Blockchain technology, the technology which led the revolution in the development of cryptocurrencies such as Bitcoin, is now showing potential in other domains of the financial industry. Initial Coin Offerings (ICOs) has become a popular way for new tech startups to raise funds for projects that are based on blockchain technology.
An ICO event is when the developers of a new cryptocurrency project offers for sale part of the project cryptocurrency tokens to investors as a method of raising development funds for the project. The ICO normally takes place before the actual project is completed so the fund raised goes to paying the project expenses until its launching date. For larger projects, normally a portion of the ICO funds goes into a foundation that will provide ongoing funding for the project. Most the ICOs funds are raised in other cryptocurrencies such as Bitcoin or Ether.
Difference between ICOs and Other Forms of Investments
Although ICOs share some similarities to crowdfunding and Initial Public Offerings (IPOs), they are unique in their own right as they are a new form of market innovation which makes it possible to raise investment and development funds in ways that were not possible before. ICOs have been compared to IPOs because ICOs involve selling a stake in the project to raise funds. They offer investors a chance to earn potential profits with their stake in the project as well as the possibility of losses should the project failed to deliver on its promises. However, this is where the similarity between IPOs and ICOs ends as the way the funds are raised bears more resemblance to crowdfunding campaigns as the product or service has yet to be launched. But with crowdfunding, the funds raised are more of a donation rather than a purchase of a stake in the project. In short, ICOs is a mix between an IPO and a kickstarter project.
Launching an ICO
Normally prior to an ICO event, an announcement is made on popular cryptocurrency forums such as bitcointalk or cryptocointalk where the idea of the project is pitched together with a white paper and other relevant documentation. The goal of the project, its timeline and key information will also be provided so as to help investors evaluate the feasibility of the project. It should be noted that being transparent and comprehensive at this stage of the ICO is crucial is gaining trust and confidence as ICOs only happens before a project is actually completed.
ICOs typically last a few weeks as developers normally will want to try to raise as much money as possible. In some cases to further instill trust and confidence in the project, some developers put a cap on the amount of money to be raised. Usually the cryptocurrency tokens are sold for bitcoin. Upon completion of the ICO and the project launched, the ICO tokens will be listed on cryptocurrencies exchanges for trading. The price of the ICO tokens will then be determined by the market forces.
Advantages of ICOs
For new tech startups, ICOs is a way for developers to self finance their project. Handled properly, an ICO event can raise as much funds as going way through a Silicon Valley seed funding round. The main thing with an ICO is that the developers do not have to sacrifice their equity in the project for the funds they raised. Through an ICO, the developers of a project can bypass many of the hurdles involved in the venture capital process by pitching their idea directly to the market. Another benefit of an ICO is the fact that it gives developers a way to gauge how receptive the market is to their ideas. In addition because blockchain projects are open-source, this gives developers the ability to branch out their project to be slightly different to cater for a more targeted audience. Finally ICOs seem to promise a democratisation of classical investing, allowing the common citizen to participate and invest in projects he is drawn to.
Disadvantages of ICOs
In just a few short years, ICOs have developed a reputation of being scams due to many such projects failing to deliver on what has been promised. Because of the large number of failed cases, investors are normally wary and skeptical about ICO projects. Another disadvantage of ICOs is the fact that they are not regulated and there is no legal protection for investors. Investors have to perform their own due diligence. There is thus, large doses of skepticism concerning ICOs. Preston Byrne who is a Blockchain expert and COO at Monax expressed his lack of trust on ICOs on his personal blog post and various interviews. He says:
“In my informed opinion, many ‘coin offerings’ run the risk of being seen as closer to Ponzi schemes of the past than they are to legitimate investment products of the present-day. Draping an investment scheme in advanced cryptography and Silicon Valley futurebabble won’t change that. I’m frankly stunned that some of the best minds in venture capital can‘t see what’s right in front of them for what it is.”
What to do then, to safely navigate the if one wants to successfully invest on an ICO?
Examples of successful ICOs
2016 witnessed a high number of ICOs, but ICOs actually began in 2015, with well-known projects like ethereum, Factom, Augur, NXT and Mastercoin. Factom, for example, which is a Blockchain-as-a-service technology company based in Austin, TX focusing on mortgage compliance solutions, launched its ICO in 2015, having raised approximately USD 541,548 by selling 4,379,973 Factoids to over 1,500 people.
2016 saw growing activity in the ICO space, both in terms of total campaigns that raised money, and also in terms of the total number of investor dollars estimated to be around $200 million.
Fast forward to 2017, we have the case of last April’s Humaniq successful ICO campaign, which finished with a participation of a record breaking 11.860 people! Humaniq, is a revolutionary Blockchain Ethereum-based financial services project providing banking 4.0 services for the unbanked and the pre-seed funding for this crowd-sale reached $5.163.000. To date, the most successful example of an ICO sale is the Ethereum cryptocurrency project. The project managed to raise $18 million for its ICO and its 2016 market cap stands at around $1 billion.
Over the past two years, several startups raised millions of dollars to develop their projects, through ICOs, which relied only on a promise and a website, and some of these ICOs have failed to deliver their projects.ICOs are still in their infancy and there is still room for growth for it to become a widely accepted method of raising investment funds. On the other hand, the potential and interests surrounding ICOs can eventually make it a more democratized type of investment that can rival even traditional methods of raising funds.
Only time will tell whether ICOs will thrive and how they will evolve.
Maria Fonseca is the Editor and Infographic Artist for IntelligentHQ. She is also a thought leader writing about social innovation, sharing economy, social business, and the commons. Aside her work for IntelligentHQ, Maria Fonseca is a visual artist and filmmaker that has exhibited widely in international events such as Manifesta 5, Sao Paulo Biennial, Photo Espana, Moderna Museet in Stockholm, Joshibi University and many others. She concluded her PhD on essayistic filmmaking , taken at University of Westminster in London and is preparing her post doc that will explore the links between creativity and the sharing economy.