In this blog post, we will discuss what is Initial Coin Offerings and what are usability, future need, and risk associated with ICO.
In an ICO, a quantity of cryptocurrency is sold in the form of tokens or coins to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum.
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Tokens are issued on an indelible distributed ledger called blockchain and are more liquid than traditional closed investment schemes such as IPOs.
In theory, this process enables investors to raise funds for projects that would otherwise be considered unviable.
There has been a lot of buzz around Initial Coin Offerings (ICOs) lately, with some of the major news sites even calling it the hottest tech trend right now or the next big thing. But what are ICOs exactly?
Here we will attempt to answer that question, looking at how ICOs work and why they have become so popular in recent years.
First off, let’s get the most obvious point out of the way: ICOs are NOT coins. So why do we call them that?
What is Initial Coin Offering?
In a nutshell, an initial coin offering (ICO) is a new way of fundraising. Instead of creating and selling traditional security such as stock or investment bonds, companies are issuing cryptocurrencies.
In some cases, these crypto-assets can be converted into tokens that allow for access to a network or services being developed by companies.
For example, Storj offers cloud storage and users have been buying tokens with which they can pay for storage space.
Another company might sell coins/tokens in order to raise money in order to fund future projects.
It’s also worth noting that ICOs often provide more liquidity than traditional private investments do the investor can convert their tokens back into currency immediately instead of waiting years for an exit.
Despite all its potential benefits, however, there’s no telling whether ICOs will become standard practice for entrepreneurs and investors looking to raise money; much depends on regulations from various governments around the world.
How do Initial Coin Offerings work?
However, ICOs differ from IPOs in several distinct ways. The first difference between an ICO and IPO is that an IPO deals with equity while an ICO deals with tokens or coins.
While investors don’t own stock directly when they buy into a corporation, they hold coins/tokens directly when they purchase through an ICO.
To put it another way, if you buy 100 shares of Stock X at $10 per share through an IPO, you would get Stock X Corporation as your shareholder in exchange for your investment.
On the other hand, if you participate in an ICO for Company X, your investment entitles you to receive 100 tokens issued by Company X.
Tokens give participants access to products and services within that network; coins represent something else entirely access to capital gains on investments made with those funds.
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Benefits of Investing in ICOs
An Initial Coin Offering, or ICO, is an event in which a blockchain project sells part of its cryptocurrency tokens to early adopters and enthusiasts in exchange for money today. These funds are then used as working capital for development.
It’s similar to an IPO (initial public offering) that new companies use when they first go public, except instead of shares issued by a company, an ICO offers digital coins or tokens based on blockchains such as Ethereum and Waves.
Some people also call it crowd investing because many projects allow everyone who wants to invest to do so.
A startup can simply issue a coin or token through a blockchain platform such as Ethereum, sell them and use those proceeds however it sees fit.
In most cases, investors buy into ICOs with Bitcoin or other popular cryptocurrencies like Ether the currency associated with Ethereum but there have been instances where investors purchased altcoins using national currencies like USD directly at special bank accounts provided by exchanges dealing with those particular cryptocurrencies.
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Risks and Limitations of ICO
Investing in an ICO can be risky because there’s no way to know if your investment will ever pay off.
Blockchain startups are so high risk that more than 9 out of 10 fail according to Forbes. There have been many scams too over $2 billion has been lost to scams since 2014.
Yet despite all these risks, many still believe there is potential for big profits with ICO investing. Currently, ICOs come with a number of risks and limitations:
Only invest what you can afford to lose and then some. It’s critical that you only invest funds that are, in essence, play money that is fully expendable if things go south.
Unfortunately, all too many ICO investors fail to heed this advice, causing them severe financial hardship when they later have to take a loss on their investment.
In one extreme example, one investor lost his life savings when he bet everything on an ICO, which ended up being a scam.
Future of Initial Coin Offerings
With more and more ICOs are popping up these days, it is important to understand what makes an ICO good or bad.
Initial coin offerings have become an increasingly popular way for blockchain startups to raise capital.
Their explosive growth in 2017 alone made it clear that initial coin offerings are here to stay, but their future is uncertain.
As with any investment, there are risks involved. ICOs are a great new way for companies and individuals to fund projects and for investors to reap rewards when investments pay off.
However, as more people invest in ICOs, government regulations will likely tighten, which may cause risky projects to fail or be abandoned before they reach fruition.
We already see a lot of scams happening through ICOs because they’re unregulated at the moment and governments will not let them get out of control.
When regulations come into play, we will probably lose some good projects due to political reasons, just like what happened during the dot-com bubble.
