What Are Initial Coin Offerings?
Initial Coin Offerings, or ICO for short, are used by start-up cryptocurrency businesses as a means to establish themselves quickly, avoiding the strictly regulated funding process required by most banks. Many people will be familiar with the website Kickstarter which is used to crowdfund a project or to support a cause. An ICO campaign is a hybrid of crowdfunding, software token and speculation which is used to get new cryptocurrencies into circulation.
How do they work?
An ICO relies upon blockchain technology, a decentralised ledger which can record and store information. When a cryptocurrency start-up decides they are going to use an ICO to raise money, they create a whitepaper which will explain the projects aims and the needs it will fulfil when it’s completed. The whitepaper will also give details of exactly how much money is needed to get the project started and how much of the cryptocurrency the creators will keep for themselves when they are up and running, as well as how long the campaign will run for.
Once the whitepaper has been created, technology enthusiasts and supporters of the new firm will begin investing in the ICO. They are offered early use of the software token at a discounted price. For this reason investors buy some of the cryptocurrency tokens with an alternative digital currency using Bitcoin. Investors are motivated to purchase the tokens because they believe that the project will be successful once it launches, meaning the cryptocurrency they own will increase in value. This allows investors to make a profit as the ICO will be worth more than it was purchased for initially.
The good news is that if the project does not meet the minimum funding level established by the firm, the ICO will be deemed unsuccessful and funding will be returned to investors. If the funding level required is reached then the cryptocurrency project will be initiated or completed, depending on how the firm decided it was to be used initially.
Have there been successful ICOs?
There are a range of different cryptocurrencies currently available, each with their own uses and functions. There have been a number of successful examples of ICOs. One of the first-known examples of an ICO is Mastercoin, which managed to sell $5 million worth of Bitcoins in 2013 by selling their own tokens. This successful endeavour led to others following the same pattern, such as Ethereum in 2014, which raised $18 million. Ethereum is now one of the main contenders as the top cryptocurrency taking the world by storm. Two years after its development, there was Waves which raised $16 million in 2016. This indicates that ICOs are an efficient way of getting new crypto projects started, although, of course, this depends on the demand for the product and whether the team behind it is skilled and experienced.
The very nature of ICOs is that they are unregulated and are not controlled by the government. Investors are not necessarily given a share in the business in exchange for their money, nor are they entitled to it. For this reason, investors put themselves at risk of spending money on a token which may not have any value in the future. There are many legitimate ICOs currently operating and these usually have self-imposed restrictions such as storing their investors’ money in escrow wallets, which have several private keys and one key is usually kept by an uninvolved third party. This prevents the firm from accessing the money illegitimately. Some ICOs will establish their own legal entity, with a set of full terms and conditions. However, there are also a number of individuals and organisations who are taking advantage of the unregulated space to raise money for their own personal gain. These are some of the ways you can spot an ICO scam:
- The developers are anonymous or unknown to anyone in the cryptocurrency community.
- They don’t use an escrow wallet for contributions.
- Their goals are vague or unrealistic, meaning they don’t know what they are doing or don’t have any intention of doing it.
At the moment, ICOs are legal in most countries. The legality of ICOs is a topic which has been widely debated among the cryptocurrency community. However, in the future some countries may be tightening restrictions as the amount of money being generated in this way increases.
ICO in the media
In September 2017, ICO made the news as the People’s Bank of China officially banned ICOs because of potential risks to economic and financial stability in the country. This ban had a direct impact on the leading cryptocurrency Bitcoin, which fell in value by $200 almost immediately. It is not yet known whether other countries will follow this lead. Singapore’s financial authority has also expressed concern about ICOs, citing them as having the potential to finance terrorist activities.
Whether you believe ICOs are an innovative way to raise money for new cryptocurrency projects, or you think that more regulations are needed to keep people safe, it’s likely that they will be in the news more frequently.