ICO Series: The state of a bubble - Episode 1
What is an ICO?
ICO stands for Initial Coin Offerings. The term has recently been made famous after several new ventures raised $50M+ in only a short amount of time. In this series, we will explore the market’s recent fascination with ICO by explaining why it exists, how it works, from where ICO players are emerging, who these main players are, and why the ICO market may be the next bubble. This first episode is about giving a broad overview of ICO with a beginner’s eye.
Concretely, an ICO is a fundraising tool where investors give dollars (technically bitcoins or altcoins) in exchange of a new cryptocurrency issued by a startup wanting to develop a new product/service.
It’s similar to crowdfunding in the way investors give money to finance a company’s new service/product but don’t receive any share — I am not talking about equity crowdfunding here. And it’s similar to IPOs because investors give money to a company and hope the value of their investments will go up in time.
Let’s take an example. Imagine you want to build Upbox, a storage software startup. You have a kick-ass team and want to raise money to develop your platform. Going for an ICO will be a way to issue Ups, a new currency to buy storage space on your soon-to-be storage platform, in exchange of dollars to build your company. The magic being, as a founder of Upbox, you won’t have to give away any equity in the process.
So why investors are so interested in buying these new coins? Because they hope that successful projects will cause the new cryptocurrency’s value to rise. Remember, investors bought coins of a new cryptocurrency that is volatile and depend on demand and supply. If the demand for Ups rises, the value of the currency will increase as well and you will get more storage space with the same initial investment. Then, you would potentially be able to sell this additional storage you wouldn’t use and make a profit out of it.
So far, ICOs are completely unregulated, highly risky and have been targeted by non industry experts investors seeing the opportunity to gain short term returns. Of course, in an ideal world, investors in a company issuing an ICO would be its future users. But what we see is that investors are mainly speculating on the value of these new ICO-based currencies without really thinking or understanding the business case behind it. These new coins are resold on exchange marketplaces even before the product they are aimed for are even created(our storage platform in our example). Potentially, this dynamic leads us to a dotcom bubble type of situation where non expert investors want to be part of a business opportunity by investing in things that don’t have any business case.
