3 Myths of ICOs
By DERRICK LEE March 3th 11m read
As the blockchain industry matures, so too will the way ICOs be conducted.
3 Myths of ICOs
Here are three myths about ICOs that we want to debunk. As the landscape matures, there will be significant changes in the way that ICOs will be conducted with greatest emphasis placed on the fundamental value that projects bring.
Myth 1: I need to create FOMO for my ICO.
The acronym for FOMO is “fear of missing out”. Many of the past ICOs used FOMO strategies to influence potential investors to contribute funds to the project earlier rather than later. These strategies were successful in raising large sums of funds when investors were impervious to the success or failure of the projects they invest in. Investors bought tokens with the objective of selling when the price of their tokens rises exponentially (moons) after a short duration of time.
We foresee that going forward, creating FOMO as a strategy to influence investors to part with their funds will be ineffective and unsustainable. Investors will want to invest in projects with sound, fundamental value. They will want projects to be more than just an idea written on a whitepaper. They will want projects to have completed a proof of concept and built their minimum viable product. A novel idea on a whitepaper will not cut it.
These are some ways that projects of recent past used to generate FOMO for their ICO projects. We envisage that such practices will wither out and projects will instead focus on the raising the value of their project.
Method 1: Only a small proportion of tokens to be sold to the public.
Some projects of the past intentionally set aside an exceptionally low proportion of tokens to be sold to the public. The purpose of doing this is to artificially create a shortage of tokens that the public can buy. With fewer tokens on public sale, investors think they have little time to act before the sale closes. They then act on impulse and not based on rational thought. By constricting supply, the tokens can be more exorbitantly priced.
Method 2: Constantly pushing back the ICO end date.
To artificially create FOMO, some projects devised a clever strategy which is to constantly push back the end date of their ICO. When the pre-set date for the ICO is approaching, the project changes the end date further into the future. When a potential investor sees the end of the ICO approaching, they may be inclined to make an impulsive contribution.
Method 3: Big countdown timer and completion bar.
In alignment with creating FOMO, some project’s ICO website have a big countdown timer and a completion bar. The countdown timer indicates the time left before the ICO finishes while the completion bar tells potential investors how close the project is to hitting its hard cap. The purpose of these not-too-subtle posturing is to insinuate to potential investors that they should contribute soon before it is too late.
Method 4: Constant “Mooning” / “To the moon” chatter.
In the crypto world, the word “mooning” or the phrase “to the moon” means that the price of a particular cryptocurrency is about to increase drastically. The metaphor supposedly originated from the imagery of a rocket being launched straight up to the moon. During the marketing campaign, influencers may through social media channels (Reddit, Telegram, etc) make suggestions that a particular project’s token is going to moon. These suggestions most frequently are just mere puffs and not backed by an in depth understanding of the value proposition of the project. In other occasions, such insinuations are part of a “pump and dump” scheme conducted by charlatans to defraud foolish investors into parting with funds. Be that as it may, the main purpose of proclaiming that a token is about to moon is to create a sense of FOMO among potential investors.
Method 5: If you invest early, you receive large discounts.
Typically, the sale of tokens occurs in phases. Investors that invested in an earlier phase would be given a significant discount. Investors that invested in a later phases would buy tokens at a higher price point. On many occasions, the purpose of structuring the fundraising campaign as such was not to reward early investors for the increased risks that took on. This is because most projects were just “ideas” and little progress would have been made whilst the fundraising campaign was ongoing. Early and late investors would have taken on similar levels of risks. Rather, the purpose was to entice potential investors to invest earlier rather than later.
There are non-FOMO strategies that we foresee will become less common going forward.
Method 1: Dutch auction.
A Dutch auction is a method of selling something where the price is lowered until a buyer is found. It is also known as descending price auction. The selling of tokens is usually done in conjunction with an excessive marketing campaign. In most instances, the purpose why projects use such a strategy is to extract as much money out of their investors. We foresee that all investors in a particular fundraising phase will invest at the same price point and not differentiate between individual investors. The amount of funds that the project will raise will only be as much as their current needs and according to what they value their project at.
Method 1: Excessive marketing.
In the weeks leading up to the launch of ICOs, many projects spend a large amounts of resources on marketing. This is with the objective to gaining traffic to their website and getting potential investors talk about their project. When hype for the project reaches a climax, the ICO commences. The combination of low hard cap and excessive marketing leads to some ICOs being completed in literally seconds. Instead of focusing on marketing, we foresee that projects will concentrate their efforts on developing their project and raise funds only be as much as their current needs.
Myth 2: I need to list my token on a big exchange ASAP.
In the past, getting listed on a big cryptocurrency exchange was of top priority once the project completes its ICO. However, we foresee that the idea and motivations of getting listed on a big exchange straight after the public sale of tokens ends will slowly diminish. We think that creating value will and should be the focus instead of getting listed (on a large exchange). The focus should be about developing the project, proving its use case alleviates an industry pain point, and gaining adoption thereafter. Getting listed on a big exchange should therefore be a consequence of being a quality project.
Reason 1: Allow early investors, founders, and advisors to cash out.
Early investors were given substantial discounts for their purchase of tokens. The objective was not to price the tokens commensurate to the value and risks of the project at the point in time or to give discounts on the basis that early investors were strategic. More frequently, the objective of giving discounts was meant to entice investors to make their contributions sooner rather than later. Having gotten the tokens cheaply, they would want an avenue to sell their tokens away quickly and reap a tidy profit. To do so, they will want the token to be listed on an exchange right after the ICO.
