What Are ICO Pre-Sales?
Everyone and their cousin has at least heard of an ICO these days. But many people, even in crypto, don’t know about their lesser known cousin: a pre-sale. An ICO pre-sale is when an up-and-coming token team sells a set amount of coins before the initial coin offering. This gives the team immediate funding and generates buzz.
THE RISK AND REWARD OF ICO PRE-SALES
Everyone and their cousin has at least heard of an ICO these days. But many people, even in crypto, don’t know about their lesser known cousin: a pre-sale. An ICO pre-sale is when an up-and-coming token team sells a set amount of coins before the initial coin offering. We study many Pre-sales as part of our research for our premium members only Coinist Insiders Network. That’s because we’re interested in identifying early stage tokens before there is any retail hype surrounding them. Discovering tokens early is imperative if we wish to continue seeing the gains that we experienced year after year.
However, pre-sales aren’t only potentially beneficial for investors, they also give the development team immediate funding as well as help generate pre-ICO buzz. But it’s not all rainbows and sunshine. Pre-sales have some risks and downsides, which we’ll cover below.
Our readers probably know an Initial Coin Offering is an Initial Public Offering for a cryptocurrency. Investors buy tokens when they’re publicly available, usually swapping more established cryptocurrencies like Bitcoin or Ethereum to do so. Buyers get a hot new token that could be worth a fortune someday. Development teams get immediate needed funds to work with. But a pre-ICO throws everyone a curveball.
Typically occurring some months prior to the ICO, a pre-sale is similar conceptually. Early enthusiasts swap money for tokens. The benefits of ICOs are emphasized in a pre-sale. Buyers of tokens stand to make an even greater profit. Development teams get funds at an even more critical time. Early days creating a coin is a ton of work. Writing software, marketing a coin, hiring new staff; creating a useful cryptocurrency requires funds. A pre-sale gives a team a financial boost when it’s desperately needed.
But the risks are real, both for investors and for the development team. Obviously, buyers of pre-sale tokens may find themselves holding worthless junk in a year. Or when the actual ICO occurs, the glut of tokens available may drive down the value of theirs. Meanwhile, development teams must beware short-sighted investors. Buyers in pre-sales often turn around and dump the tokens after an ICO, when the buzz has boosted the value of their coins. This guarantees a profit, but it’s not a good look for a coin if early buyers are selling at the first possibility. An ICO can be make-or-break for a cryptocurrency. Any bad news circulating will hurt the coin in a pivotal time.
Some up-and-coming tokens have taken steps to avoid this. Said Blockstack co-founder Ryan Shea to Coindesk: “We think it’s just really antithetical to what decentralization is about, so we considered that with the design of this entire process.” Pre-sales are often dominated by whales, large investors with deep pockets. A few big investors can buy up most of the available tokens. This still gives the team the needed funds, but goes against the entire point of decentralization.
Concern over being labeled a security makes some teams leery of pre-sales as well. The ever-present Howey Test and the looming specter of the SEC are constant concerns for cryptocurrencies. Many have taken steps to avoid being labeled a security, as we’ve covered. Pre-sales, where investors expect to profit off the work of others, sound an awful lot like securities to many.
Sometimes a pre-sale can just be too effective. Vinny Lingham’s Civic ICO drew a lot of eyeballs when the pre-sale alone raised $33M. The team actually oversold tokens, and had to retract some. It’s not a good look to need to yank back sold coins from investors. Teams with pre-sales should set strict limits on the amount of tokens released. For the same reason, a hard cap was one of the keys to a successful ICO we covered. Releasing a set amount of tokens prevents dilution and allays concerns that the team is just trying to make as much money as possible.
Much like ICOs in general, pre-sales have big risks and big rewards. Development teams and investors alike should think long and hard before pulling the trigger on a pre-sale.
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