What is an ICO (Initial Coin Offering)?
It means that someone offers investors some units of a new cryptocurrency or crypto-token in exchange against cryptocurrencies like Bitcoin or Ethereum. Since 2013 ICOs are often used to fund the development of new cryptocurrencies. The pre-created token can be easily sold and traded on all cryptocurrency exchanges if there is demand for them.
With the success of Ethereum ICO are more and more used to fund the development of a crypto project by releasing token which is somehow integrated into the project. With this turn, ICO has become a tool that could revolutionize not just currency but the whole financial system. ICO token could become the securities and shares of tomorrow.
Advantages of ICOs
- Opens opportunities to up-and-coming projects
- Doesn’t require unnecessary paperwork
- Gives the startup creators the opportunity to build a community of the project’s supporters
- Creators have an extra incentive for innovation
- Investors have the opportunity to get an early access to potentially valuable tokens.
History of Initial Coin Offering? – ICO
In early 2013 Ripple Labs started to develop the Ripple called payment system and created around 100 billion XRP token. The company sold these token to fund the development of the Ripple platform.
Later in 2013, Mastercoin promised to create a layer on top of Bitcoin to execute smart contracts and tokenize Bitcoin transactions. The developer sold some million Mastercoin token against Bitcoin and received around $1m.
Several other cryptocurrencies have been funded with ICO, for example, Lisk, which sold its coins for around $5m in early 2016. Most prominent however is Ethereum. In mid-2014 the Ethereum Foundation sold ETH against 0.0005 Bitcoin each. With this, they receive nearly $20m, which has become one of the largest crowdfunding ever and serves as the capital base for the development of Ethereum.
As Ethereum itself unleashed the power of smart contracts, it opened the door for a new generation of Initial Coin Offering.
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 easy. 1. You transfer ETH; 2. Paste the contract in your wallet; 3. The tokens appear in your account and you are free to transfer them as you want.
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 legal state of ICO is mostly undefined. Ideally, the token is sold not as a financial asset but as a digital good like many other things. This is why ICO is often called “crowd sale”. In this case, in the most jurisdiction, the funding with an ICO is not regulated, which makes it extremely easy and paperless, given a lawyer experienced with the issue is on board.
However, some jurisdictions seem to be aware of ICO and tend to regulate them similar to the sale of shares and securities. The spectacular implosion of the DAO did a good job in kindle regulators attention. So while ICO currently mostly happen in a grey area, in the future they most likely will be regulated. This could bear some financial and legal risks for investors. Also, the cost and effort to comply with regulation could reduce the advantages of ICO compared with traditional means of funding.
ICOs Profit and Loss
Many ICO has been a lucky choice for investors. ETH, for example, was sold at 0.0005 Bitcoin and is worth today 0,05 BTC. Profit: 10,000 percent. Augur token (REP) were sold for around 0,005 each and are now traded at 0,01. The gain in value of 100% to 500% in Bitcoin is common for successful ICO.
The ICO market is currently still completely unregulated. Everybody should be aware, that this does imply not only large profits for investors, but also large losses.
On the other side, many ICO ends with losses. Cryptocurrencies like Lisk, IOTA-token or Omni did not hold the value in Bitcoin the token has been assessed at the ICO (or struggle to keep it). Often ICO is even used by scammers and semi-scammers: Build a glossy website, write some blocks of bullshit bingo, promise the greatest project/cryptocurrency ever, and be happy if you receive just 50 or 100 Bitcoin. Besides the large and successful ICO, like Lisk, Melonpost, Augur or Iconomi, many small and shady ICO did collect funds and delivered nothing at all.
Not every ICO is worth your money. Some just throw a couple of keywords in the air, something with blockchains, distributed platforms, smart contracts and so on, without having a real business plan or just the skills to realize the project. But some are really interesting. Good ICOs have presented months ahead, and the investment community looks forward to participating in it.