What is An Initial Coin Offering? An unregulated means by which funds are raised for a new cryptocurrency venture.
An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, but usually for Bitcoin.
Before getting into the details, it’s worth providing some detail on blockchains, tokens and cryptocurrencies.
What is a Blockchain?
A blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record, not just financial transactions, but anything of value. It’s essentially a digital spreadsheet that is duplicated across a network of computers.
The network is designed to update the spreadsheets on a regular basis. As the information is shared and regularly updated and not stored in a single location, it’s considered to be truly public and easily reconciled.
Why is it considered revolutionary? Imagine not needing a single database that must be passed across global geographies and companies for updating…
What are Tokens?
Tokens are coins that are offered during an ICO and would be considered an equivalent to shares purchased in an IPO and are also referred to as cryptocoins.
What are Cryptocurrencies?
Cryptocurrencies are a digital or virtual currency that uses cryptography for security. It is not issued by any central authority, such as a central bank, taking it out of the reach of governments who can interfere or manipulate. The transactions are anonymous in nature.
Tokens issued from an ICO will have a value, with the ICO allocating equivalent to equity to the token, which gives the investor ownership with voting rights and, in certain cases, qualifying for dividends.
While this will be the closest format of an ICO to IPOs, the vast majority of ICOs issue tokens that are an asset giving investors access to the features of a particular project rather than ownership of the company itself.
It’s ultimately the process of crowdfunding a new cryptocurrency project, involving a token sale, with the cryptocurrency project raising capital to fund operations, with investors receiving an allocation of the project’s tokens in return.
ICOs tend to be open from between a few weeks to a month, though some have been open for longer and fund raising for a particular ICO possibly taking place on multiple occasions, unlike an IPO which is a onetime event.
The Initial Coin Offering gold rush – the future of fundraising or just another crypto scam?
If you are searching for the biggest trend in cryptocurrency today, a look at Initial Coin Offering (ICO) might be a good start. The idea to presale coins of a cryptocurrency or token of a blockchain project has evolved in a crazy successful instrument to raise funds for the development of a new application.
When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need(s) the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for.
During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction.
If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers and the ICO is deemed to be unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
Early investors in the operation are usually motivated to buy the cryptocoins in the hope that the plan becomes successful after it launches which could translate to a higher cryptocoin value than what they purchased it for before the project was initiated.
An example of a successful ICO project that was profitable to early investors is the smart contracts platform called Ethereum which has Ethers as its coin tokens.
In 2014, the Ethereum project was announced and its ICO raised $18 million in Bitcoins or $0.40 per Ether. The project went live in 2015 and in 2016 had an ether value that went up as high as $14 with a market capitalization of over $1 billion.
Ethereum – The Initial Coin Offering?- ICO Crowdfunding Machine
One of the easiest application of Ethereum’s smart contract system is to create a simple token which can be transacted on the Ethereum blockchain instead of Ether. This kind of contract was standardized with ERC#20. It made Ethereum host of such a wide scope of ICO that you can safely say that Ethereum found its Killer App as a distributed platform for crowdfunding and fundraising.
The most prominent demonstration of the potential of Ethereum’s smart contracts has been The DAO. The distributed investment company was fuelled with Ether worth $100m. The investors received in exchange against Ether Dao Token which had their own market price and enabled the holder to participate in the governance of the DAO. After it was hacked, the DAO however failed.
The concept of funding projects with a token on Ethereum became the blueprint for a new and highly successful generation of crowdfunding projects. If you already tried out, you know that investing in token on top of Ethereum is charmingly easy: You transfer ETH, paste the contract in your wallet – and, tata: The token appear in your account and you are free to transfer them as you want.
Examples for successful Initial coin offering on Ethereum are:
- Singular DTV
- First Blood
- Digix DAO
There are dozens of ICO every month which explore new and creative ways to connect the application with the token and to leverage smart contracts to add more features to these tokens.
The potential of this trend is immense. ICO enables every individual and every company to easily release freely tradable tokens to raise funds. It could be used to completely reconstruct the financial system of shares, securities and so on. It decentralized not just money, but stock creation and trade.
If you want to assess Ethereum’s market capitalization you should not only look at the market cap of Ether itself but also on the value of the token, which adds something like $300 Million to Ethereum’s $4 Billion market cap.
The New Way of Tech Companies to Raise Money
Start up companies are generally some form of an entrepreneurial venture, which will take the form of a new, rapidly expanding business targeting the needs of a marketplace by way of innovative products, processes and services.
While historically, start ups would have raised capital through venture capitalists, the advancement of fund raising through ICOs has been almost spectacular. While venture capitalists tie up investor money for lengthy periods of time that can extend to years, ICO money is far more liquid and with value easily assigned, traded within a very short period of time.
The liquidity associated with ICOs is certainly a contributory factor to the increasing number of ICOs, with the lack of cumbersome documentation and unjustified demands and requirements of the VC also avoided.
Adding to the upside for start ups is the involvement of the investor in the decision making process, whether it is an actual business or a project, providing the investor a say, many of the initial investors in start ups being entrepreneurs and experts in their respective fields.
Blockchain technology and cryptocurrencies have certainly paved away for the more innovation, with the lack of regulatory oversight allowing start ups to push the boundaries created by those before them.
As a mechanism for scams?
ICOs can be used for a wide range of activities, ranging from corporate finance to charitable fundraising to outright fraud.
The US Securities and Exchange Commission (SEC) has warned investors to beware of scammers using ICOs to execute “pump and dump” schemes, in which the scammer talks up the value of an ICO in order to generate interest and drive up the value of the coins, and then quickly “dumps” the coins for a profit.
However, the SEC has also acknowledged that ICOs “may provide fair and lawful investment opportunities.”
The UK Financial Conduct Authority has also warned that ICOs are very high risk and speculative investments, are scams in some cases, and often offer no protections for investors. Even in cases of legitimate ICOs, funded projects are typically in an early and therefore high-risk stage of development.
Be careful if you spot any of these potential warning signs of investment fraud.
“Guaranteed” high investment returns. There is no such thing as guaranteed high investment returns. Be wary of anyone who promises that you will receive a high rate of return on your investment, with little or no risk.
Unsolicited offers. An unsolicited sales pitch may be part of a fraudulent investment scheme. Exercise extreme caution if you receive an unsolicited communication—meaning you didn’t ask for it and don’t know the sender about an investment opportunity.
Sounds too good to be true. If the investment sounds too good to be true, it probably is. Remember that investments providing higher returns typically involve more risk.
Pressure to buy RIGHT NOW. Fraudsters may try to create a false sense of urgency to get in on the investment. Take your time researching an investment opportunity before handing over your money.
Unlicensed sellers. Many fraudulent investment schemes involve unlicensed individuals or unregistered firms.
Before making any investment, carefully read any materials you are given and verify the truth of every statement you are told about the investment.