Back in 2017, Initial Coin Offerings (ICOs) were all the rage: Investors poured money into every token sale they could find, so much so that a token called the Useless Ethereum Token raised over $200,000 in its token sale. The token is, as its name implies, useless and it made this laughably clear in its project. Still people “invested”.
The hype surrounding ICOs allowed scammers to run amok, saw retail investors lose their life savings in less-than-stellar projects and gave token sales, in general, a bad name. When the dust settled, major projects are still growing today. Two notable examples are the Brave browser, which is challenging Google’s ad monopoly with its own cryptocurrency-based system, and cryptocurrency exchange Binance, which recently traded a record $15.9 billion in a single day.
The token sales of these projects have a few things in common we’re going to look at in this post, but first, it’s important to determine what, exactly, a token sale is, and what are its advantages when compared to other ways of raising capital.
What is a token sale and why is it done?
A token sale, essentially, involves creating and launching a new cryptocurrency into the market. The cryptocurrency must support the project, and vice-versa, in order for it to be successful. Various projects that raised funds via token sales in 2017 didn’t need to use blockchain technology or to create a new cryptocurrency/token.
For a business, there are various ways of raising capital. While some choose to raise funds privately and expand organically this way, others look to outside investors for support so they can get a quick influx of cash and grow faster. Firms like Uber, Facebook, Google, and Coinbase raised funds to expand.
Another method firms can use is going public. By selling shared through an initial public offering (IPO) these same businesses are able to raise even more funds, although this process is complicated and puts more responsibility on the company. Both these methods have a trade-off: giving up a portion of ownership stake.
Token sales allow projects to raise funds without giving up ownership stake. The tokens can have a variety of use cases: some distribute dividends, some give discounts and are used to gain bonuses on platforms, some work as loyalty points or in-game items, and more.
It’s important to note a successful token sale incurs costs. Estimates vary, with some pointing to $50,000, and going as high as $150,000.
Token sales: The basics
If you’re going ahead with creating a token there first thing you’ll need is a use case. The Useless Ethereum Token raised funds in the middle of a bubble and is now used as a reduction to absurdity. The Binance token uses exchange fee reductions as its main usecase, while Brave has its browser backing its token.
1. Create your token
If a use case exists, it’s time to create your token. Chances are the best way to go about this is to create it on the Ethereum network. It’s the second-largest cryptocurrency by market capitalization, and the largest one supporting the creation of tokens.
Creating a token on Ethereum will mean it’ll be instantly compatible with any Ether wallet or client using its standards. These tokens are controlled by smart contracts. These tell the token how to react in certain situations. While creating a smart contract is out of our scope, there’s plenty of information online, and an example created by Ethereum’s developers for educational purposes.
2. Write a whitepaper and Roadmap
Whitepaper are essentially prospectuses, documents with descriptions of the project, the team behind it, the token’s use case, generation, and distribution strategy, and the of the project’s roadmap.
Some whitepapers are incredibly complex, and as a result, are never read. This leads to confusion and often ends up in lawsuits and tons of legal expenses. Binance’s 17-page whitepaper is a good example, as it’s relatively short, filled with images and descriptions that make it easy for investors to get through, and lays everything out clearly.
Since your token sale investors will need to know what you have planned for the token throughout the time, it’s also important to create a comprehensive roadmap and to stick with it.
3. Create and expand your community
Various token sales in the past ended up being pump and dump schemes: projects raised capital the initial hype drove the price of a token up once it got on the market, but after those who participated in the token sale sold what they got at a profit, the price of the cryptocurrency dropped to lows it never really recovered from.
To avoid ending up in this situation it’s important to create a strong community in a chat channel – usually Discord, Slack, or Telegram – made up of early investors and supporters. The channel can be used to communicate with potential buyers and as part of its PR.
Ensuring early investors don’t sell their tokens too soon may also be a good idea. Locking the tokens for some time, adding bonuses for holding onto them, or other benefits can help.
4. Get your token on exchanges
After you created a strong community that loves your token and project, it’s time to get it on the open market, where it will be “on its own.” The price of the token will rise and fall based on investor sentiment once it’s on exchanges.
It’s important to get it on top trading platforms – like Binance, OKEx, Huobi – to improve its liquidity. Buying an illiquid token may be a risk investors aren’t willing to take, even if it’s on the Ethereum network.
It’s also possible to make a deal with a cryptocurrency exchange and conduct an initial exchange offering (IEO). In an IEO, the tokens are sold on an exchange’s platform, assuring investors the project isn’t a scam.
Compliance and security
We highly advise against conducting a token sale without first consulting legal experts and without having your token code audited, especially if said token relies on complex smart contracts. Receiving money from retail investors could lead to all sorts of legal trouble, and the best way to avoid these is to talk to experts to be on regulators’ good side.
There are several law firms working in the cryptocurrency space, but Perkins Coie and Cooley are two well-established firms in token sales. The latter has even created a framework that reduces the cost of these legal requirements.There are also many security audit firms specializing in smart contracts and blockchain technology.
Once everything is set, you’ll need to find effective ways to market your token sale to a wider cryptocurrency audience. We have shown you a few ways to market your business for free but a large scale fundraiser will certainly require you to allocate a marketing budget, possibly gathered from a pre-sale or private investors.
At the end of the day, running a token sale has its own advantages and disadvantages. It’s important to note interest and growth will need to be maintained but in order to achieve the desired results with your fundraiser, you’ll need to create a buzz around your sale which can be done at an efficient ROI with Paradox Group.