A bigger number of companies and individuals continuously turn to initial coin offerings (ICOs) as a way to raise the much-needed capital for an investment opportunity. Before jumping into the bandwagon, you need to have a detailed understanding of what it entails. This article covers all the basics so that you can make a wise decision.
Meaning of Initial Coin Offering
Traditionally, companies have always used a wide range of ways to raise the much-needed capital for expansion and development. In most cases, companies would prefer starting out small and then grow as profits trickle in. This is a challenging approach and one which limits the chances of the business growing at a rapid rate.
That is why some businesses look outside for support from investors, hoping to get an influx of cash that can jump-start their venture. As attractive as this might be, it involves great trade-off whereby you could give away as much as 50% of your company.
Another method that is quickly gaining momentum is the idea of an Initial Coin Offering (ICO). ICO is the cryptocurrency equivalent of Initial Public Offering (IPO). ICO begins like some kind of a fundraiser whereby a company that wants to create a new app, coin, or service first launches the ICO. Interested investors are given an opportunity to buy in the offering using digital tokens or fiat currency.
As the investors provide this invaluable support, they are given a cryptocurrency token that accurately represents the ICO. The investors accept the token, hoping that it will perform very well in the near future, generating them greater returns on investment.
The business that has this ICO bases on investor funds to enhance its goals like launching a new product or digital currency. Initial Coin Offering is viewed as a means by which the business overcomes the tedious and heavily-regulated process of getting funding from banks or venture capitalists.
How did ICOs start?
You are probably wondering how the idea of ICOs began. One thing that is for sure is that it did not emerge as a part of a well-orchestrated system to make profits like is always the case with banks and major venture capitalists.
Rather, the concept was coined after Ripple became the first cryptocurrency to be distributed via the ICO. When Ripple Labs created the Ripple payment system, it came up with about 100 billion XRP tokens. These tokens were sold by the company to build the Ripple Platform.
All of these activities took place in 2013, about five years after the release of Bitcoin. This clearly demonstrated how fast cryptocurrency is evolving and how it would be of great impact with more innovative ideas.
Still fostering the concept of ICO, Mastercoin announced that it would build a layer on top of BTC that would be used for smart transactions and tokenizing BTC transactions. This announcement alone helped the developer sell about 1 million Mastercoin token in favor of Bitcoin and generated $1mil.
This trend was soon followed by Ethereum that used a token sale to raise money in 2014. Within the first 12 hours of going live, Ethereum managed to raise 3,700 BTC which was equivalent to $2.3 million at that time.
By 2017, token sales and ICOs had become the order of the day. Within the last year, there have emerged about 18 websites that track ICOs. Brave emerged in 2018 as a superb browser to do so. Within 30 seconds of launch, it raised $35 million.
The reason why I term 2017 as the breakthrough year for ICOs is because this is the time when it paved the way for ICOs sales. As a matter of fact, the year yielded 40 times more capital than it had been made from 2016 ICOs. The industry continues to grow and as of 2019, more and more companies are trying to learn how they can make the most of it.
Is ICO a Bubble?
One of the biggest criticism that ICO faces is that it is a bubble. According to skeptics, this is a bubble that would soon fade away, generate significant revenue for those who had tried it earlier and incurring losses for those who did not play it smart.
This is a legitimate concern considering that the open and permissionless nature of blockchains paves the way for literally anyone to join. Therefore, as some argue, the blockchains facilitate the interaction of numerous social forces under a reified name referred to as an ICO bubble.
Most base their arguments on the manner in which BitTorrent works. If you may not be aware, BitTorrent was created with the interest of revolutionizing low-cost file distribution. Rather, it ended up opening doors for internet piracy to take shape. The design of BitTorrent made it virtually unreachable by any copyright holder.
However, it must be understood that ICOs are construed along completely different lines. The fact that cryptocurrencies decentralize the idea of transactions means they are not guided by a specific set of rules, hence there are minimal chances of worrying that a certain rule would be broken. If there are no rules to break, what makes you think that things will get worse in any way?
In my honest opinion, backed by extensive research, I do not think ICOs are a bubble. Rather, I feel this is the new way businesses want things to be done.
Are ICOs Regulated?
The issue of regulation is also a major concern when it comes to Initial Coin Offering. Ever since the 2017 cryptocurrency prices boom thanks to countless speculations, the scope of regulations has been undergoing key changes. Much of this change is due to cases of trading halts, cybertheft cases, and possible market manipulation.
Regulations are coming and significant modification on the part of ICOs will be necessary to overcome them. Pros-cons-cryptocurrencies
- It would be hard to sell securities to unaccredited investors.
- Whether investors are global or local, it would be hard for them to make such an investment.
- No exchange would have the leeway to facilitate unaccredited investment.
How well regulators manage to implement these will depend on users’ ability to maneuver around all kinds of regulations. That still does not water down the essence of ICOs. More organizations will continue to embrace it as an effective way to launch their products or even other coins.
Can Anyone Launch ICO?
Yes, just about anyone has the ability to launch an ICO. This is just how powerful Initial Coin Offerings are. Even though ICOs expect more regulations in the near future, as at the moment, the U.S. has minimal regulations for the same. This means that provided you have the tech requirements to get started, you can give ICO and get funding for your currency.
Cryptocurrencies of the modern era are a bit developed and still continue to do so. It has the ability to either make you money or get you swindled. Despite the risks involved, ICO remains the easiest way to get funding. Provided you have a great idea, there are numerous investors who would be willing to trust your venture with their money.
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