cryptocurrency fundraising platforms and sources that provide the latest information on cryptocurrency fundraising and popular projects. Through these channels, you can gain deeper insights into this dynamic emerging market.
History of Cryptocurrency Fundraising
In 2013, Mastercoin became the first cryptocurrency project to conduct fundraising. Founder J.R. Willett published the Mastercoin whitepaper on Bitcointalk, outlining the project’s intention to raise funds for its development through an Initial Coin Offering (ICO). To incentivize potential investors, he proposed exclusive features accessible only to those holding Mastercoin. This made Mastercoin the first utility token subscribed through an ICO.
Mastercoin aimed to add additional functionality and improvements to the Bitcoin blockchain, including custom tokens, decentralized exchanges, and gambling. Although the Mastercoin token didn’t gain widespread adoption due to limited use cases, the protocol’s development was successful. Currently known as the Omni Layer of Bitcoin, Mastercoin is one of the blockchain networks used by stablecoin USDT.
J.R. Willett’s ICO concept pioneered the path for cryptocurrency fundraising. Traditional investment institutions typically didn’t consider small investments below $1-2 million. However, the advent of ICOs allowed startups to raise small amounts of funds, making them popular and quickly prevalent in the market.
In late 2013, the Ethereum whitepaper was introduced, outlining the blueprint for smart contracts and blockchain applications. In August 2014, Ethereum conducted an ICO, selling tokens at an initial price of around $0.3 and raising over 31,000 BTC in the sale.
The establishment of Ethereum and its smart contract functionality made token issuance simpler and more accessible, providing better technological support for cryptocurrency fundraising. The design of the ERC-20 token standard enabled compatibility among different tokens and facilitated the growth of ICOs in the cryptocurrency market. In 2016, the experimental project called DAO (Decentralized Autonomous Organization) raised a staggering $150 million, but a subsequent hacking incident and the theft of 500,000 ETH led to a hard fork in Ethereum. This resulted in the two blockchain networks we see today: Ethereum (ETH) and Ethereum Classic (ETC).
In 2017, the surge of Bitcoin sparked a significant upswing in the cryptocurrency market. With improved infrastructure and an influx of funds, cryptocurrency fundraising experienced explosive growth. Projects like EOS, Filecoin, Bancor, Polkadot, and more emerged during this period. However, the influx of capital also attracted many speculators and unreliable startup teams who repackaged projects unsuitable for traditional IPOs. Exploiting the anonymity and limited scrutiny of blockchain, they raised funds through Initial Coin Offerings (ICOs) to capitalize on the market frenzy.
ICOs quickly became a hot topic, but they also gave rise to numerous fraudulent projects and illicit fundraising activities. Many unsuspecting investors suffered significant losses, prompting countries worldwide to become more vigilant and strengthen regulations surrounding ICOs. For example, China announced a ban on ICO fundraising in September 2017. In 2018, the cryptocurrency market experienced a prolonged and substantial decline, leading the ICO market into a “crypto winter”. Over 90% of ICO projects in 2017 vanished during this bear market.
However, over time, the Initial Exchange Offering (IEO) supported by cryptocurrency exchanges is gaining traction. With an increase in risk awareness, investors have started shifting their focus to fundraising teams that have undergone scrutiny by centralized exchanges. While exchanges do not endorse any specific IEO project, listing directly on a centralized exchange typically indicates the higher quality of a project and its accessibility to the exchange’s reputation and user base.
On December 14, 2017, Binance Launchpad launched its first project, Gifto. It later launched BitTorrent, Fetch AI, Polygon Matic, Axie Infinity, etc., which also showed very high returns on investment, providing substantial returns on investment for participants. This move prompted other exchanges to follow suit and introduce their own IEO platforms. Examples include Huobi Prime, BitMax.io Pre-sale, OK Jumpstart, and Gate Startup. These platforms were established during this period to support high-quality projects and early-stage entrepreneurs.
The flourishing blockchain industry also attracted the attention of traditional institutions and enterprises. In July 2018, the U.S. Securities and Exchange Commission (SEC) adopted stricter regulations, classifying token offerings as securities and subjecting them to relevant regulations, which increased the fundraising threshold and costs. Despite that, since 2019, innovations in the DeFi sector and the emergence of various decentralized applications (Dapps) encouraged some companies to explore issuing traditional financial assets (such as stocks and bonds) as security tokens through blockchain networks, preparing for the potential widespread adoption of cryptocurrencies in the future. This fundraising approach is known as Security Token Offering (STO).