Founders and advisors, whom may not have contributed financially to the project, are allocated a proportion of the tokens minted. If they do not have a vesting schedule that stipulates when they will receive their tokens, they will normally receive their tokens when the ICO ends. They are then incentivised to list the tokens on an exchange quickly so that they can sell their tokens away. After all, they will reap the full gains of the sale of their tokens since that they did not have to “buy” the tokens.
Reason 2: Getting listed will raise my project’s valuation
Getting listed on an exchange does contribute in the liquidity of the token as it increases the ease of getting market participants to participate in price discovery mechanism. With more market participants, the token turnover increases leading to a general increase in valuation. This is because investors put a premium to increased liquidity. This stems from the certainty attained from the ability to trade tokens quickly with reduced transactional costs at a predictable price.
However, getting listed does not automatically translate to a liquid market for the token and hence higher valuation. It depends on several factors like the size of the exchange the token is listed on, the presence of market makers, the utility of the token, and most importantly the level of success of the project. Getting listed on a large exchange and employing market making services are expensive. Additionally, the inflated valuation of the project can only last for so long. The focus in the long run should always be the development of the project. Benjamin Graham summarises this point succinctly. “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
Reason 3: Getting listed on a big exchange helps to get widespread adoption.
Getting listed on a big exchange will help crypto-enthusiasts gain awareness of the project. In no way does it guarantee adoption of the project’s technological solution. Long term sustainable adoption of the said technological solution will only occur when the project is able to show real, tangible alleviation of a key pain point in their targeted industry. Instead of focusing on getting listed on a big exchange, projects should first focus on proving an actual use case of their technological solution.
Reason 4: Getting listed on a big exchange is validates my project’s value proposition.
In the past, exchanges do not abide by a strict filter when selecting which project tokens they will list. As the industry matures and evolves, large exchanges are increasingly getting pickier. They will now only list projects that they deem to be of quality. However, making the automatic assumption that getting listed on a big exchange is validation of the project’s success is convenient but misguided. Projects should instead test out their value proposition through actual adoption of their technological solution and not use their acceptance on a large exchange as a litmus test.
Myth 3: Preparing for ICO takes a lot of time and resources. I can no longer focus on my business.
In the past, the preparation of ICO consumes lots of time and resources. With Ceito, this is no longer true. Leave the ICO to us and focus on your business.
Reason 1: I need to create a separate website to conduct my ICO.
When performing an ICO, projects will need to conduct a background check on every person that intends to make a financial contribution. This background check will include “Know your customer (KYC)”, “Anti-money laundering (AML)” and “Countering the financing of terrorism (CFT)”. Part of the process of conducting this check will require potential investors to disclose their identification documents like driver license, passport, or national identity card. The information disclosed are highly confidential and should be handled with utmost care.
To ensure that the contribution platform is safe and secure for investors to use, projects that did their ICO built a fresh website in a sterile environment. Such a website would have a URL that looks like this “https://ico.projectname.io”. After creating the website for the ICO, the project will use it once and will not have any use for it thereafter. Expending time, effort, and resources to create a website for a one-off event to never be used again is wasteful.
In addition, the project may not have the technical expertise to create a secure website. Consequently and unfortunately, there were ICO projects of the past that mishandled and exposed the personal data of their investors. The main cause for the data breach was due to some vulnerability on the website that allowed hackers to exploit.
Ceito has built an ICO platform for projects to do their fundraising in a safe and compliant manner. Projects will not have to build their own ICO website.
Reason 2: I need to know how to code in Solidity.
Most projects mint their tokens on the Ethereum blockchain that abide by the ERC-20 Token Standard. Writing this smart contract to mint the token requires a programmer who is familiar and proficient at Solidity. Vulnerabilities in the code arises when projects do not know how to mint their tokens properly. Instead of following the ERC-20 Token Standard strictly, some projects chose to deviate away from this tried and tested approach. There were other occasions when the projects wanted to add additional functionalities to their tokens. The increased complications, if written by a programmer who is not competent, may inadvertently develop vulnerabilities in the code of the smart contract that are unbeknownst to the project.
We at Ceito have automated the generation of smart contract so that you do not have to.
Reason 3: Compliance checks have been done manually.
When projects do their compliance checks, they will need to do the following steps. Projects will collect identification documents and a self-portrait from their investors. The project will then verify the identities of their investors. This is generally done by verifying the authenticity of the identification documents submitted and whether the self-portrait represents the same individual as reflected in the identification document. After verifying the identity of investors, the investors will be checked if are on any money laundering and terrorism financing black lists.
Most projects have done these processes manually. It is very time consuming and takes several weeks to complete. The collection of data are done through an email correspondence and the checks are done physically by a team member of the project. More importantly, the verification checks being done by a person is less accurate in detecting fraud and will be biased in their judgment.
With the Ceito Dashboard, we have automated the entire process of the collection of requisite data, verification of identity, and checking against money laundering and terrorism financing black lists. Instead of taking weeks, investors will complete their compliance checks in five minutes and with a very high level of accuracy.
Reason 4: Order book reconciliation
Different projects will have different fundraising structure. Some may choose to have multiple rounds of private sale or none at all. It can get pretty messy when tracking how much money each investor has invested and the number of tokens he or she should be allocated.
We have an automated process that reconciles the investor order book. Leave this task to us.