Running a Cryptotoken ICO

To date, most blockchain loyalty companies have engaged in Initial Coin Offerings (or Initial Token Offers (ITO)) to raise essential seed funding to establish their blockchain loyalty program. Running an ICO also serves the purpose of injecting cryptotokens into the investment community to trade on exchanges, which builds a market price and a market for the cryptotoken when loyalty earn behaviour commences.

It is important to note that an ICO is not an essential step for launching a blockchain loyalty program. As a loyalty management consultant, I recommend against it. A company that doesn’t have capital-raising requirements would be much better off creating a cryptotoken, launching it on an exchange, then conducting an airdrop to their community and relevant crypto investors to generate trading behaviour (as per Japanese company Line). This also includes established loyalty programs which aim to convert their points or miles into a cryptotoken. The key advantage of this approach (outside of avoiding the need to run an ICO) is better control over the token supply, as the company only needs to release enough tokens into the community to stimulate trading behaviour.

Most companies to date have taken the ICO route however the opportunity to collect enough seed-funding for the first 2-3 years of operation without having to relinquish any equity in the business has been considered too good an opportunity to pass up. Based on that, this chapter provides a general introduction to organising and running an ICO.

With an ICO, the investor is provided with something specific for their investment; cryptotokens. While a cryptotoken is not a share of the business ownership, it can sometimes carry with it the promise of a return. (For example, conducted an ICO where holders of their TIO tokens earn a share of profits generated as a “security token”). More importantly, the investor is provided with something relatively liquid in exchange for their funds, which they can sell on a digital exchange if they no longer wish to maintain their holding.

A feasibility assessment is required to ensure the business and ICO approach will be compliant with legal and regulatory requirements. This can be challenging in the rapidly changing world of blockchain as governments worldwide scramble to make sense of it and either overreact— banning cryptocurrencies outright— or open up the market with tax-free crypto trading policies.

It is also worthwhile considering using the services of an ICO rating agency such as ICORating, ICObench or Hacked. These companies review the ICO and provide a rating across a range of measures, including profile, team, vision and product. The rating agencies can provide valuable promotional support by featuring the ICO on their website which is a place many potential investors will look for opportunities. A high rating can play a critical role in securing community support for the ICO.

With the completion of feasibility, the team can turn to the preparation phase. This involves completing the whitepaper, developing a detailed campaign plan, building the website, creating content, registering social media accounts, building a PR strategy, booking roadshows, hiring the promotional team and setting an ICO target date. It is key during this phase to develop a community of supporters and potential investors which can be used to recruit a wider community with a multiplier effect, such that when the ICO opens, the support is established and the next phase happens quickly and effortlessly.

There are a large number of digital trading exchanges and during the execution phase it will be necessary to engage some of them to persuade them to range the new cryptocurrency. This can often involve paying a substantial fee, as well as passing some significant due diligence criteria. Some exchanges, such as KuCoin, create shortlists of potential coins then invite their members to vote on which one they should range (which includes charging a voting fee in KCS, KuCoin’s own cryptotoken). With a large number of ICOs and new cryptocurrencies being created every day, competition for exchange listings is intense, with businesses aware that landing their coin on a major exchange can dramatically increase their exposure. One thing which is common to all exchanges is the need for a reasonable number of cryptotoken holders. Even if the ICO has eventuated in a small number of major investors, there will be little interest from exchanges to proceed with a listing, as they seek volume of trades to support their business model. A cryptocurrency which isn’t traded often, due to a concentration of ownership by a few, is of no interest to them. Thus, bounty marketing and gamification can play an early role in building this essential spread of ownership, while simultaneously building engagement and interest in the ICO.

As ICO approaches evolve rapidly, a trend which became mainstream in mid-2018 involved most or all of the cryptotoken allocation being secured by large investors in the private ICO stage. One advantage for the blockchain company is that concentrating the cryptotokens into the hands of a few potentially allows for far better control over liquidity, especially if positive relations can be maintained. It also means the main part of the ICO doesn’t need to progress, saving greatly on marketing costs. It is evident ICO approaches will continue to evolve in line with the demands of investors and the opportunities to access funding, meaning advisory services available to support ICO’s will become increasingly sophisticated, despite many industry observers declaring the ICO approach all but dead, due to the heavy losses suffered by large numbers of investors in the 2018-19 bear market.

This is an excerpt from Blockchain Loyalty: Disrupting loyalty and reinventing marketing using cryptocurrencies (2nd Edition) by Philip Shelper.

Blockchain Loyalty is available at all good book stores. Buy it now.