In the DeFi Summer of 2020, numerous new decentralized exchange (DEX) protocols emerged on the Ethereum blockchain. The growing number of on-chain users injected more liquidity into the cryptocurrency market, and the Initial DEX Offering (IDO) fundraising model gained popularity. For grassroots cryptocurrency communities driven by a strong sense of decentralization, IDOs provided a more free and diverse fundraising approach, liberating them from the constraints of centralized exchanges. The different stages of cryptocurrency fundraising development can be visualized on the timeline below.
Cryptocurrency fundraising development timeline
Characteristics of New Cryptocurrencies
With the flourishing development of the blockchain industry in recent years, new projects are emerging daily in different sectors. The cryptocurrency market is diverse and constantly evolving, with new cryptocurrencies being introduced regularly. CoinMarketCap alone lists over 20,000 different cryptocurrencies, each aiming to make a name for itself in the market by offering unique features or appealing visions to attract investors’ attention.
Generally speaking, newly launched cryptocurrencies have the following characteristics:
Higher liquidity: New coins tend to have higher popularity and market attention. Investing in new coins instead of the old ones is the common practice, leading new coins to enjoy higher turnover rates and trading volumes compared to old coins.
Greater profit potential: New coins have no trapped holders and offer a wide range of speculative possibilities. There is no price ceiling or limit on potential gains.
Higher risk of losses: The market and community for new coins are not fully established, making it difficult to determine their value as there is no price floor in the initial stage. Their prices came with more uncertainty and volatility.
Intense competition: Some coins may have already captured a significant market share, posing a challenge for newly launched cryptocurrencies to stand out.
More flexibility: The development and design of new cryptocurrencies are not bound by existing frameworks and stakeholders’ interests, allowing for flexible design of issuance rules and quantities, among other aspects.
More gray areas: The issuance of cryptocurrencies may operate outside the jurisdiction of specific countries’ laws and policies. This creates opportunities for unscrupulous anonymous teams to exploit the privacy and permissionless features of blockchain to engage in illicit and fraudulent activities.
Therefore, before investing in new cryptocurrencies, users must diligently evaluate these characteristics, trying to consider and balance the associated risks and rewards in order to make informed investment decisions.
How to Issue New Cryptocurrencies
New cryptocurrencies can gain recognition and liquidity in the market through various issuance and fundraising methods, including ICOs, IEOs, IDOs, and STOs.
ICO (Initial Coin Offering)
ICOs, short for Initial Coin Offerings, are emerging fundraising methods that involve raising funds through the issuance of cryptocurrencies to support the development of blockchain-related products, technologies, services, or platforms. They are a fundraising method based on blockchain technology, where companies and project teams can issue their own tokens and sell them to investors to raise funds for project development. Investors can purchase these tokens using cryptocurrencies (such as Bitcoin, Ethereum, and USDT) or fiat currencies.
In an ICO, the project team sets a token issuance plan, including the token quantity, price, and duration. Investors can then buy these tokens using cryptocurrencies or fiat currencies. These tokens typically have use cases such as purchasing products or services on a specific blockchain platform, or being used simply for speculative purposes. If an ICO is successful, the value of the tokens may increase, allowing investors to generate profits by selling the tokens.
During the ICO period, tokens are sold to investors. If the funds raised within the specified timeframe reach the minimum required amount, the project can proceed as planned. However, if the fundraising falls short, the funds are usually returned to investors. Prior to the token sale, startups or project teams often release a whitepaper that introduces their project and the objectives of the ICO to potential investors. The whitepaper typically contains the following information:
Fundraising goal: How much funding does the project plan to raise?
Utilization of raised funds: How will the funds be used?
Business plan: The project’s operational model and business strategy.
Accepted currencies for subscription: Which cryptocurrencies (or fiat currencies) may participants use for investment?
Tokenomics and allocation: Token issuance, price, distribution mechanisms, etc.
ICO timeline: This includes the specific start and end dates of the ICO, as well as any potential phased issuance plans.
