Whenever it comes to investing in ICO, the concept of “ICO tokens” appear by default. They are sold and earned on them, both by the organizers of the ICO and by the investors. What exactly they represent and how to achieve the maximum increase in their value – we will describe in this article.
What are ICO to differ from cryptocurrency?
Earlier in the vocabulary of people associated with the cryptosphere, “coins”, “cryptomonettes” and “coins” (which means the same thing) were more common. They successfully lined, cryptocurrency mining was profitable, other ways of attracting money were of moderate popularity, so the blockchain did not have the public need for the term “token”.
Today, the profitability of mining has decreased, because to get a good income with its help, more and more significant computer capacities are required, which not everyone can get. Therefore, many people prefer to earn in the field of blockchain technologies using the more traditional method for the world economy to create a start-up and attract investment for its development.
The term “cryptomonet” is not enough to attract investors using many methods. The offer of coins that, after the ICO, with the successful development of the project, can be profitably sold on the stock exchange, is of course one of them. However, there are others – for example, the offer of a percentage of the profits or the right to own some assets of a company that holds an ICO.
The list of such rights, guarantees and assets is huge and depends on the start-up fancy and what it is willing to share with investors. The starter establishes the right to receive all these benefits in his type of cryptocurrency, which is issued and sold for fiat money in the ICO process. A certain “percentage” of rights and bonuses is “included” in each cryptocurrency unit, and thus, the more currency units of this company an investor acquires, the more rights and bonuses that this company provides, investor receives.
These currency units are called ICO tokens. The digital token ICO is the internal currency of the company, which is issued and distributed in the ICO process in order to attract investments and for which in each case the investor can receive various specific benefits.
There are ICO tokens with which you can pay within the company that conducted the ICO. For them you can buy tangible goods, services, receive additional bonuses in the virtual space, advanced versions, for example, software, etc. Such tokens are called appcoins (from application – “application”) – tokens for applications or, as they are called less often, application tokens.
The tokens of shares are called ICO tokens, which give the investor the rights inherent in ordinary shares, sometimes taking into account the peculiarities of blockchain technologies. for example
Another type of ICO token is credit tokens. Investors receive from the company a certain percentage of their own investment, as a rule, not less than 10%, and sometimes significantly more. The more tokens the investor has acquired, the more he will receive. The investment is considered by the company conducting ICO as a loan.
Some ICO tokens have no difference from the usual cryptocurrency. They do not make an investor a shareholder of the company, do not provide him with any special advantages, etc., but have only speculative value. However, an investor can sell anything at an increase in value – appcoins, “shares”, and credit tokens.
A token can combine the properties of several listed species, for example, being simultaneously a “share” and a credit token or appcoin and a “share”. The last is rare, since it is not profitable for a start-up to create such a token, but there are no restrictions.
How are ICO tokens created and stored?
ICO Tokens are created and issued by the company conducting the ICO. Creation occurs on the same principle as the creation of any cryptocurrency. Tokens are generated on the blockchain principle on the basis of a specific protocol in the same way as Bitcoin, etc. Each company develops a protocol on its own, gives it a name and creates its own token.
Currently there are several platforms for creating tokens, the most common of which are Ethereum and Waves. Ethereum is a pioneer in this field and a giant with the largest audience of 5 million users. Waves – the second most popular platform, gained fame due to the high rate of release of tokens. There are others – NEM, EOS and KickICO, which are also used by many startups and who also proved to be quite reliable.
The documentation that regulates the conditions of the ICO and is provided to potential investors in front of the ICO indicates the number of tokens the company plans to create. The realization and sale of tokens begins during the ICO. However, during an ICO, a company may not sell all the tokens planned for generation, but leave a reserve for the future.
The reserve is postponed or not postponed depending on the success of the ICO and the preliminary plans of the startup. It’s enough for a startup to collect the amount needed to start a project, after which he can stop fundraising and send unsold tokens to the reserve.
Being in reserve, tokens are stored on Escrow services or on “Escrow accounts”. An escrow account in the traditional financial world is a conditional storage of assets before the occurrence or performance of certain obligations by one or both parties, a kind of escrow.
