The initial coin offering is a new mode of financing, one that mixes cryptocurrency and crowdfunding and a combination that seduces the start-up blockchain.
Thanks to the ICOs start-up blockchain can raise funds in cryptocurrencies in just a few minutes. According to a Coindesk study, since the beginning of 2017, blockchain entrepreneurs have raised more than $3 billion through ICOs, compared to $295 million from VCs. And that’s just the beginning because this practice is developing.
About one or two ICOs are created every week in the world. The record is held by Filecoin, a kind of decentralized Dropbox, which raised $257 million. Another ICO that made noise is Brave, the web browser created by Mozilla’s co-founder Brendan Eich, which, on May 31, 2017, raised $35 million and that in only 30 seconds!
Top 5 Biggest ICOs to Date
|Amount Raised||ICO Dates||Project|
|Filecoin||$250+ million||08/10/17 – 09/10/17||Decentralized Cloud Storage|
|Tezos||$232 million||07/01/17 – 07/14/17||Self-Amending Distributed Ledger|
|EOS||$185 million||06/26/17 – 06/18/18||Smart Contracts|
|Bancor||$153 million||06/12/17||Prediction Markets|
|The DAO||$152 million||05/01/17 – 05/28/17||Decentralized VC|
To raise funds via ICO, a company must issue tokens on a dedicated platform. Tokens issued will allow the holder to receive a portion of the profits generated by the company, such as a dividend with a share. Once the project is posted on the platform, the company promotes it to the community. Interested investors then send cryptocurrency, mainly ether or bitcoin, in exchange for tokens.
Flexible and fast financing
The ICOs get closer to crowdfunding, but in addition, they can very quickly attract investors who are looking for the tumble with tokens that are likely to be appreciated over time, just as in the case of an IPO.
ICOs are very popular among start-ups working with cryptocurrencies and blockchain. In the second half of 2017, the cumulative value of tokens in circulation exceeded the $100 billion mark.
The success of the ICO causes an increase in the popularity and value of cryptocurrencies, which in turn determine a rise in the assessment of new ICOs, with investors betting on the future value of their tokens.
The simple concept of “ICO”, borrowed from traditional forms of financing
The operation of an ICO is inherently confusing as it is simple and looks like an IPO (Initial Public Offering). The company or the team gathered around a single project, who wishes to raise funds issues tokens, a form of virtual tokens issued just as a company could issue shares or bonds.
Then, on a dedicated platform, investors buy tokens issued by paying in cryptocurrency. In practice, it is common for an ICO operation to be completed in a few seconds after it is opened. The company can then use cryptocurrency (more and more goods and services will be acquired in Bitcoins or Ether soon via the giant Amazon) or convert it into a currency at official rates via exchange platforms that are more and more widespread.
The “speculative” market of the ICOs
Since funds are raised on the Internet, anyone can participate. The duration and the amount of the fundraising are planned before the launch of the ICO and cannot be modified en route. Once the amount is reached, the following payments are automatically declined.
However, it is still possible to buy tokens after fundraising. Tokens can land on unregulated marketplaces just an hour after the fundraiser has ended, so some investors resell them at a much more value than they were initially bought, which is purely speculative. Not all investors are attracted by this kind of profit making. The Ethereum blockchain itself benefited from community support when it launched its ICO on September 2, 2014. As a result, $18 million was raised.
Very volatile exchange rates that affect ICOs
However, ICOs do not have advantages only. For example, there is no guarantee for investors. It is indeed difficult for them to verify the relevance and quality of a project that does not exist yet. Unlike a stock exchange, no controlling body regulates the market.
Anyone can issue a digital title, so there are a lot of scams going on. Another disadvantage is the volatile price of crypto-currencies. It is linked to a strong speculation that can quickly raise or lower their prices.
From January to October 2017, the value of Bitcoin increased more than 5 times to go past the $6,000 mark. Sometimes, Bitcoin experiences a crash. In September 2017, all crypto-currencies lost 20% of their value in only one day.
An ICO can lose a lot of value in a few seconds. For example, when Bancor Protocol raised $153 million from ICO on June 12, the ether was worth about $385. Three days later, it was worth only $300.
The amount raised was only $119 million, and that’s a loss of $34 million (-22.2%). To avoid this loss, iEx.ec has already converted part of its ICO gain into euros so as to pay salaries and new premises. Well played!
The risk of legal uncertainty
The lack of specific regulations governing all new fundraising activities based on cryptocurrencies and blockchain technology has forced some national authorities to reduce or even ban cryptocurrency-related projects.
During an ICO transaction, participants receive, in exchange for their investment in cryptocurrency or legal tender, tokens issued by the project holder(s).
Depending on the operations observed, these tokens do not automatically confer the same rights (rights of use of developed services, financial rights and/or involvement in the project etc.) to their subscribers.
Sooner or later, regulators will have to focus their attention on ICOs. They will be able to make decisions concerning certain projects, for example, to establish that tokens with certain characteristics do not comply with the regulations.
(Update) The European Securities and Markets Authority (ESMA) calls for vigilance regarding the initial coin offering (ICO). It is aimed at both investors and organizers of these cryptocurrency fundraisers. The organization insists that ICOs projects are “at an early stage of development”. ESMA also spoke about the tokens received in exchange for a contribution. The European Securities and Markets Authority imagines scenarios that would allow the ICO to enter the field of several existing European directives. For example, if the token is similar to a financial instrument, then it would fall under the 2014/65 Markets in Financial Instruments Directive.
Disclaimer: This article should not be taken as, and is not intended to provide, investment advice. Please conduct your own thorough research before investing in any cryptocurrency.