Background of founders and team members: It provides information about the experience and background of the project’s founders and other team members.
The advantages of ICOs lie in that they are not subject to regulation and restrictions imposed by centralized institutions. Anyone can participate without complex audits and compliance procedures. However, ICOs also come with significant risks of fraud and failure, as project teams may lack sufficient credibility and capabilities to fulfill their promises. Additionally, there is no legal protection or regulatory mechanism to protect the rights and interests of investors.
IEO (Initial Exchange Offering)
IEOs are a fundraising method similar to ICOs, but with the difference that IEOs take place on cryptocurrency exchanges. In an IEO, the exchange is responsible for arranging the token sales process, while also conducting appropriate due diligence and evaluation of the project. The reputation of the exchange may improve investors’ trust in the project’s feasibility and credibility.
To initiate an IEO, the project team needs first to apply to conduct an IEO on a specific cryptocurrency exchange and gain approval after undergoing the exchange’s evaluation. Typically, exchanges hold IEOs on a regular basis and publicly sell tokens on their trading platforms. Investors can purchase tokens using the cryptocurrencies supported by that exchange.
Compared to ICOs, IEOs are easier to attract the attention and participation of investors, as the project that undergoes evaluation by a reputable exchange enhances user trust. Additionally, the IEO process is more transparent and fair, hence reducing the risks of fraud and failure. However, IEO also comes with certain drawbacks. For example, the project team needs to pay service fees to the exchange for conducting token sales and must abide by other limitations and requirements imposed by the exchange.
Overall, IEO can be considered a relatively secure and reliable method of cryptocurrency fundraising. However, investors still need to conduct thorough evaluations and research when selecting projects and exchanges to participate in.
IDO (Initial DEX Offering)
IDOs are a cryptocurrency fundraising method similar to IEOs, but with the key difference that IDOs take place on DEXs. Compared to IEOs, IDOs are more decentralized, and DEXs typically have fewer restrictions and audits, making it easier to achieve token liquidity.
In an IDO, the project team issues their tokens on a decentralized exchange, allowing investors to buy these tokens using the supported cryptocurrencies on the exchange. Typically, the project team provides a whitepaper and other relevant information for potential investors to reference before the token issuance.
DEXs generally establish IDO token trading markets using liquidity pools. However, the trading volume and liquidity on DEXs may not be as high as centralized exchanges, and there is a higher risk of attacks. These are important considerations for users investing in IDO tokens. Nevertheless, as a decentralized fundraising method, IDOs align more with the decentralized ethos advocated by the cryptocurrency community, and they have gained increasing attention and importance in recent years.
For example, in August 2021, Mango Markets, a decentralized exchange on Solana, conducted an IDO referred to as a “fair launch” by the team. This IDO had a 24-hour Unrestricted Period and a 24-hour Withdraw Only Period. During the Unrestricted Period, users may deposit or withdraw USDC, while during the Withdraw Only Period, they could only withdraw their USDC. The final fundraising price of the tokens was determined based on the remaining funds after the Withdraw Only Period. There were no private sales or behind-the-scenes transactions with venture capitalists. All participants contributed under the same fair conditions, making the fundraising more transparent and open.
STO (Security Token Offering)
STOs, short for Security Token Offerings, are a blockchain-based fundraising method that complies with securities regulations. In contrast to other types of token offerings such as ICOs, IEOs, and IDOs, STO tokens are designed to resemble regulated securities, offering higher legitimacy and security.
In an STO, issuers typically choose a compliant platform for the offering. They need to apply for relevant securities licenses and undergo KYC (Know Your Customer) and AML (Anti-Money Laundering) verification processes to ensure the legitimacy of investors and transactions. Investors can purchase STO tokens using fiat currencies or cryptocurrencies, representing ownership in securities by holding them.
STO tokens are typically backed by real-world assets such as stocks, bonds, real estate, etc., and the value and returns of the tokens are linked to these underlying assets. Therefore, STOs can provide more investment opportunities and returns while adhering to stricter auditing and regulatory requirements. Some projects that have adopted STO include Enegra (EGX), Mt Pelerin Shares (MPS), and Realio Security Token (RST).
