Find out exactly what an ICO is and why they are an important tool for those seeking to raise capital directly.
What is an ICO?
Raising money for a new project can be a daunting task! Traditionally there are a lot of hoops, and middlemen along the way, that you would need to jump through in order to raise a significant amount of capital. In recent years we have seen the rise of “crowdfunding” which is a more direct way to raise funds from your supporters and fans versus turning to traditional investors for startup cash. Cryptocurrencies have their own type of crowdfunding called Initial Coin Offerings (ICO’s), and they have helped to propel an ever-increasing stable of cryptocurrency startups.
Initial Coin Offering Breakdown
ICO’s are today’s most popular way for a new blockchain or cryptocurrency based project to raise money directly from their supporters. The first step for any company want to raise money this way is to create their very own cryptocurrency. This newly created coin is then sold directly to investors for the first time before the project is officially launched. This is where we get the “initial” part of Initial Coin Offering. You can think of it like a digital stock certificate, but instead of owning a piece of the actual company you are invested in the utility of the product.
Once the set limit of coins are sold, the project moves from the ICO phase into development. Typically this is when a coin is listed on a major exchange for trading. Investors love ICO’s because it allows them to speculate and get in cheap on a project before it hits “the market”, while it enables the startup to receive much needed capital to develop their product. To date, the ICO world is also very unregulated which has made them incredibly popular in the last few years.
Red Hot ICOs
It’s no doubt that ICO’s are on fire! It seems you can’t surf your favorite websites or social media without seeing someone promoting the next “red hot ICO”. Everyone wants a piece of the action and an ICO is a low cost and easy way for people to jump on your new projects blazing bandwagon. To date, there has been well over 2 billion invested in ICO’s spread across a dynamic range of product applications. We have even seen popular ICO’s sell millions of dollars worth of tokens in just the first few hours of launching! The big hit example of 2017 was the Tezos ICO where they raised a staggering 232 million worth of ETH (now around $450 million at the time of writing this article!) making Tezos the largest ICO to date. Here is a chart from CoinDesk’s ICOtracker which is a great resource, it shows you just how explosive ICO’s were in 2017!
What About Regulation?
One of the best aspects of an ICO is that they make it easy for individuals that are not experienced traders to get involved with just about any level of investment. Because ICO’s are not currently regulated it’s like a digital gold rush of crowd-sourced funding. In 2017 we saw quite a few examples of scam ICO’s that garnered millions in funds from supporters then quickly closed up shop taking all that funding with them. Seeing such explosive growth, even the SEC had to step in and state that certain ICO’s may be considered a “security” which would be regulated by US laws. The looming fear of “regulation” is a daily worry for many, but in the case of ICO’s it would be a welcomed oversight in a very unregulated financial market. Regardless of the risks, developers are still jumping on board with ICO’s along with their supporters looking for the next big coin to make a massive run up in price.
The Conclusion
Initial Coin Offerings are not going away any time soon. Despite a few drawbacks, the benefits of being able to raise funds directly from individuals without having to use a middleman is just too appealing to pass up. For the investor, an ICO gives you a direct way to support a project before it hits the masses. For the most part an ICO is a win/win for all parties. Like any investment, do your own research before investing. These ICO’s are a dime a dozen these days and many of them are just a whitepaper and a dream. If the only information you have about a new coin is a Facebook post that says “it will moon soon!!!” it’s probably high time you thought about doing your own coin homework!
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