We are living in the blessed digital era.

First, we got a digital watch, then digital photo, digital TV, digital marketing and digital sex. The world was ready for digital currency and Bitcoin was born. So, no surprise that in a very short time digital stock has joined the party. ICO (Initial Coin Offering) is pretty close to the well-established IPO (Initial Public Offering) with two major differences:

1. You are not going to own a share in a future company.
2. It must be somehow connected to a blockchain.

Why will a startup company prefer ICO?

The concept is relatively new, and the old IPO might look safer, but some ICO benefits are just unbeatable:

1. Retaining control: you are not sharing your company with an investor, you sell him a future service. That’s a huge difference, you will get the money but still control your business.
2. Globalization: while some companies go door to door to find an investor, with ICO you can immediately rise money from anybody in any country worldwide.
3. No regulation. That means no bureaucracy which could take months. Tech startup success is very much a matter of being first on the market. Otherwise you will be yesterday’s news and somebody else will take the jackpot.

So how does ICO work?

First of all, we need a bunch of guys with a cool idea somehow connected to a blockchain. For example, a startup that will allow you to buy a genetically modified tree and when it will grow- it will have your name on its leaves for a Bitcoin. Sounds pretty insane, but I’ve heard much weirder ideas that turned into a successful business.

These guys start a marketing campaign and invite everyone to buy tokens.

What is an ICO token?

Not a race-car or a shoe. It might look pretty much like Monopoly, though. You buy and sell something that doesn't really exist, but somebody wins and somebody loses.

The ICO token basically signifies your contribution to the startup investment. The more money you will give, the more tokens you will get in return. With the tokens, you will be able to buy future company services or just sell tokens.

But why would you give the money if you will not own a part of the company as it works in IPO? Right, nobody will. That’s why you have a smart contract.

What is an ICO Smart Contract?

The guys with weird genetic trees must promise something worthy to the investors. It can be a free tree for your wife, two percent from the future company revenue or any other value or service. In this case, money definitely might grow on trees.

The smart contract is actually an agreement between the ICO issuing company and the token holder. It is a code that makes a certain “then” happen if a certain “if” happened. For example, it can say that everyone who bought “the genetic tree” token before 2020 can sell it for a fixed price. One a holder will send the token – the price will be adjusted automatically.

How to create a smart contract?

Most of them are still created on the Ethereum platform (the first smart contract was issued by the platform creator, Vitalik Buterin). But there are more, such as Confideal, ChainLink, BlockCAT and others. Each one has its pros and cons. You can read about them here.

So, why one should invest in ICO tokens?

1. The tokens’ price can rise quickly, so you can make money buying and selling in time This part is pretty similar to the regular stock exchange.

Ok, we got it, it is a Bitcoin-inspired stock-exchange. I can invest in weird trees instead of Apple or Intel. What’s the buzz about it?

Here are some pretty impressive numbers:

1. Plutus, a Bitcoin easy-pay app, issued the tokens on June 2016 with an initial price of $1.183. The current token price is $15.122, which makes 1,178 percent growth! And you could buy lots of it with the price.
2. Neo, another cryptocurrency, did even better. They started with humble 33 cents per token. And today it’s worth $107. You are welcome to calculate the revenue by yourself. I am busy with a self-flagellation for not buying it.
3. Daily ROI for Ethereum token holders is 206 percent.

Got it, it's a good deal, isn’t it?

How not to fall for a scam ICO?

That’s a very good question. There is something important to mention: everybody lies (special thanks to Dr. House for the perfect quote). There are good guys and there are less good guys. A start-up named Condido has raised $375,000 and disappeared with the money. Their website was deleted and nobody can find the founders. Well, old-fashioned burglars had to drive to the nearest bank wearing funny pantyhose on their faces. These days, you can do the same without leaving your house.

Here is a short “stay away from” list:

1. The team is anonymous. Right, it's all about decentralization and regulation free. But would you give your money to a complete stranger? I prefer at least to know who the founders are
2. Too good offer. Remember, that only a second mouse can enjoy the free cheese. If the revenue percentage is much higher than the average, there should be a heck good reason for it. Otherwise this cheese doesn’t smell good.
3. No clear roadmap. If it is a serious startup, they will work on a detailed roadmap at least for the next year. If the only thing you can read on their website is “it will be cool, so cool, supercool – trust us and give us your money,” probably you should think twice.

Last, but not the least: Pre-ICO.

What is Pre-ICO?

Hey, wait. There is something else I forgot – actually you can buy the tokens before the ICO. How come, you ask? It’s a cryptoworld, you know, everything is possible. Nothing is real, follow the white rabbit, Neo. In fact, sometimes a company needs funds for the ICO itself (advertising etc.) In that case they can pronounce “sale before sale.” Pre-sale token price is cheaper, so it can be a very good deal. It is usually very limited and can finish literally in seconds. So, if you want to buy on pre-sale, you need to check the upcoming events all the time.

Pre-sales might look like a low hanging fruit but it is not easily achievable. The popular practice is to run the pre-sale for a limited number of investors, who take the role of business angels. So, a startup can use the money raised with the pre-ICO to get much more money with the ICO itself.

Article Produced By
CoinTelegraph

https://cointelegraph.com/ico-101/what-is-ico#how-not-to-fall-for-a-scam-ico