Bitcoin, Ethereum and other altcoins are on the rise to unprecedented levels, driven in part by South Korean and Japanese regulations and low interest rates, with the total market cap of hitting $112 billion in June of 2017. ICOs are thus an alternative of crowdfunding, existing outside the parameters of traditional financial systems, which heightens both the rewards and risks. For example, in April 2017, Blockchain Capital raised $10m in six hours through an ICO. A few months before that, Polychain raised $5m from 30 investors. Its thus one of the most efficient methods for organizations to invest in their projects. This article will outline the basic steps of how to invest in an ICO.
What is an ICO?
The same way one would buy stocks on the stock market, an ICO (initial coin offering) operates in the same way as an IPO (Initial Price Offering), but instead of buying stocks, you’re buying digital coins. Thus, ICO is a mix between online crowd-funding and IPO, whereby organizations raise funds on the blockchain, like Ethereum, the leading blockchain platform as of 2017, to fund projects. They give participants tokens.
How to Invest in an ICO
- Do your due diligence
The first step to take is to decide which ICO you’re going to be contributing towards. The risks are high, and although many ICOs are launching, not all of them are reputable. Make sure you’ve read the organization’s whitepaper and have official ICO page on hand to reference. Be sure to research the development team, join the Slack community to discuss the project, so you have someone to hold accountable. Further, be on the lookout for an ICO project that has already has a minimum viable product, to lessen the security risks of the ICO not putting out their project. So, before you invest, it’s crucial to have a sense of the organization’s business model and game theory, so you aren’t stuck with a token that won’t appreciate. So before you invest, take the time to familiarize yourself with process of how to trade in cryptocurrencies.
- Sign up for a Coinbase account
In order for you to be able to buy, sell, and receive digital currency, you will need to sign up for a Coinbase account, to send bitcoin anywhere around the world. Coinbase is simply a place to securely store your bitcoins, and offers easy payment methods for converting your local currency in/out of bitcoin. A Coinbase account functions as a digital currency wallet, where you can securely store your digital currency. With a Coinbase account, you can further connect your bank account, credit, or debit card, exchange digital currency into and out of your local currency. Generally, it’s better to use a bank account, as the fees are lower as opposed to using a bank account, the rates currently at 3.99% for credit/debit card transactions, as opposed to 1.49% for bank transactions.
- Buy bitcoin or ether
You can do this from Coinbase if you navigate to the “buy” screen. This will enable you to buy some Ethereum, as you’re essentially trading USD (or whatever your local currency is) for a form of cryptocurrency. Make sure to buy your bitcoin/ether at minimum in advance of the ICO you want to participate in, as the transaction can take over a week to process, so you’ll be sit tight until the transaction is processed. After that, you’ll want to set up an Ether Wallet.
- Set up an EtherWallet and move your bitcoin to a wallet you control
This step is crucial as you shouldn’t participate in an ICO from your Coinbase account, as you don’t own the private keys to your bitcoin/ether address, and if you send your coins through Coinbase, you won’t actually receive the tokens. In order to participate in an ICO, you need to send your bitcoin to them and thus receive tokens back to wallet. If you send bitcoin to an ICO from your Coinbase account, you won’t receive your desired tokens. If you’re using ether, one of the more commonly accepted currencies in ICOs, you would use My Ether Wallet to create a new Etheruem Key, and then transfer your ethers that are on your Coinbase account to this wallet. Whatever wallet you use, the key step here is to transfer your digital coins to a user controlled wallet, who’s private keys you control, meaning that you’ll be able to receive your tokens there.
- Register for the ICO and wait for the ICOs launch day
This will allow you to participate in the ICO by sending your crypto to their address. To register, you’ll need your public wallet address. When the token sale starts, you’ll receive instructions for the next steps. At this stage, you should be informed of an address where the money will be collected, usually during a set period of time, and will involve the transferring of cryptocurrency from MyEtherWaller to the ICOs public address, in exchange for tokens (the ICOs cryptocurrency). Note that in order to send ether, you’ll need to pay for the transaction fee—or “gas”, which is set around .01. So, to send 1 ether, you’ll need at least 1.01 ether in your wallet to cover the transaction fee. However, be sure that the address you are sending the coins is actually the address of the token sale. During Coindash.io’s ICO, hackers were able to access just under $8 million worth of ether simply by changing the address on the website to their own.
- Transfer your ICO tokens back into your currency of choice.
This is where things can get tricky, as there’s no set rule for transferring ICO based tokens back into currency. The company who offered the ICO may or may not offer a service, or you might have to trade the token on a token-to-token exchange who lists the token.
It may seem intimidating, but that’s just the nature of buying into an ICO and trading in cryptocurrency. With careful due diligence, you should be able to reap the benefits of the lucrative cryptocurrency market.