The reserve is usually used after the ICO, sometimes immediately (if the ICO was not successful enough and additional funding is required), sometimes after a long time. It goes on expanding the company, financing new projects in successful startups.
How to increase the cost of tokens during an ICO?
Determining the correct cost of a token during an ICO is one of the main tasks of a startup or its financial advisor, on which the profitability of an ICO depends. On the one hand, the price of the token determines the demand for the product, on the other, the number of tokens that are planned to be sold during the ICO, and on the third, what the investor receives as a result of the purchase of tokens. It is necessary to evaluate the mutual influence of all factors.
If the tokens provide the investor with the right to purchase a product or service, it is necessary to assess the prevalence of the product in the traditional market. Subject to the availability of similar products there, it is necessary to proceed from the market price and set the value of the token so that the investor can buy the product from the issuer’s company at a price lower than the market price. This will attract investors willing to take risks in order to acquire the desired product at a lower price, which means that it will be possible to sell more tokens. At the same time, the issuer company must convince the investor that the product will be no worse than those represented on the market. If the company offers stock tokens, the formula for calculating the cost of the token will be different, and if the credit tokens – third.
A product or service that is not on the market in principle, but which it is ready to appear in, allows you to vary the cost of the token in a larger range and set a higher price for one token.
Selling a large number of tokens during an ICO is justified only when a very high demand for a product or service is anticipated. Otherwise, the market will be oversaturated with tokens, in which goods with low demand are “laid”, and their value will drop significantly. Meanwhile, a small number of tokens could create a moderate deficit of even a not very demanded product and would increase the cost of each token.
The most reliable way to increase the cost of tokens is to “embed” real bonuses in them and, if possible, give guarantees. For example, quite good guarantees during ICO were provided to investors by BitFlip cryptocurrency exchange. It promised to allocate 30% of the income to maintain the value of their tokens. The money, according to the developers, will be stored in the FLIP, thereby ensuring that the value of the tokens is guaranteed, subject to growth in turnover.
You can use the mechanisms of commercial policy. For example, establishing adjustable discounts on goods or services and adjust them depending on the time of purchase of tokens. That is, for example, for a short period of time after an ICO, holders of tokens will be able to receive a product or service at a greater discount than in two months.
Finally, we should not forget about the classical methods of increasing the value of a company, such as having a clear business development strategy in the open for potential investors, building a business image and a good reputation.
How much is the maximum profit?
Many startups tend to set the highest possible price for a single token, but this is not always justified, even if the project seems to be successful. The overestimation of the value of the token can lead to a number of negative consequences, namely
It is financially easier to buy a token for $ 0.2 than for $ 1. Some potential investors, especially newcomers and investors with a small budget are guided by this simple rule. However, large investors more often buy more tokens at a low price, and less – at a high price. This is due to the fact that the risk of falling prices for initially cheap tokens after ICO is lower than the risk of their falling on expensive tokens. If the project is more or less promising, the probability of a price increase for a cheaper token is N times higher than that of an expensive token N times. Moreover, it is more convenient to operate with five tokens, when they rise in price, more than with one.
A token whose price is too high may become cheaper after an ICO if the company’s product is not sufficiently in demand. It is better to set the lowest possible price from the entire range of expedient (i.e., those for which it is realistic to attract the necessary amount) and wait until it grows after the ICO to the market than to establish the market immediately (and even more so – above the market).
More difficult is the situation with an excessive increase in the cost of the token in the long term. The fact is that hyperdeflation can lead to a cumulative scheme of using tokens by holders. Watching the steady rise in the price of the currency owned by them, they will not seek to sell it and / or receive those services and rights, the receipt of which presupposes the corresponding token, but instead will wait for the price to rise even more.
On the one hand, increasing the value of the token for the issuer company is good. On the other hand, if every owner of tokens reasoned like this, the cash flow of the issuer company would slow down significantly, the number of transactions may decrease and the whole business will slow down as a result.
This problem can be solved by proposing, for example, the market tokens from the reserve, but, firstly, by the time the token will increase in price so significantly, there can be no reserve, and secondly, if the token, on the contrary, has grown very quickly and it does not seem sustainable, the appearance on the market of new units in a large volume may entail a sharp depreciation, which will negatively affect the reputation of the token and the issuer’s company.