The cryptocurrency world is going mad for token offerings. So far, over $320 million have already been raised this year through what is called Initial Coin Offerings (ICOs) – the blockchain community’s version of crowdfunding. Many regard them as a promising new funding model that has the potential to disrupt traditional venture capitalists.
But how does an ICO actually work? Basically, a company issues a certain amount of digital tokens, kind of an own cryptocurrency, to gain funding from potential investors. These tokens – which are similar to shares issued in an IPO – are sold in exchange for Bitcoins or Ether, but it can be fiat money as well. To do so, the startup firm must create a document that outlines key aspects such as
- The overall idea of the project
- Ways in which company seeks to generate value
- Amount of money needed to undertake venture
- Running time of the ICO campaign
Investors hope that the startup will become a success, which will lead to a value increase of their tokens. In fact, there have been already some very successful ICO projects in the past, such as Ethereum that managed to raise $18 million in 2014. Accordingly, ICOs are more and more seen as an efficient way to kickstart blockchain-focused projects.
However, insiders increasingly warn that ICOs become a hype and investors do not critically assess the companies they are investing in. In many cases, startups are launching an ICO without having a working product. Example: EOS. The company raised 650,000 ETH, which is the around $200 million, within the first five days of its ICO campaign. EOS could convince its investors with the idea of building a platform that is similar to Ethereum – just better, without transaction costs and faster processing. However, so far, it is just an idea and the startup has not come up with a working product yet. Accordingly, it is highly unclear, whether investors will ever get a return on their investment.
In general, a potential problem of ICOs is that they are unregulated, which means that they are not overseen by financial authorities like the Securities Exchange Commission. Thus, investors have no protection in case of fraudulent initiatives. Paired with a lack of careful upfront research and analysis, as investors blindly follow the temptation of potential huge returns, ICOs may in fact become a ticking time bomb…
References
Coman, A. (2017, June 25). ICO Review of: EOS (EOS tokens on Ethereum blockchain). Retrieved October 18, 2017, from https://medium.com/@EthereumRussian/ico-review-of-eos-eos-tokens-on-ethereum-blockchain-8984c975cd48
Marshall, A. (2017, March 07). ICO, Explained. Retrieved October 18, 2017, from https://cointelegraph.com/explained/ico-explained
Momoh, O. (2017, September 05). Initial Coin Offering (ICO). Retrieved October 18, 2017, from http://www.investopedia.com/terms/i/initial-coin-offering-ico.asp
Wong, J. I. (2017, June 05). The new cryptocurrency gold rush: digital tokens that raise millions in minutes. Retrieved October 18, 2017, from https://qz.com/994466/the-new-cryptocurrency-gold-rush-digital-tokens-that-raise-millions-in-minutes/