Overall, STOs are one of the directions that some companies and institutions are exploring in addition to ICOs. It combines the characteristics of cryptocurrency fundraising while resembling traditional financial markets, hence enjoying higher trust. However, STOs also come with disadvantages. Investors often need to meet specific requirements to be eligible to participate, and investment amounts are typically higher compared to other token offering methods. For example, the STO of BlockStream Mining Notes set a minimum subscription threshold of $100,000.
Information Sources for New Cryptocurrencies
Understanding the sources of information for new cryptocurrencies is essential for investors in the cryptocurrency market. By accessing reliable information, investors can make better-informed investment decisions and identify early-stage projects to enhance their profit potential. Below are several common sources of information for new cryptocurrencies.
Official Websites
Information on new cryptocurrencies is often published on the official websites. This includes details about the token’s uses, technical aspects, token supply, and the project team. By researching the official website, investors can gain a better understanding of the token’s use cases, market positioning, and future development, enabling them to assess its profitability.
Social Channels
Social channels, such as Twitter, Telegram, Reddit, and Discord, are important sources of information for new cryptocurrencies. Token issuers or community members frequently share the latest token updates, news, and project progress on these platforms. Additionally, some project teams conduct AMA (Ask Me Anything) sessions and other interactive activities, allowing investors to interact with the team and gain further insights into the investment opportunity.
Cryptocurrency Information Platforms
Cryptocurrency information platforms serve as vital sources for market trends. For example, Top ICO List , CoinMarketCap , CryptoRank , and ICO Drops aggregate information about upcoming cryptocurrency projects.
Cryptocurrency Exchanges
Cryptocurrency exchanges are also significant sources of information for new cryptocurrencies. Some exchanges, such as Gate.io, initiate token sales or listing events on their platforms. By participating in these activities, investors can obtain these tokens and gain insights into the token issuer, tokenomics, as well as the exchange’s evaluation and listing standards.
Conclusion
This lesson provides a detailed introduction to various methods of fundraising in the cryptocurrency market, including ICOs, IEOs, IDOs, and STOs. Each method has its unique characteristics but also comes with potential risks. Investors may choose the best suitable one based on their own needs and specific situations. Furthermore, understanding the sources of information for new cryptocurrencies can help investors make better decisions and identify early investment opportunities. Common sources include official websites, social channels, cryptocurrency information platforms, and cryptocurrency exchanges. In the next lesson, we will discuss some techniques for analyzing investments in new cryptocurrencies, enabling you to become a more professional angel investor in the crypto space.
Takeaways
- ICOs (Initial Coin Offerings) refer to the issuance of tokens by a company or project on the blockchain to raise funds from investors. It eliminates the need for centralized institutions to audit or for adhering to compliance procedures, but it carries high risks of fraud and failure.
- IEOs (Initial Exchange Offerings) refer to the sale of tokens by a company or project through a centralized exchange. The exchange will thoroughly verify and evaluate the project, making IEOs safer and more reliable than ICOs.
- IDOs (Initial DEX Offerings) refer to the sale of tokens by a company or project through a decentralized exchange. IDOs face fewer audits and restrictions but may suffer from problems of low trading volume and liquidity.
- STOs (Security Token Offerings) are a fundraising method that utilizes blockchain technology and complies with securities regulations. STOs require issuers to conduct offerings on compliant platforms and undergo KYC and AML verifications. STO tokens are classified as securities, offering higher legitimacy and security, but the execution cost is higher compared to other token issuance methods.
- Understanding the sources of information for new cryptocurrencies can help investors make better investment decisions and identify early-stage projects to enhance their profit potential.
- Common sources of information for new cryptocurrencies include official websites, social channels, cryptocurrency information platforms, and cryptocurrency exchanges.
What is Anti-Money Laundering?
Understanding Cryptocurrency Fundraising
Key topics: 1. Understand cryptocurrency fundraising methods, including ICOs, IEOs, IDOs, and STOs. 2. Recognise the importance of reliable information sources when making investment decisions regarding new cryptocurrencies.
Foreword
With the vigorous development of blockchain technology, cryptocurrency investment has become a hot topic in today’s financial markets. For cryptocurrency projects, obtaining sufficient funding is crucial for their successful development, and investors also hope to obtain exceptional returns on investment in this emerging industry.
