What are Initial Coin Offerings?
An ICO (initial coin offering) is a non-regulated method for which fundraising occurs to develop a new crypto currency venture. Through the course of an ICO, a percentage (can be large or small) of the currency is sold to early fund-backers of the investment in exchange for fiat currency or alternative coins. This process is used by crypto currency startup founders to bypass and capital-raising process (which can be rigorous and very challenging) that are usually required by banks and venture capital funds.
The Concept of The Blockchain, Condensed
The blockchain is a public ledger of all transactions on crypto currency that have ever occurred since Bitcoin’s inception. As of August 2017, this blockchain text file is over 170GB in size and growing exponentially. Completed blocks in the blockchain are added to this file in real time with a new set of recordings and new alphanumeric hash tokens in linear chronological order.
Nodes are computers connected to the cryptocurrency network via a peer to peer client performing validation and relaying of transactions. Each of these nodes has a stored copy of the blockchain, downloaded automatically to their machine after joining the Bitcoin network. The blockchain has complete information in regards to the addresses and balances from the genesis block (first cryptocurrency transaction ever) to the most recently completed block.
What is A Token? How Does This Alphanumeric Protect Me?
All cryptocurrencies are tokens utilizing a specific software that allows control of their supply and demand, inflationary rate, and usage of a blockchain to develop a trusted currency network. Tokens are unique and anonymous and keep identities from being revealed and personal information from being linked to transactions. A token can be produced by anybody, and no confirmations or supply rules is governing the development of tokens.
When cryptocurrency start-ups reach the point in their fundraising where they can begin the process of starting an initial coin offering, their first step is the most important: the development of a white paper. The purpose of the ICO white paper is to define what the project scope is, the reason for the initial coin offering, the needs the startup will fulfill once the ICO completes, and the estimate of how much funding is necessary for the undertaking of the venture.
Additional information typically provided in the whitepaper includes the percentage of token availability being kept by the owners of the coin (ICO startup), the funding that will be accepted for fundraising efforts, and the length of time in which the ICO will be active.
Throughout an initial coin offering, coin enthusiasts, as well as supporters of the startup initiative, will purchase new crypto coins with fiat or with other virtual currency. These coins are referred to as tokens, explained earlier, and are very similar to “shares” of a corporation when the company goes public with an IPO.
If for some reason the amount raised does not meet the minimum funding requirements of the startup, the money is then returned to the investors and the OCI is considered to have been unsuccessful (think Kickstarter).
Earlier investors in an initial coin offering are doing so on the motivation to purchase the coins in the hopes that the startup idea is successful, which in the long run translates to an increasing currency value and profit. Ethereum is one solid example of a massively successful ICO. Ethereum, whose coins are referred to as ethers, announced their ICO in 2014, and raised over $18 million in Bitcoins, setting the value per ether at 40 cents. The following year the project went live, and by the next year, the value had risen to $14. The value skyrocketed in 2017 and currently sits at almost $350 as of this writing. If you’re seeking know how to buy or sell ICO, click here.
Initial coin offerings, as stated above, are similar to a stock initial public offering, blended with the relatively new concept of crowdfunding. Like an IPO, a portion of a company is sold to the public in tiny fragments to continue operations or achieve goals. The main difference, though, comes in the purchasers. While IPO’s deal with investors, OCI’s deal with individual public supporters interested in either the project or the profitability potential. ICO’s, sometimes called crowd sales, is a project push first and a profit push second, while IPO’s are notoriously the opposite.
There are many successful initial coin offerings, and the quantity of ICO’s that are successful has exploded with the recent blow-up of cryptocurrency in 2017. ICO’s are positioned to be incredibly innovative and highly disruptive tools in the digital era. However, investors have been cautioned to do due diligence, as some ICO’s are blatant fraud wrapped in a beautiful package. As ICO’s are unregulated by any governing body, funds lost due to fraudulent ICO’s are almost never recoverable. The profit potential with a solid ICO is huge, but, as with any other facet of crypto currency and token trading, there is an inherent risk. Treat ICO investment as gambling, and don’t gamble more than you are willing to lose.
An ICO, or Initial Coin Offering, refers to the practice of raising funds for any venture or investment involving cryptocurrency. Cryptocurrency, on the other hand, refers to digital coins that have become the alternative legal tender to online wallets, debit, or credit cards. The most recognizable of this currency is the Bitcoin.
You must be familiar with the concept of crowdfunding. Kickstarter is a website that links people who are in need of funding from potential investors. GoFundMe is another platform which allows people in need to reach out to others who are willing to help.
In an ICO, the startup will announce the initial coin offering and present a whitepaper which details the purpose of the project, the expected output, the funding requirement, and any other pertinent information concerning the venture. The concept paper will also inform the investors about the type of currency to be used and the period of the ICO.
Think of it as the initial public offering in the standard bourse. Just like in the IPO, the initial coin offering may also be declared a failure if the startup cannot match the desired budget due to a lack of interested investors. In that case, the digital money or token is returned to the pioneer investors. In the event that the company manages to raise the necessary amount in the set period, the tokens will be used to fund the venture or complete the transaction.
There are several instances where the ICO has been successful. Listed below are just some of them:
For every successful ICO, there are also countless other failures. So what spells the difference between a successful initial coin offering and a disastrous one? Below are just some of the strategies that have been employed by successful startups:
Much of the crowdfunding ventures are aboveboard, even if there’s no oversight. Even Facebook joined the bandwagon and announced that it can already be used for raising funds for a worthy cause or project—giving Kickstarter and GoFundMe a serious run for their money. So why shouldn’t ICO be legal?
The answer, however, is not that simple. The issue is that some companies, government agencies, and regulators are still not comfortable with recognizing cryptocurrency as a viable alternative to fiat money (which is essentially the legal tender sanctioned by governments).
But money is nothing but a piece of paper unless its value is affirmed by the people who use or trade it. It’s the same with digital coins. For instance, according to the price index, a single Bitcoin is already worth $4,317 at closing of Aug. 18, 2017. Alternative coins are already being bought and sold in the Coinbase Exchange so clearly, there’s value there.
But back to the main question about its legality: for now, it operates in the gray area. It’s not illegal in the sense that participating in an ICO will get you in trouble. But there are no regulating agencies that oversee these undertakings.
With reports about fraudulent ICOs, the bad press is bound to get the attention of the regulating agencies. That can either work for or against the practice. On one hand, the legality of initial coin offerings will be established in black and white. On the other hand, the government can just stop the practice by declaring it illegal.
In conclusion, the ICO has been found to be an effective platform for crowdfunding to raise funding using cryptocurrency as the main trading exchange. However, it’s also important that you be circumspect in your investments because of the reports of scams and the number of complaints regarding deceitful ventures. But then again, all investments come with risks whether you are using digital currency or the fiat.