Almost everywhere you look on the internet, different ICOs are being advertised. They are all up in your face and dominating your internet space. ICOs have gone on to become a major part of the cryptocurrency revolution. More developers and entrepreneurs of blockchain-based start-ups seem to prefer ICOs to more traditional fundraising models.
Initial Coin Offerings (ICOs) in 2017s raised a whopping of total $5 billion for blockchain-based start-ups. They have become the preferred route for security start-up capital for blockchain-based enterprised and they are a testament to the way in which cryptocurrencies and blockchain technology have successfully upset the global business process.
Different cryptocurrencies that have crept up over the years have come no without a statement and a plan to disrupt the already organized centralized system. Bitcoin since its inception was seen as a means to disorganize the payments system, Ethereum, another major cryptocurrency, has taken giant steps in disrupting the application development and network governance market. Cryptocurrencies unavoidably cause widespread disruptions that lead to a paradigm shift in the general market dynamics.
In the past, start-up entrepreneurs and developers had to do a lot of convincing to banks and venture capitalists to invest in their ideas. Many concepts, sadly, have been stuck in funding hell because nobody was willing to back the project. With ICOs, the decentralized nature of the blockchain which brings people closer together is paying big dividends. Developers and entrepreneurs no longer need to sweat or give long convincing speeches to get investors or bankers; they just take their ideas directly to the public and invite them to invest in the project. ICOs are creating a far more democratic environment for project funding.
An Initial Coin Offering commonly referred to as ICO, is a crowdfunding mechanism where a company issues cryptocurrency tokens to investors in exchange for funding. Depending on the preference of the company, this funding can be in the form of fiat money like USD or cryptos like Bitcoin and Ether.
ICOs are relatively new, but they have quickly become a dominant topic of discussion within the blockchain community. It is unregulated and start-ups use ICOs to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks.
An ICO is a lot different from an IPO (Initial Public Offering) and other mainstream venture capital models. When you invest in an IPO, for example, you are given shares of the company in exchange for your investment. It’s completely different with ICOs as investing in an ICO doesn’t yield shares, but rather tokens which are expected to appreciate in value once the project is established. These tokens can be likened to a privately issued currency which has value within the operating ecosystem of the organization that issued it.
The first ICO was held by Mastercoin in July 2013 and it raised over $500,000. The following year, the Ethereum ICO raised $18.4 million and has gone on to become arguably the most successful project launched via an ICO. In 2016, the DAO ICO raised $150 million and was touted to become the next big thing. Unfortunately, less than a month after the ICO, the project was hacked and $50 million was stolen. In 2017, ICOs became an established crowdfunding model with more than $5 billion raised by numerous projects. The highlights of the year include the Tezos ICO which raised over $200 million, the Filecoin ICO which raised $257 million and the EOS ICO which has raised more than $700 million to date.
Once a concept has been developed and it is ready for funding, a white paper is written. The white paper is a document that contains relevant technical and commercial information about the project. It contains details of the problem being solved by the project, the way in which the problem is being solved as well as the technical architecture of the solution, the project roadmap, how long the ICO will run for, the token implementation plan and the professional details of the project team members. The white paper becomes the principal sales document for the ICO campaign.
Marketing strategies are developed to create the necessary hype and market awareness for the ICO campaign. This includes online posts on Bitcointalk and other online cryptocurrency forums as well as social media marketing. Some projects include a bounty program as part of their ICO activities, rewarding participants with tokens.
The main ICO process itself is straightforward as potential investors can go to the ICO website and deposit their investment funds. Once verified, they are given the token value of their investment. At the end of the ICO, the project team begins to develop the project while the token becomes available on cryptocurrency exchange platforms.
While ICOs soared in 2017, there were people who thought that it was all a smokescreen, while others firmly support ICOs and have not hesitated to fund start-ups. Billionaire investor, Warren Buffett, has been skeptical about ICOs and cryptocurrencies from the very beginning. He was quoted thus “People get excited from big price movements, and Wall Street accommodates.” He has also described Bitcoin as a “real bubble”. Arianna Simpson, managing Autonomous Partners, a crypto investment firm, does not discourage teams from doing ICOs, but she has an issue with the huge amounts of money that some projects have raised. Capital Group, an 87-year-old financial services company barred its associates from investing in ICOs. According to their updated code of ethics, “All associates and immediate family members residing in the same household may not participate in IPOs or ICOs.” The prohibition suggests that when employees invest in token sales, it could create a conflict of interest.
The rapid ICO surge in 2017 attracted the radar of government regulations. Since then, there has been an increase in the degree of government scrutiny on ICOs. In July 2017, the United States SEC ruled that some ICOs were issuing securities and as such, were subject to securities law. This led to an increase in the utility tokens – tokenized securities debate. In 2017, China banned ICOs while other countries like France, Switzerland, Japan, and Russia are reportedly developing stricter ICO regulations. Japan’s Financial Services Agency recently set up new criteria for cryptocurrencies.