This course will introduce you to various fundraising methods for cryptocurrencies. You will learn about angel investments (venture capital) in the context of cryptocurrencies and how the fundraising process has changed in the traditional finance industry with the advent of cryptocurrency. You will explore the characteristics and advantages of cryptocurrency issuance by startup teams and how they leverage cryptocurrency fundraising to meet the demands of investors and the market.
Next, we will explain various terms related to cryptocurrency fundraising, including ICOs, IEOs, IDOs, and STOs, highlighting different fundraising methods and their details, while analyzing their pros and cons.
Additionally, we will share some well-known cryptocurrency fundraising platforms and sources that provide the latest information on cryptocurrency fundraising and popular projects. Through these channels, you can gain deeper insights into this dynamic emerging market.
History of Cryptocurrency Fundraising
In 2013, Mastercoin became the first cryptocurrency project to conduct fundraising. Founder J.R. Willett published the Mastercoin whitepaper on Bitcointalk, outlining the project’s intention to raise funds for its development through an Initial Coin Offering (ICO). To incentivize potential investors, he proposed exclusive features accessible only to those holding Mastercoin. This made Mastercoin the first utility token subscribed through an ICO.
Mastercoin aimed to add additional functionality and improvements to the Bitcoin blockchain, including custom tokens, decentralized exchanges, and gambling. Although the Mastercoin token didn’t gain widespread adoption due to limited use cases, the protocol’s development was successful. Currently known as the Omni Layer of Bitcoin, Mastercoin is one of the blockchain networks used by stablecoin USDT.
J.R. Willett’s ICO concept pioneered the path for cryptocurrency fundraising. Traditional investment institutions typically didn’t consider small investments below $1-2 million. However, the advent of ICOs allowed startups to raise small amounts of funds, making them popular and quickly prevalent in the market.
In late 2013, the Ethereum whitepaper was introduced, outlining the blueprint for smart contracts and blockchain applications. In August 2014, Ethereum conducted an ICO, selling tokens at an initial price of around $0.3 and raising over 31,000 BTC in the sale.
The establishment of Ethereum and its smart contract functionality made token issuance simpler and more accessible, providing better technological support for cryptocurrency fundraising. The design of the ERC-20 token standard enabled compatibility among different tokens and facilitated the growth of ICOs in the cryptocurrency market. In 2016, the experimental project called DAO (Decentralized Autonomous Organization) raised a staggering $150 million, but a subsequent hacking incident and the theft of 500,000 ETH led to a hard fork in Ethereum. This resulted in the two blockchain networks we see today: Ethereum (ETH) and Ethereum Classic (ETC).
In 2017, the surge of Bitcoin sparked a significant upswing in the cryptocurrency market. With improved infrastructure and an influx of funds, cryptocurrency fundraising experienced explosive growth. Projects like EOS, Filecoin, Bancor, Polkadot, and more emerged during this period. However, the influx of capital also attracted many speculators and unreliable startup teams who repackaged projects unsuitable for traditional IPOs. Exploiting the anonymity and limited scrutiny of blockchain, they raised funds through Initial Coin Offerings (ICOs) to capitalize on the market frenzy.
ICOs quickly became a hot topic, but they also gave rise to numerous fraudulent projects and illicit fundraising activities. Many unsuspecting investors suffered significant losses, prompting countries worldwide to become more vigilant and strengthen regulations surrounding ICOs. For example, China announced a ban on ICO fundraising in September 2017. In 2018, the cryptocurrency market experienced a prolonged and substantial decline, leading the ICO market into a “crypto winter”. Over 90% of ICO projects in 2017 vanished during this bear market.
However, over time, the Initial Exchange Offering (IEO) supported by cryptocurrency exchanges is gaining traction. With an increase in risk awareness, investors have started shifting their focus to fundraising teams that have undergone scrutiny by centralized exchanges. While exchanges do not endorse any specific IEO project, listing directly on a centralized exchange typically indicates the higher quality of a project and its accessibility to the exchange’s reputation and user base.
On December 14, 2017, Binance Launchpad launched its first project, Gifto. It later launched BitTorrent, Fetch AI, Polygon Matic, Axie Infinity, etc., which also showed very high returns on investment, providing substantial returns on investment for participants. This move prompted other exchanges to follow suit and introduce their own IEO platforms. Examples include Huobi Prime, BitMax.io Pre-sale, OK Jumpstart, and Gate Startup. These platforms were established during this period to support high-quality projects and early-stage entrepreneurs.
