The world of cryptocurrencies was weird to begin with, but since its beginnings as a serious form of currency in 2009, it has continued to expand in both value (at the time of writing, one bitcoin is worth over $4300) and in seemingly endless formats (Remember Dogecoin, anyone?). By now, it's safe to say the tech niche is bigger and weirder than ever.
Which is why it's time for an explainer on the uniquely cryptocurrency-based spin on an old business term, the Initial Public Offering, or IPO. Here's what you need to know about the Initial Coin Offering, aka the ICO, and how your startup just might be able to benefit from one.
Are ICOs Like IPOs?
When a new cryptocurrency launches, it needs users. It gets them through the ICO, in which it sets a rate, and anyone who wants to invest in it turns over a certain amount of another, more stable cryptocurrency, usually bitcoin. Like shares of an IPO, the ICO “coins” can be traded. Unlike shares, they don't confer ownership rights. But explaining what these coins represent is a little more complicated.
Here's how The Economist explained it in a recent article: “ICO ‘coins' are essentially digital coupons, tokens issued on an indelible distributed ledger, or blockchain, of the kind that underpins bitcoin, a crypto-currency. That means they can easily be traded, although unlike shares they do not confer ownership rights. Instead, they often serve as the currency for the project they finance: to pay users for a correct prediction, as does Gnosis; or for the content users contribute. Investors hope that successful projects will cause tokens’ value to rise.”
The main benefit is that potential for a rapid value-add for investors. The main problem? A lack of regulation behind ICOs.
Beware of Fraud
A white paper explaining how a creator hopes their ICO will pan out may be all that is offered to potential investors, meaning that a fraudulent deal that could lose an investor everything is only a shady write-up away.
In January, reports surfaced of an investment scheme for “LCF Coins” or the “Rothschild Family LCF Project,” which the official financial advisory firm Rothschild & Co then denounced as an impostor that was using their name to fleece investors. The coins were “very similar to a Ponzi scheme,” Rothschild & Co said. A ICO for Matchpool also failed, and another cryptocurrency founder was found to have a troubled history with earlier ICO collapses.
However, as the cryptocurrency industry rapidly matures, regulating factors (like an escrow account) are beginning to ensure the needed checks and balances. It's not there yet, but a solid regulatory system is in the works.
Is It a Bubble?
Eventually, the market for ICOs will take a dip, forcing the cryptocurrencies with legs to the surface while burying everything else. And the fraud cases aren't helping matters, as Wired reported recently.
“The side effect is that millions are going to entities which, apart from tokens and a project outline — crypto parlance: ‘white paper'— have very little to offer. Take for example ‘Useless Ethereum Token', a parody initiative which still managed to raise $40,000 in funding. Or, for a grimmer story, look at OneCoin: a Ponzi scheme which had amassed over $350 million before being busted by the Indian police,” Wired says.
A boom and bust cycle seems inevitable. But that bubble pop has been predicted for practically a year now — since last October — with no dice. While you wait for the bust, you can stay relatively safe when participating in an ICO by keeping most of your cryptocurrency safe in bitcoin, the digital gold standard.
Why Should You Care?
Research firm Smith+Crown puts the total investments in various ICOs at $250 million, with $107 million of that from 2017 alone. That's not something to sneeze at. And since ICOs offer a path for any cryptocurrency project creator to raise funds for their operations, it's a smart idea for any creator within the niche to examine as a useful option for them. You might try out a crowdfunding platform designed for ICO such as CoinList, which is designed to ensure the ICO stays on the right side of the law.
But before you start, you'll have to be in the niche first. If you're not a cryptocurrency fanatic, you'll need to know someone who is. You don't need your own blockchain in order to raise funds — just a Bitcoin or Ethereum address and a convincing white paper — but having an expert cryptographer explain the process is a must.
Dipping a toe into the fast-paced, volatile ICO world is easier said than done, and as you can tell from the density of this article, it isn't even very easy to say.
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