An Introduction to ICO Cryptocurrency Company Models
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1.3 Capped Sale Model
1.3 Capped Sale Model
In this model, a fixed number of coins are sold at a predetermined price, thereby giving a fixed valuation for your network. The primary benefit is the transparency and certainty of the valuation you are placing on your company tokens. If investors believe your network is worth more than the valuation implied by the token price, they will feel confident in purchasing your tokens. If you are lucky enough to be launching a particularly hot ICO, it may become a race by investors to buy up as many tokens as possible.
Of course, investors are hoping to sell those tokens later, for a profit, after listing on an exchange.
1.3 Capped Sale Model
Although this is a good situation, compared to insufficient investor interest in your tokens, it can also become somewhat of a disadvantage, if we could call it that, for this particular model.
Of course, investors are hoping to sell those tokens later, for a profit, after listing on an exchange.
1.3 Capped Sale Model
For example, in the capped BAT token sale they were able to raise $35million within 30 seconds.
People wait on the webpage determined to get in early. Bid requests start coming in the instant the token sale goes live. Bigger investors pay higher transaction fees to get in first. They buy up a majority of tokens before the average investor has a chance to buy any.
This trading strategy is often used when the token first goes live. Then the bigger investors might dump the coins onto all the people who were excluded from the first round of transactions. These later investors pay a higher price because they are desperate to buy in.
1.3 Capped Sale Model
Early investors can take advantage of such intense investor demand to hike the price and resell the tokens as soon as possible. This may not be the most ideal situation for your token sale, but at the same time, this is a very nice problem for you to have. Your project is popular.
In all cases, the cap is the limit.
But the key attributes of a Capped Sale model enable us to distinguish between Soft Caps, Hard Caps and Hidden Caps based on the nature of the cap limit set.
1.3 Capped Sale Model
Key Attributes
1
Soft Caps
A cap is set, but after this cap is reached, there is an extended time period until the full closure of the sale. A soft cap is typically a lower limit, more like the minimum amount a team is aiming to raise. A soft cap is often also used in conjunction with a hard cap, so, instead of having a certain time period before closing the token sale, the sale ends once a specific monetary or cryptocurrency value is raised. If a team doesn’t reach their soft cap at all, the funds should be returned to investors.
1.3 Capped Sale Model
2
Hard Caps
There is just one fixed cap, and the ICO stops as soon as this monetary limit is reached. There will usually be a specific time period limitation attached as well. A hard cap is the absolute upper limit of funds a team will take for their tokens. If a team receives funds in excess of their hard cap, those funds should be immediately returned to investors. A failure to promptly return excess funds is a big red flag.3
Hidden Caps
In a Hidden Cap model, the participants do not know when the allocation will be finalized. This is revealed during the actual progress of the ICO. It is not common in most ICO business models. It is more likely to be used during the private pre-sale stage of an ICO. The team might be attempting to gauge investor interest without giving away too many details yet. But this model isn’t popular during a public sale for the obvious reasons. Investors like more clarity about the business and they like to know exactly where they stand as investors in the company.
1.3 Capped Sale Model
1.3 Capped Sale Model
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4
Assetreon Energy
A real-world example of a capped ICO sales model is Assetreon Energy. Assetreon published their soft cap figure of $170,000 and a hard cap of $3.35million in the weeks prior to the ICO. They also included a detailed breakdown of why they needed to raise that amount.
The figures were calculated by accounting for expenses such as staffing costs, infrastructure, office payments, developers and so on. It is important to investors that the soft and hard caps have a comprehensible and sensible basis of some sort, ideally one grounded in necessity.
1.3 Capped Sale Model
Theoretically, a lower amount raised can allow the project to multiply in value even more after listing on an exchange.
If a company has already raised a very large amount of money, for example, it may be more difficult to double $100 million to $200 million, as opposed to $1 million to $2 million.
1.4 Uncapped Sale Model
This is the direct opposite of the Capped sale model. There are no set limits for coins to be distributed at a predetermined price.
1.4 Uncapped Sale Model
The more people invest, the more total tokens you will mint.
The nice part about this is that everyone gets to participate. No one needs to rush to make their investment before all the tokens are sold-out, bought up by large investors.
The major disadvantage about this model is that it is somewhat impossible for an investor to know the implied valuation of the project. The number of tokens being sold is ultimately unknown. So even though this may allow for smaller investors to actively participate, these smaller players may get a poor deal. If too many coins are sold, there can be an imbalance at the time of trading on an exchange, with too much supply and too little demand.
1.5 Fixed Rate Contribution Mechanism
1.5 Fixed Rate Contribution Mechanism
In this model investors are required to exchange cryptocurrency or fiat for tokens at a fixed ratio. Early contributors tend to receive a better rate per token, (although that is not always the case), and later investors often receive less discount, or no discount at all on that token price. This model will use a specific period for contributions.
This mechanism is popular because it can help to attract important early investors and allow them to earn a greater return for taking more risk by buying in early. But it is also important to ensure that the early discounts are not too great, or that too many of the tokens were not sold at a material difference to the pre-sale or ICO price. Such factors will depress the token price at the time of exchange listing.
1.6 Alternate ICO Models
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The Dutch Auction
1.6 Alternate ICO Models
The price of the offering gets set after taking in all bids and then determining the highest price at which the total offering can be sold. Bids are sorted from highest to lowest. The highest bids are accepted until the desired quantity of tokens will all be sold.
Then, after the final bid is accepted, all bidders with an accepted bid will pay the same price, the price of the final bid, for each token
1.6 Alternate ICO Models
1.6 Alternate ICO Models
A real-world example of a Dutch Auction occurred in the sale of Ethereum.
The Ethereum sale ran for 42 days. The sale price was 2000 ETH for 1 BTC for the first 14 days, and then started increasing linearly, finishing at 1337 ETH for 1 BTC.
Nearly every uncapped sale is criticized for being “greedy” although there is also another more interesting criticism of these sales: they give participants high uncertainty about the valuation at which they are buying in.
1.6 Alternate ICO Models
1.6 Alternate ICO Models
To use a not-yet-ICO project as an example, there are likely many people who would be willing to pay $10,000 for a pile of Bancor tokens if they knew for a fact that this pile represented 1% of all Bancor tokens in existence, but many of those same people would become quite apprehensive if they were buying a pile of, say, 5000 Bancor tokens, and they had no idea whether the total supply would be 50000, 500000 or 500 million.
In the Ethereum sale, buyers who really cared about predictability of valuation generally bought on the 14th day, reasoning that this was the last day of the full discount period and so on this day they had maximum predictability together with the full discount.
This is certainly not optimal economic behavior. The equilibrium would be something like everyone buying in on the last hour of the 14th day, making a private tradeoff between certainty of valuation and taking the 1.5% hit (or, if certainty was really important, purchases could spill over into the 15th, 16th, and later days). Hence, the Dutch Auction model has some peculiar economic properties that we would rather avoid if there is a convenient way to do so.
1.6 Alternate ICO Models
2
The Reverse Dutch Auction
This is by definition a capped sale. However, the portion of tokens given to purchasers depends on how long the sale takes to finish. If the sale finishes on the first day, only X% of total tokens are distributed among the purchasers. If the sale finishes on the second day, X+Y% of total tokens are distributed among the purchasers, and so forth.
1.6 Alternate ICO Models
The Gnosis token sale is an example of an ICO that implemented a Reverse Dutch Auction.
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