The flourishing blockchain industry also attracted the attention of traditional institutions and enterprises. In July 2018, the U.S. Securities and Exchange Commission (SEC) adopted stricter regulations, classifying token offerings as securities and subjecting them to relevant regulations, which increased the fundraising threshold and costs. Despite that, since 2019, innovations in the DeFi sector and the emergence of various decentralized applications (Dapps) encouraged some companies to explore issuing traditional financial assets (such as stocks and bonds) as security tokens through blockchain networks, preparing for the potential widespread adoption of cryptocurrencies in the future. This fundraising approach is known as Security Token Offering (STO).
In the DeFi Summer of 2020, numerous new decentralized exchange (DEX) protocols emerged on the Ethereum blockchain. The growing number of on-chain users injected more liquidity into the cryptocurrency market, and the Initial DEX Offering (IDO) fundraising model gained popularity. For grassroots cryptocurrency communities driven by a strong sense of decentralization, IDOs provided a more free and diverse fundraising approach, liberating them from the constraints of centralized exchanges. The different stages of cryptocurrency fundraising development can be visualized on the timeline below.
Cryptocurrency fundraising development timeline
Characteristics of New Cryptocurrencies
With the flourishing development of the blockchain industry in recent years, new projects are emerging daily in different sectors. The cryptocurrency market is diverse and constantly evolving, with new cryptocurrencies being introduced regularly. CoinMarketCap alone lists over 20,000 different cryptocurrencies, each aiming to make a name for itself in the market by offering unique features or appealing visions to attract investors’ attention.
Generally speaking, newly launched cryptocurrencies have the following characteristics:
Higher liquidity: New coins tend to have higher popularity and market attention. Investing in new coins instead of the old ones is the common practice, leading new coins to enjoy higher turnover rates and trading volumes compared to old coins.
Greater profit potential: New coins have no trapped holders and offer a wide range of speculative possibilities. There is no price ceiling or limit on potential gains.
Higher risk of losses: The market and community for new coins are not fully established, making it difficult to determine their value as there is no price floor in the initial stage. Their prices came with more uncertainty and volatility.
Intense competition: Some coins may have already captured a significant market share, posing a challenge for newly launched cryptocurrencies to stand out.
More flexibility: The development and design of new cryptocurrencies are not bound by existing frameworks and stakeholders’ interests, allowing for flexible design of issuance rules and quantities, among other aspects.
More gray areas: The issuance of cryptocurrencies may operate outside the jurisdiction of specific countries’ laws and policies. This creates opportunities for unscrupulous anonymous teams to exploit the privacy and permissionless features of blockchain to engage in illicit and fraudulent activities.
Therefore, before investing in new cryptocurrencies, users must diligently evaluate these characteristics, trying to consider and balance the associated risks and rewards in order to make informed investment decisions.
How to Issue New Cryptocurrencies
New cryptocurrencies can gain recognition and liquidity in the market through various issuance and fundraising methods, including ICOs, IEOs, IDOs, and STOs.
ICO (Initial Coin Offering)
ICOs, short for Initial Coin Offerings, are emerging fundraising methods that involve raising funds through the issuance of cryptocurrencies to support the development of blockchain-related products, technologies, services, or platforms. They are a fundraising method based on blockchain technology, where companies and project teams can issue their own tokens and sell them to investors to raise funds for project development. Investors can purchase these tokens using cryptocurrencies (such as Bitcoin, Ethereum, and USDT) or fiat currencies.
In an ICO, the project team sets a token issuance plan, including the token quantity, price, and duration. Investors can then buy these tokens using cryptocurrencies or fiat currencies. These tokens typically have use cases such as purchasing products or services on a specific blockchain platform, or being used simply for speculative purposes. If an ICO is successful, the value of the tokens may increase, allowing investors to generate profits by selling the tokens.
During the ICO period, tokens are sold to investors. If the funds raised within the specified timeframe reach the minimum required amount, the project can proceed as planned. However, if the fundraising falls short, the funds are usually returned to investors. Prior to the token sale, startups or project teams often release a whitepaper that introduces their project and the objectives of the ICO to potential investors. The whitepaper typically contains the following information:
Fundraising goal: How much funding does the project plan to raise?
