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Creating your own cryptocurrency? Here's what you need to know

  • Hundreds of new cryptocoins are trying to or planning to raise money using a new method called an initial coin offering.
  • Upcoming coins need to clearly communicate their intended purpose to potential investors as well as the SEC, which is becoming more involved in ICOs.
  • As the cryptocurrency industry matures, regulators are slowly stepping in with the intent of protecting potential investors from fraud.

Bitcoin may have plunged from its eye-popping price, but demand is high for cryptocurrencies.

A quick search on TokenList shows hundreds of new coins are trying to or planning to raise money using a new method called an initial coin offering.

Just how hard is it to create your own cryptocurrency?

Turns out the process can be a complicated, time-consuming legal juggernaut with a high rate of failure for investors and creators.

A recent report found nearly half of last year's ICOs failed to raise enough funding or went out of business after their launch.

We decided to take the process for a little test run to how it all works by creating a hypothetical token called DIY Coin.

What's in a coin?

Most new cryptocurrencies are utility-based coins and are not designed to replace traditional forms of currency.

Unlike a stock, which entitles you to a piece of ownership in a company, utility tokens give buyers access to products or services the company hopes to offer.

"The analogy is they are a bit like frequent-flyer miles and you can use it in a certain way," said Jeff Bandman, founder of Bandman Advisors and former fintech advisor to the Commodity Futures Trading Commission.

"The difference is there's not an open and transferable market."

For our purposes, DIY Coins give owners knowledge or access to the ICO process, each token gives you access to CNBC's collection of research on the topic.

The idea is the value of the DIY Coin will rise as demand for this knowledge grows.

Get a team of experts

Upcoming coins need to clearly communicate their intended purpose to potential investors as well as the Securities and Exchange Commission, which is becoming more involved in ICOs.

"They're going to treat it like any security. You're going to be required to have a prospectus, you're going to have to download that information, and people will see risks associated with it," said Kevin O'Leary of O'Shares ETF and "Shark Tank."

To get a coin off the ground, you need a team of advisors with experience in marketing, high-profile investors to give credibility to the project, as well as cryptocurrency industry insiders.

We turned to O'Leary as well as Andy Bromberg, CEO of CoinList, a website that runs token sales, for pointers.

"Launching an ICO is a deeply technical process, but high-level the process looks a lot like starting a start-up," Bromberg said.

Sell it

Many coin offerings use white papers to communicate the goals of the token to potential investors.

According to Bromberg, the contents of that white paper can vary from explaining high-level problems and solutions to very complex technical details that describe the blockchain code being designed to support the coin.

Because we aren't planning on listing the coin, we chose to use another route that is becoming popular in the ICO process: a pitch deck. This more high-level presentation contained an explanation of DIY Coin and its intended purpose and listed our advisors.

Build it

Drumming up interest and support in the cryptocommunity is important, but that won't get you far if the token doesn't work.

"In order to have a robust platform, one that can really support a good project, you need four important elements: You need speed, you need safety, you need scalability and simplicity," said Monica Quaintance, a lead technology developer for Kadena.

Even though most use existing platforms like etherum, each new coin needs its own supporting code that allows it to live and transact on the blockchain.

This is a task best left to the professionals, and the good news is the field of developers with cryptocurrency experience is growing rapidly.

Make it legal

"The investing market and the issuing market need to be on notice right now, the regulators are paying attention," said Bandman.

As the cryptocurrency industry matures and grows, regulators are slowly stepping in with the intent of protecting potential investors from fraud.

Which means being ready to answer specific questions about DIY Coin, including the business model and how the coins would be used once issued.

Bromberg says this relatively new oversight is being welcomed by the cryptocommunity.

"In the past year we saw a lot of low-quality deals, and I think we're going to see fewer and fewer of those," he said.

"At the same time, more people [are] getting interested in the space both in the investor and issuer inside, and that's going to result in an explosion of new tokens that are really high quality, that have deep technical merit, have reasons to exist."

Disclosure: CNBC owns the exclusive off-network cable rights to "Shark Tank."