Initial Coin Offerings: Understanding Some Crowdsale Operating Models
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While many investors have already familiarized themselves with the general idea behind Initial Coin Offerings (ICO), the steep learning curve can prevent the public-at-large from understanding specifics about how tokens are issued and how fundraising ‘success’ is measured.
ICO Defined
Initial Coin Offering (ICO) refers to a disruptive method of fundraising made possible by the emergence of blockchain technology that undoubtedly continues to bring in millions of dollars for startups. ICOs take clear inspiration from Initial Public Offerings (IPO) — a term referring to when private companies first sell their stock shares to the public. At face value, Initial Coin Offerings are quite similar to many of the fundraising methods that have existed for many years. Investors with big ideas look to the public for financing, hoping to create a product of value or necessity.
The primary purpose of an ICO is to fund new projects by selling the company’s utility tokens to investors interested in the project. Documents such as a whitepaper, a pitch-deck, and other associated marketing and technical materials will generally be used in the attempt to raise capital in an ICO.
Not All Coins Are Limited in Supply
While some ICOs choose to set a limit on the total amount of coins that can be purchased, others choose to offer a seemingly unlimited supply of coins during the sale.
Initial Coin Offerings (ICOs) that choose to set a ‘cap’ typically have a maximum amount that can be funded and will refund any transaction that occurs once there are no tokens left to sell. It operates on a ‘first come first served’ basis. Though this gives a limitation to the maximum amount of funding that the team can procure, it is also believed that this type of model creates a heightened sense of value and ignites the scarcity mindset which gives investors more motivation to grab the offerings.
The idea of limiting the number of tokens on sale has strong ties to digital currencies that employ a maximum supply cap. The way in which you structure the token sale has a big influence on the outcome of your ICO. There has been a lot of debate about the optimal method for a token sale, but the truth is, there is no single solution best for every situation.
The optimal method depends upon your goals for your ICO and your company.
Do you want to maximize the amount of money you raise?
Do you want to encourage a fair distribution of the tokens among investors?
Do you want to avoid a pump and dump of your token once it goes live on exchanges?
Do you want to minimize any negative downstream effects of your token sale upon the rest of the token ecosystem?
You must consider these questions and other relevant factors before selecting the best ICO company model to adopt for your project. We can examine several different Cryptocurrency ICO/token sale models now and see how each model has its own peculiarities. These models range primarily from Capped to Uncapped Sales models.
Capped VS Uncapped Sales Models
The Capped Sales model can then be further distinguished by the nature of the raise, including the Soft Caps, Hard Caps and Hidden Caps. The Uncapped Sales model implies a loser interpretation of ceiling or applies no ceiling at all. Also, a Fixed Rate form of contribution applies to both Capped and Uncapped models of fundraisings.
Capped Sale Model
In this model, a fixed number of coins are sold at a predetermined price, thereby giving a fixed valuation for your network. The primary benefit is the transparency and certainty of the valuation you are placing on your company tokens.
If investors believe your network is worth more than the valuation implied by the token price, they will feel confident in purchasing your tokens. If you are lucky enough to be launching a particularly hot ICO, it may become a race by investors to buy up as many tokens as possible. Of course, investors are hoping to sell those tokens later, for a profit, after listing on an exchange.
This trading strategy is often used when the token first goes live. Then the bigger investors might dump the coins onto all the people who were excluded from the first round of transactions. These later investors pay a higher price because they are desperate to buy in. Early investors can take advantage of such intense investor demand to hike the price and resell the tokens as soon as possible. This may not be the most ideal situation for your token sale, but at the same time, this is a very nice problem for you to have. Your project is popular.
Key Attributes of a Capped Sale Model
SOFT CAPS. A cap is set, but after this cap is reached, there is an extended time period until the full closure of the sale. A soft cap is typically a lower limit, more like the minimum amount a team is aiming to raise. A soft cap is often also used in conjunction with a hard cap, so, instead of having a certain time period before closing the token sale, the sale ends once a specific monetary or cryptocurrency value is raised. If a team doesn’t reach their soft cap at all, the funds should be returned to investors and the project is considered unsuccessful. Other times, the project may proceed with however amount was raised even if the amount is under its soft cap.
HARD CAPS. There is just one fixed cap, and the ICO stops as soon as this monetary limit is reached. There will usually be a specific time period limitation attached as well. A hard cap is the absolute upper limit of funds a team will take for their tokens. If a team receives funds in excess of their hard cap, those funds should be immediately returned to investors. A failure to promptly return excess funds is a big red flag.
HIDDEN CAPS. A hidden cap ICO has checkpoints or goals that are not publicly announced before the sale. This triggers a price change for the coin, a closing of the sale, the opening of the new sale to new classes of investors, or the end of purchasing bonuses. Hidden Caps are used for blocks of tokens sold at different price points. Typically, this would mean an upward price direction for increasingly smaller blocks of tokens. In a hidden cap model, the participants do not know when the allocation will be finalized. This is only revealed during the actual progress of the ICO. This model is more likely to be used during the private pre-sale stage of the ICO.
Uncapped Sale Model
This is the direct opposite of the Capped sale model. There are no set limits for coins to be distributed at a predetermined price.
The more people invest, the more total tokens you will mint. The nice part about this is that everyone gets to participate. No one needs to rush to make their investment before all the tokens are sold-out, bought up by large investors.
The major disadvantage of this model is that it is somewhat impossible for an investor to know the implied valuation of the project. The number of tokens being sold is ultimately unknown. So even though this may allow for smaller investors to actively participate, these smaller players may get a poor deal. If too many coins are sold, there can be an imbalance at the time of trading on an exchange, with too much supply and too little demand.
Fixed-Rate Contribution Mechanism
In this model, investors are required to exchange cryptocurrency or fiat for tokens at a fixed ratio. Early contributors tend to receive a better rate per token, (although that is not always the case), and later investors often receive less discount or no discount at all on that token price. This model will use a specific period for contributions.
This mechanism is popular because it can help to attract important early investors and allow them to earn a greater return for taking more risk by buying in early. But it is also important to ensure that the early discounts are not too great, or that too many of the tokens were not sold at a material difference to the pre-sale or ICO price. Such factors will depress the token price at the time of exchange listing.
DOWNSIDES OF TRADITIONAL ICO FUNDING
Lack of regulation, proliferation of fundraising fraud projects, private or institutional investors have more privilege to get in first and the risk that token’s price will decrease after listing are just some of the disadvantages of traditional ICO funding method.
The problems for buyers are lack of opportunity, lack of initiative, and lack of tools to store, compare, manage, optimize, and liquidate purchases. On the other hand, the problems for affiliates include the lack of lasting foundation, lack of easy tools, lack of career route, and the lack of pride in what they are doing.
CONCLUSION
What makes ICOs so disruptive is their reduced barrier for entry. In theory, anyone can launch an ICO or contribute to funding an ICO, creating a new wealth of opportunity for investors, entrepreneurs, and any coin enthusiast across the world.
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