Utilization of raised funds: How will the funds be used?
Business plan: The project’s operational model and business strategy.
Accepted currencies for subscription: Which cryptocurrencies (or fiat currencies) may participants use for investment?
Tokenomics and allocation: Token issuance, price, distribution mechanisms, etc.
ICO timeline: This includes the specific start and end dates of the ICO, as well as any potential phased issuance plans.
Background of founders and team members: It provides information about the experience and background of the project’s founders and other team members.
The advantages of ICOs lie in that they are not subject to regulation and restrictions imposed by centralized institutions. Anyone can participate without complex audits and compliance procedures. However, ICOs also come with significant risks of fraud and failure, as project teams may lack sufficient credibility and capabilities to fulfill their promises. Additionally, there is no legal protection or regulatory mechanism to protect the rights and interests of investors.
IEO (Initial Exchange Offering)
IEOs are a fundraising method similar to ICOs, but with the difference that IEOs take place on cryptocurrency exchanges. In an IEO, the exchange is responsible for arranging the token sales process, while also conducting appropriate due diligence and evaluation of the project. The reputation of the exchange may improve investors’ trust in the project’s feasibility and credibility.
To initiate an IEO, the project team needs first to apply to conduct an IEO on a specific cryptocurrency exchange and gain approval after undergoing the exchange’s evaluation. Typically, exchanges hold IEOs on a regular basis and publicly sell tokens on their trading platforms. Investors can purchase tokens using the cryptocurrencies supported by that exchange.
Compared to ICOs, IEOs are easier to attract the attention and participation of investors, as the project that undergoes evaluation by a reputable exchange enhances user trust. Additionally, the IEO process is more transparent and fair, hence reducing the risks of fraud and failure. However, IEO also comes with certain drawbacks. For example, the project team needs to pay service fees to the exchange for conducting token sales and must abide by other limitations and requirements imposed by the exchange.
Overall, IEO can be considered a relatively secure and reliable method of cryptocurrency fundraising. However, investors still need to conduct thorough evaluations and research when selecting projects and exchanges to participate in.
IDO (Initial DEX Offering)
IDOs are a cryptocurrency fundraising method similar to IEOs, but with the key difference that IDOs take place on DEXs. Compared to IEOs, IDOs are more decentralized, and DEXs typically have fewer restrictions and audits, making it easier to achieve token liquidity.
In an IDO, the project team issues their tokens on a decentralized exchange, allowing investors to buy these tokens using the supported cryptocurrencies on the exchange. Typically, the project team provides a whitepaper and other relevant information for potential investors to reference before the token issuance.
DEXs generally establish IDO token trading markets using liquidity pools. However, the trading volume and liquidity on DEXs may not be as high as centralized exchanges, and there is a higher risk of attacks. These are important considerations for users investing in IDO tokens. Nevertheless, as a decentralized fundraising method, IDOs align more with the decentralized ethos advocated by the cryptocurrency community, and they have gained increasing attention and importance in recent years.
For example, in August 2021, Mango Markets, a decentralized exchange on Solana, conducted an IDO referred to as a “fair launch” by the team. This IDO had a 24-hour Unrestricted Period and a 24-hour Withdraw Only Period. During the Unrestricted Period, users may deposit or withdraw USDC, while during the Withdraw Only Period, they could only withdraw their USDC. The final fundraising price of the tokens was determined based on the remaining funds after the Withdraw Only Period. There were no private sales or behind-the-scenes transactions with venture capitalists. All participants contributed under the same fair conditions, making the fundraising more transparent and open.
STO (Security Token Offering)
STOs, short for Security Token Offerings, are a blockchain-based fundraising method that complies with securities regulations. In contrast to other types of token offerings such as ICOs, IEOs, and IDOs, STO tokens are designed to resemble regulated securities, offering higher legitimacy and security.
In an STO, issuers typically choose a compliant platform for the offering. They need to apply for relevant securities licenses and undergo KYC (Know Your Customer) and AML (Anti-Money Laundering) verification processes to ensure the legitimacy of investors and transactions. Investors can purchase STO tokens using fiat currencies or cryptocurrencies, representing ownership in securities by holding them.