It’s up to you whether you want to invest in ICOs at an early stage while they’re still relatively cheap and outside of strict regulations.
Things to Consider Before Investing in ICO
Before investing in an ICO, you need to ask yourself a few questions: Who is running it? Is it legally registered and incorporated? Is there a product or service involved? Does white paper exist?
An ICO is subject to different rules than traditional funding so be sure that you’re clear on how they work before deciding if an ICO is right for you.
Just because many investors are making money from them doesn’t mean that every investor will also make money.
Learn as much as possible about initial coin offerings before putting your hard-earned cash into one. It might not have what you think. Researching Initial Coin Offerings
I prefer to do a quick Google search by searching (ICO name) scam or fraud which I have found has turned up some useful information regarding any red flags people should watch out for when looking at an initial coin offering investment opportunity.
Types of Tokens (ICO)
There are 2 types of tokens being issued in ICOs, those are security tokens and Utility Tokens.
1. Security Tokens:
The first is a security token or a security coin that is subject to federal securities and regulations. A security token can be either an equity ownership stake, a debt instrument, etc.
These coins allow investors to receive income from companies using blockchain technology.
This type of issuance was made possible due to an SEC ruling that made it legal for companies to raise money using cryptocurrencies through these coins as opposed to IPOs.
In general terms, security tokens represent some form of investment contract which gives its owners financial claims on specific underlying assets that have been formally registered and approved by regulators or authorities.
Notable examples include shares in traditional stock market firms like Apple Inc., a fund management firm such as BlackRock, Inc., or even an exchange platform like Binance.
Most people invest in these currencies hoping that their value will increase over time making their investment valuable just like how traditional stocks work.
2. Utility Tokens:
Utility tokens give users full access to certain networks and ecosystems without having any rights of ownership when it comes to company equity or profits generated by sales.
The second type of token is utility token which gives buyers access to products or services within its ecosystem.
These coins/tokens may not qualify as securities under federal law but they still need to comply with existing financial laws governing public offerings. (For example, only accredited investors can purchase them.)
Regulation for Initial Coin Offering
While an ICO is like an IPO (initial public offering), there are some significant differences. As a recent Medium post detail, a new type of regulator the U.S. Securities and Exchange Commission (SEC) has a lot of questions about ICOs that need answering before regulation will be introduced.
In short, SEC believes many tokens represent securities under current law; however, given its evolving nature, the onus falls on anyone who is considering raising funds through an ICO or any other means with ensuring they have answers to these questions.
Is what I’m selling really security? Does my company/organization qualify as an investment company? Have I registered as one, if required? Are all relevant disclosure documents being provided? Do I know what they say?
However, securities regulators have started to monitor ICOs more closely and are currently investigating several potential cases of fraud.
The SEC is working to build a legal framework around ICOs that would allow them to regulate transactions without stifling innovation.
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Key Points about Initial Coin Offering:
The distributed ledger technology (DLT) that cryptocurrencies are based on also means that they can be used as securities.
It is likely, therefore, that a cryptocurrency would need to be traded through regulated markets in order for it to be successfully tokenized.
This will make it difficult for any private organization wishing to conduct an ICO and may deter some projects from pursuing them.
Although there is no current legislation surrounding ICOs in Japan, finance minister Taro Aso has said that his ministry might issue guidelines for crypto exchanges next year in collaboration with experts from FSA.
Before deciding whether or not you should hold your own ICO and what kind of project might suit an ICO (as opposed to alternative fundraising options), think about these key factors: How much do you really need?
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Conclusion
Initial coin offerings (ICOs) have quickly become a popular form of raising funds for new startups and businesses. In 2017, ICOs raised over $5 billion. There are many benefits to raising funds through an ICO.
Investors can quickly gain access to promising early-stage projects that were previously unavailable due to venture capitalists’ exclusivity in terms of fund flow and knowledge of upcoming opportunities.
However, there is also an inherent risk involved with purchasing digital tokens during a crowd sale.
When reviewing any prospective ICO offering carefully, it is important to consider both sides of every project before making any investment decisions.
Initial coin offerings (ICOs) are becoming increasingly popular as a way to raise money for projects, but they can be risky investments.
Meet Nitin, a seasoned professional in the field of data engineering. With a Post Graduation in Data Science and Analytics, Nitin is a key contributor to the healthcare sector, specializing in data analysis, machine learning, AI, blockchain, and various data-related tools and technologies. As the Co-founder and editor of analyticslearn.com, Nitin brings a wealth of knowledge and experience to the realm of analytics. Join us in exploring the exciting intersection of healthcare and data science with Nitin as your guide.
