ICO Tokens: Why Do We Need Them And How Much Do They Cost
The main mistake of a novice investor is the lack of theoretical training and specific knowledge about the ICO. Investing in a developing sphere is risky, and the only way to minimize the risk is to understand the project.
The types of tokens offered for sale is not the only thing an investor has to know before investing in an ICO. In fact, there are a few questions to be answered:
- What are the main features of the token?
- What determines its value?
- What is the goal of the project?
- Do the token type and its functionality correspond to the business model of the project?
- Does the project offer something innovative: the very idea or its implementation?
- Is it possible to set out all the above in the project’s whitepaper?
All these lead to three key components of a successful ICO — relevance, uniqueness, prevalence. They determine whether it is worth investing, and if yes, what the best time to invest is. A project might be really good, so people should put their money in it as quickly as possible. Or vice versa, the project might seem attractive, but in fact it raises a lot of questions.
It is also important to pay special attention to the token issued within the ICO. An investor should determine its functionality and find out what role it is supposed to play in the project.
Functions of tokens
An exchange function guarantees that an investor gets the right to purchase the company’s services. The token in this case is the internal currency of the project. Token holders can exchange the coins for a specific product or service that the platform provides.
A payment function allows a token to be used for transactions within the project. A token holder can pay for:
- using of the product
- participation in the chain of actions with other users
- launching of a smart contract.
It also includes transaction fees and other possible payments that may be carried out on the platform.
Store of Value
This function means that tokens can be accumulated and saved as money resources by analogy with a bank deposit. As a rule, this function is enabled if an investor has a long-term investment and does not withdraw tokens.
Future Access Rights
It may be the access right to the platform or the right to make decisions. For example, a token holder can take part in voting when solving any issues related to the internal processes of the project.
In this case tokens are used as a reward for any user's activity within the project. Like in-game currencies, tokens can motivate participants. In the future, they can play other roles that are embedded in the project's economy.
Tokens are used to generate new units of a resource. They take part in the chain of actions with other users (or separately). The final product can be an item or a token.
How is the token price formed?
The token functionality must be determined in the project's business model. If the functions are just "announced", it will soon become clear that only the founders benefit from the ICO — hence, this is a scam.
To avoid this, an investor needs to compare the token price with its possible market value. It allows to understand whether the price of the token reflects the real product's cost, or whether it is unreasonably high. This applies to utility tokens, which are 90% on the market.
For illustration, a project offers 1 GB of cloud storage for $5 per token. However, the same volume can be bought for $1 without any tokens. Obviously, in this case the token purchase is unprofitable.
Another factor that forms the token price is uniqueness. The task of the founder is to make people buy issued tokens. Thus, the startup has to represent the idea that will make it relevant. A project that does not offer anything new is doomed to failure.
What can be unique:
- The very idea. For example, blockchain technology can be integrated in the field it has never been used before.
- Implementation. This can be an absolutely new way or form of applying things that are already widely used.
- Benefit. If the project allows to make products or services simpler or cheaper.
Investors need a combination of uniqueness and mass character — this will ensure the success of the project. The more investors are interested in the product, the more investment the ICO attracts. This ultimately affects the cost of the token because the main rule of the market economy works: demand generates supply. It will be fair to say that a successful project will bring something good into the world and also increase the profit of investors.
What is the best time to buy tokens?
The time of purchase is another factor that determines the token price. The earlier you invest, the more profit you will get if the project is successful.
Private sale is the earliest stage of attracting big investors to the project. At this stage, only the investors who have received a personal notification about the token sale start can take part. For this stage, the team prepares the ICO website and the project presentation. It also indicates that the amount required to launch the project.
At the private sale, the token price is the lowest, but the risk is the highest. It is still unclear if the project will be successful. As a rule, if opinion leaders get interested in the product at this point, it is good because thousands of smaller investors will be attracted.
Pre-ICO is a stage, when any interested person can buy tokens for an affordable price.
At the pre-ICO stage the project is presented in public: in the media, blogs, forums and so on. It is common for successful projects to collect the required amount of funds at the pre-ICO stage, before the official ICO run.
At the Pre-ICO stage, ICO-runners use different methods to increase sales. Here are a few of them:
- AirDrop — free distribution of tokens by all potential investors who are interested in the project. This method expands the loyal audience and broadens the client base of potential investors.
- Bounty — active promotion of the ICO in the Internet. The tokens play the role of a reward. People who are engaged in bounty, work for the future possible profit, they will receive their reward only after the official project starts.
It is the official release date, when the team is already starting to work on the project implementation (if the required amount of funds was collected during the previous stages). The Crowd Sale date is indicated in the whitepaper and on the ICO website.
If the required amount of money is already raised, there are two ways to go. The ICO founders can stop collecting funds or continue (their choice depends on the whitepaper). The second option involves an additional token issue.
Cryptocurrency exchanges sales
It is an optional stage, because not so many projects can afford to place tokens on the exchange. However, if a token can be bought on the world-famous crypto exchanges, this indicates the project is successful and reliable. Tokens sold on exchanges are usually the most expensive.
Nothing can guarantee the return of investments. Even if the product seems tempting and reliable, it might be a fraud. Unfortunately, nobody can foresee this. At the same time, it is a huge mistake to invest in the project without analyzing it in advance. Hence, it is the main task of all investors to do their best to minimize the risks involved. Go for it!