STO tokens are typically backed by real-world assets such as stocks, bonds, real estate, etc., and the value and returns of the tokens are linked to these underlying assets. Therefore, STOs can provide more investment opportunities and returns while adhering to stricter auditing and regulatory requirements. Some projects that have adopted STO include Enegra (EGX), Mt Pelerin Shares (MPS), and Realio Security Token (RST).
Overall, STOs are one of the directions that some companies and institutions are exploring in addition to ICOs. It combines the characteristics of cryptocurrency fundraising while resembling traditional financial markets, hence enjoying higher trust. However, STOs also come with disadvantages. Investors often need to meet specific requirements to be eligible to participate, and investment amounts are typically higher compared to other token offering methods. For example, the STO of BlockStream Mining Notes set a minimum subscription threshold of $100,000.
Information Sources for New Cryptocurrencies
Understanding the sources of information for new cryptocurrencies is essential for investors in the cryptocurrency market. By accessing reliable information, investors can make better-informed investment decisions and identify early-stage projects to enhance their profit potential. Below are several common sources of information for new cryptocurrencies.
Official Websites
Information on new cryptocurrencies is often published on the official websites. This includes details about the token’s uses, technical aspects, token supply, and the project team. By researching the official website, investors can gain a better understanding of the token’s use cases, market positioning, and future development, enabling them to assess its profitability.
Social Channels
Social channels, such as Twitter, Telegram, Reddit, and Discord, are important sources of information for new cryptocurrencies. Token issuers or community members frequently share the latest token updates, news, and project progress on these platforms. Additionally, some project teams conduct AMA (Ask Me Anything) sessions and other interactive activities, allowing investors to interact with the team and gain further insights into the investment opportunity.
Cryptocurrency Information Platforms
Cryptocurrency information platforms serve as vital sources for market trends. For example, Top ICO List , CoinMarketCap , CryptoRank , and ICO Drops aggregate information about upcoming cryptocurrency projects.
Cryptocurrency Exchanges
Cryptocurrency exchanges are also significant sources of information for new cryptocurrencies. Some exchanges, such as Gate.io, initiate token sales or listing events on their platforms. By participating in these activities, investors can obtain these tokens and gain insights into the token issuer, tokenomics, as well as the exchange’s evaluation and listing standards.
Conclusion
This lesson provides a detailed introduction to various methods of fundraising in the cryptocurrency market, including ICOs, IEOs, IDOs, and STOs. Each method has its unique characteristics but also comes with potential risks. Investors may choose the best suitable one based on their own needs and specific situations. Furthermore, understanding the sources of information for new cryptocurrencies can help investors make better decisions and identify early investment opportunities. Common sources include official websites, social channels, cryptocurrency information platforms, and cryptocurrency exchanges. In the next lesson, we will discuss some techniques for analyzing investments in new cryptocurrencies, enabling you to become a more professional angel investor in the crypto space.
Takeaways
- ICOs (Initial Coin Offerings) refer to the issuance of tokens by a company or project on the blockchain to raise funds from investors. It eliminates the need for centralized institutions to audit or for adhering to compliance procedures, but it carries high risks of fraud and failure.
- IEOs (Initial Exchange Offerings) refer to the sale of tokens by a company or project through a centralized exchange. The exchange will thoroughly verify and evaluate the project, making IEOs safer and more reliable than ICOs.
- IDOs (Initial DEX Offerings) refer to the sale of tokens by a company or project through a decentralized exchange. IDOs face fewer audits and restrictions but may suffer from problems of low trading volume and liquidity.
- STOs (Security Token Offerings) are a fundraising method that utilizes blockchain technology and complies with securities regulations. STOs require issuers to conduct offerings on compliant platforms and undergo KYC and AML verifications. STO tokens are classified as securities, offering higher legitimacy and security, but the execution cost is higher compared to other token issuance methods.
- Understanding the sources of information for new cryptocurrencies can help investors make better investment decisions and identify early-stage projects to enhance their profit potential.
- Common sources of information for new cryptocurrencies include official websites, social channels, cryptocurrency information platforms, and cryptocurrency exchanges.
What is Anti-Money Laundering?