Massive growth in the blockchain space over the last few years have opened up great and numerous opportunities. The momentum that the cryptocurrencies and ICOs (Initial Coin Offerings) have brought with them has accelerated this growth and spread adoption of blockchain technology to a fair extent.
Not to mention the price surges. Bitcoin peaked at above $20,000 USD per Bitcoin in early 2018, with Ethereum hit just over $1400 at it’s peak around a similar time.
The concept of an ICO is fairly new. However most people by now have heard of the term. You may struggle to understand what it is, what their purpose is, what to look for in an ICO, and what are the true issues surrounding it. So here goes. We’re about to show you the ropes and detail everything you need to know about an ICO.
Chapter 1: What is an ICO (ICO 101)
An Initial Coin Offering (ICO) is a way to raise money for a project, business, or a company. This is achieved through creating a large number of ‘digital coins‘ that are distributed to the buyers in exchange for another digital cryptocurrency.
The ICO ‘digital coins’ are essentially digital coupons or tokens that are issued based on an underlying blockchain technology such as Bitcoin, Ethereum, NXT, or other blockchain distributed ledger system. Another way of conceiving digital coins is as tokens that give people the ability to use a particular application, or participate in a particular network.
They aren’t really like shares though as they don’t necessarily represent any ownership rights to the business, company, or entity. The coins do however serve as the project’s very own digital currency (cryptocurrency). This means users can continue to be paid for contributions towards the project with that currency (e.g. SteemIt).
It can allows users to pay for services or products provided by the entity with that cryptocurrency. Or it can be used as the incentive to just use the system (gaming or fitness apps).
Most coins offered through an ICO may also be traded with other cryptocurrencies through cryptocurrency exchange services. This often leads to speculation of the currency (trading for profit at a risk due to volatility in pricing).
Once the ICO is complete and the cryptocurrency is in circulation, the tokens may even be exchanged directly with fiat currency. Most exchanges are now allowing for a broader range of cryptocurrencies to be exchanged for fiat currency- where once it was only Bitcoin. Once on an exchange buying and selling the tokens becomes exponentially easier.
As you have figured, and simply put, an Initial Coin Offering is somewhat a crowdfunding technique. It is typically used for startup projects as it allows for low cost funding from the general public.
“Crowdfunding is the practice of funding a project or venture by raising monetary contributions from a large number of people. Crowdfunding is a form of crowd sourcing and of alternative finance.
Although the concept can also be executed through mail-order subscriptions, benefit events, and other methods, it is now often performed via Internet-mediated registries. This modern crowdfunding model is generally based on three types of actors: the project initiator who proposes the idea and/or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together to launch the idea. -Source: Wikipedia.com”
So as you can see, the underlying goal of an ICO is not new. The way it is setup though leaves a lot of room for debate.
Is the ICO indeed just a fund raising technique that only entitles users to a royalty in the service they provide? or does the coin reflect ownership in the project?
ICOs can have different structures. The way the coins are released, the way funds are accepted, what the coin will represent, will all vary from ICO to ICO.
When the founding team is creating a new digital coin they are creating their very own economy, an ecosystem that will thrive on that currency. You can almost think of the company as a nation. Where the coin now acts as the nations national currency. Any service or product exchanged in that nation, will be paid for by the national currency. You could just hold onto the currency, or you could exchange it with another currency.
Benefits of an ICO
There are clear benefits to being on either end of an ICO.
For the founding team, it offers a win-win. Other funding channels can be filled with roadblocks, headaches, bureaucracy, and the constant worry about reporting to investors. Other funding methods also mean a whole lot of regulatory requirements that can otherwise be a burden on a small startup- especially one that doesn’t have funding in the first place.
Over $3.5 Billion USD was raised in 2017 through ICOS. Out of this, one-third was raised just in December 2017 alone. The figures have already been blown out of the water in 2018, ICOs raised nearly $4.5 Billion USD in the first quarter.
Well if this isn’t a convincing benefit for the founding team, then here are some other benefits of an ICO for them:
- Speed and efficiency- fast to setup, while receiving funds happens very quickly, potential to raise millions in hours
- Large pool of investors (large pool of small investors)
- Low levels bureaucracy
- Flexibility on how to structure
- Use of blockchain, decentralization, automation, and smart contracts
For the investor – they get to benefit by holding a token that allows them to pay for the services of the project.
The token also holds value in the wider cryptocurrency world. It may also be traded on various exchanges. A such through arbitrage and speculation the digital coins may generate gains for the investor who prefers to trade.
Holding onto tokens over long term could also be beneficial. This is because when the founding project hits success, is adopted, and is functioning as a profitable endeavor, the token that is tied to it also increases in value. If the founding company does grow and flourish, the token value should also increase.If the project flops though, so does the value of the coin.
There is also a chance that the coin could be used to power other projects. Similar to Bitcoin and Ethereum. As the blockchain industry develops, more cryptocurrencies will be the ‘go-to’ currencies. Like Bitcoin, we will see (we are seeing) more and more digital currencies being used for everyday transactions and purchases. Just recently Litecoin moved to the lightning network, meaning extremely low transaction fees and high transfer speeds.
Okay, so that’s the low down on what an ICO is and what are some of the benefits. These benefits reflect the positive side to ICOs and cryptocurrencies.
We’ll break it down even further in the next chapter and show you how an ICO works and how you can personally benefit from one. However. There are major issues and cons that you need to be extremely careful about. We’ll break these down too so stay tuned as we show you what to look for.