Investing in an ICO can be tricky for newcomers looking to get their feet wet.
From ERC-20 tokens to security threats, ICOs can be rough to navigate if it’s your first time sailing through their seas.
This guide was made to help you through the journey of your first ICO or provide some more insight if you already have some under your belt.
As always, it’s important to do your due diligence with ICOs before investing. I have written a guide on what to look for when investing in ICOs.
This guide will assume that you have a basic knowledge of what bitcoin and ethereum are, but otherwise if you have never traded or utilized the crypto environment that won’t be a problem.
Setting up an ERC-20 compatible wallet
The first thing you will need to do when investing in an ICO is determine what kind of wallet you will need to send them cryptocurrency to purchase the token. If the ICO is based on the ethereum protocol and ERC-20 compatible wallet will work.
A popular option due to simplicity is myetherwallet (MEW for short).
A guide to setting up a wallet can be found here. For extra security you can consider putting your tokens in cold storage (storing them offline) in cold storage wallets such as the Trezor and Ledger range.
Using a different wallet or service if not based on the ethereum protocol
If the ICO is not based on the ethereum protocol and requires you install a special client or use another proprietary platform, the ICO itself will generally provide instructions on how to participate using their platform. This is usually due to the fact that they have their own private blockchain that is not compatible with ERC-20 tokens.
Once you have set up a wallet that is compatible with the ICO, you will need to fill it with compatible cryptocurrency to pay the ICO. There are a few methods you can use to achieve this. The most popular being using an exchange.
Cryptocurrency exchanges are similar to other stock exchanges except they trade purely cryptocurrencies. There in an inbuilt wallet given when you register an account, but generally you cannot use these wallets to participate in ICOs, hence having to make your own wallet.
This is a very important concept to remember as if you send money from exchanges you may not receive tokens in return, more information can be seen here. A popular exchange people use is Coinbase, but there are many exchanges available depending where you are located in the world. Some may not accept you on their platform due to regional legal reasons, but a comprehensive list can be found here
Once you have set up your account, you will be able to deposit fiat currency into your exchange wallet and then convert it into cryptocurrency. Once you have converted it, you can then send your cryptocurrency from the exchange to your own personal wallet. From there, you are ready to send cryptocurrency. If you choose not to use exchanges, there are other methods available such as localbitcoins.com.
Regional Legality (Accreditation?)
A new aspect that recent ICOs are taking into consideration now is the regional legality of letting people participate in their ICOs. Governments such as the United States, China, and Korea have come out with hard-line policies in regards to ICOs and project are very hesitant to let investors from those countries participate due to this. Ensure to read over the terms and conditions of the token sale to make sure you don’t fall out of the legal zone for participating or the ICO may invalidate your purchase.
Celebrities who endorse ICOs may have no idea what they're talking about, the SEC says https://t.co/bSiFiJafn5
— Lisa Abramowicz (@lisaabramowicz1) November 1, 2017
Expanding on the legal framework, Know Your Customer (KYC) and Anti-Money Laundering (AML) are very hot topics in blockchain at the moment as sending cryptocurrencies anonymously brings money laundering issues to the table.
With this in mind some ICOs will have different levels of KYC/AML compliance, some requiring you to verify yourself via email or social channel and others requiring a full-fledged confirmation of government issued identification to participate in the sale. This is generally more associated with companies that are issuing security tokens.
With the rise of ICOs officially registering their tokens as securities, this can require them to make their token sale accredited, meaning you would need to be either an accredited investor, or have a brokerage firm with accreditation purchase the tokens for you.
These ICOs can usually have larger minimum buy in rates due to the reduced amount of investors they are allowed to bring on board during token sale. Once again read through the term sheet of the token sale to determine if the token sale is accredited or not.
When looking at an ICO, smart contracts are generally put in place which allow for companies to accept cryptocurrency and payout based on a standard set of criteria. A well-constructed smart contract would have been developed, audited, tested and deployed well before the token sale to show the public that their funds they are sending are secure.
Smart contracts can also have a contingency where if the ICO does not make funding the cryptocurrency will be sent back to the original wallet, giving investors their money back, a diagram of a smart contract can be seen below and more information here.
Once you have determined that you are eligible to participate in the token sale based on their terms, you are ready to send cryptocurrency. For security reasons ICOs generally release token sale wallet address details close to the ICO date so wait for the official announcement from the team usually on their social channels. Once the wallet address has been announced, you are ready to send cryptocurrency to the address.
From here, ensure you have the right address and look for the recommended GAS needed for transaction if using ether. This is usually stated in the token sale details. Gas is the internal pricing for running a transaction or contract in Ethereum. More about ethereum transaction costs and GAS can be found here. Once you have confirmed both of these you are free to send your cryptocurrency from your personal wallet to the ICO wallet address.
This can take some time to confirm as ICOs bring in a lot of transactions in a short period of time and may end up with processing time, please look for announcements from the ICO in regards to how long confirmation times are.
Avoiding security threats
Security threats are a very real problem in ICOs. Whether it’s spam bots on Slack to full-fledged hacks of mutisig wallets, proper precautions will ensure that you are not sending money to a malicious party.
Look for official announcements from the team, especially on Slack, as many phishers are trying to send you to malicious websites.
Check the URL when going onto the token sale site; many scammers will clone the token sale site and change a small part of the URL, which isn’t easily noticed.
If something doesn’t feel right, get in touch with the team for reassurance. A more comprehensive guide on personal crypto security can be seen here.
Receiving your tokens
Once the ICO has finished and you have purchased your tokens, if they are ERC-20 compatible they will arrive in your wallet ether instantly after confirmation if the coins had already been minted, or on another future day as per stated in announcements or whitepaper. Tokens may take a little longer than usual due to scope creep, but look out for announcements from the team.
Between the end of the ICO and listing on exchanges, your options
Now comes a period of time between when you have the token in your wallet, but the tokens are not listed on an exchange yet. During this time the project is usually giving all post-ICO disclosures and closing partnerships to start the project.
If things are looking good once the token launches on exchanges you may be able to make a profit from your investment. But if things don’t go well, you may find yourself panicking that you cannot make back your investment.
The options you have here are as follows. You can hold the token until exchange date, hoping that things will blow over and you can sell for a profit or break even.
Also, you can sell privately if investors are looking for tokens, or you can sell on Ether Delta, a decentralized exchange in which you can host any ERC-20 compatible token and make a buy or sell order on there, this option will only work if others are buying/selling and there is large enough volume in the market, and does not guarantee break even/profit.
Finding compatible exchanges and selling your tokens
Once the token has been listed on exchange on the ICO itself, you will have to sign up to that platform specifically if you wish to sell the token and exchange for fiat currency.
Sign up to the platform, send your token from your hard wallet to the exchange, see what pairs are available, execute a sell order at a price you feel comfortable with, transfer into a pair which will allow you to transfer to fiat, withdraw fiat from exchange and that will end the full cycle of participating in an ICO.
TLDR: Investing in ICOs can be a complex, labyrinthine task. Today’s CryptoAnalyst guest post aims to make you an ICO pro in short order.