Some people see the words Initial Coin Offering (ICO) and Pre-ICO during the launch of new cryptocurrency projects and think that they are the same event. But they aren’t and it is easy to distinguish between the two. Pre-ICO is the token sale before the main crowdfunding campaign that is the ICO. But why do companies issue a pre-sale before the main sale?
It is a fairly new practice that companies issue in order to raise funds for the main crowd funding. It is like the Angel round of Enterprises in which the company allows selected people to buy in the project before the official IPO. The goal for the projects is to get angel investors who provide an initial capital funding to provide for the operational and other costs. Some people will raise the question, what is an ICO?
An ICO in few words is the official cryptocurrency crowdsale campaign before going live. It is the same as the Initial Public Offerings that companies do when they want to become publicly traded. Usually cryptocurrency companies issue an ICO to raise funds for the development of the project by selling tokens early and to get mass investors to build a community. Usually there is a set amount of capital needed for the project and it is called a hard cap. If you want to read more on ICOs you can read our ICO comprehensive guide.
An Initial Coin Offering Presale also known as Pre-ICO, is the token sale event issued before the ICO. Like the ICO it is designed to raise money for the whole ICO campaign and product. Usually the ICO and the presale have a capital-raising target, but Pre-ICOs are often with lower targets compared to the ICO. Also Pre-ICO usually happens a month or two before the Initial Coin Offering, but sometimes they can be set to begin only a week or two before.
Pre-ICOs are usually a way to test if the user base will invest or not. It measures the initial hype but the initial raised capital is not included in the total raised capital. This can cause confusion to as how much money is raised and how much tokens are in circulation. These events have a minimum amount and a maximum amount of raised capital. Pre-ICO events are usually shorter than ICOs. Some of these can be stopped early if the necessary hard cap is reached earlier.
Also tokens are usually sold cheaper on the Pre-ICO with bonuses and have a separate smart contract. This is disclosed by the project themselves to avoid a mixture of Pre-ICO funds with the main ICO. It enables proper and easy accounting and audit. Some projects run these presales as a way to raise some capital to account for the expenses on the way to launching the main ICO and the token itself.
Cryptocurrency marketing expenses
These expenses include paid advertisements and promotions, strategic recruitments and meet-up costs to increase the interests of investors. Some companies initiate a private presale. It is usually revealed and pitched to Venture Capitalists and angel investors. Large amounts of capital could be raised this way, which is used to fund the Pre-ICO campaign. These projects reserve a percentage of the tokens for private investors from the first round. Most of the time angel investors on the Pre-ICO constitute of a small percentage of the suggested hard cap but they provide the operational funding necessary for the project to go as planned.
The raised capital takes care of infrastructural expenses and marketing campaigns. Not everyone can participate in these events as different Pre-ICOs have different requirements. Most Pre-ICOs require you to be part of a larger group of investors and will not accept angel investments from a single person. Exception is if these individuals want to make a large investment.
Of course different ICOs have different rules and not all require you to be part of a group of investors. Most of the time the only currency viable for investment, is Ethereum. The reason for this is because over 90% of all ICOs are Ethereum-based. This doesn’t mean that they accept only Ethereum, you can invest also Bitcoin and fiat currencies.
Pros and cons of investing in Pre-ICO
Pre-ICO can be an amazing investment opportunity for quick profits or for long-term believe in the project. They distribute capital easily and ensure the path forward for the project by building a following and finding investors. Investors who participate in the Pre-ICO usually get cheaper coins which boost their percentage profits. The earliest adopters can get the lowest price possible.
They also get a percentage bonus on top of what they bought. The percentage of bonus tokens can go up to 50% which is substantial. Some emerging cryptocurrency projects give additional perks, services and merchandise to the Angel backers for their support. However there are risks involved. Investors risk to lose their money or to get their investment without profits. In other words it is high risk high reward.
A bad phenomenon of ICO presales is that early investors tend to sell all of their tokens as soon as they become tradable on exchanges. Those who bought cheaper on the Pre-ICO often sell their tokens on ICO price with profits. If you are one of those people you can make quick revenue this way but the token itself takes a substantial hit and cripples. A snowballing effect can be caused in which the price just continues falling. Of course things can go differently and the price of the coin can go drastically up. Those who invested on the Angel round who got the cheaper coins with bonuses can get rich fast. Nothing is guaranteed and future investors should always be careful of scams, big promises and projects without future.