This is a guest contribution by Mr. Steve Kaaru, a freelance tech and cryptocurrency writer. The views and opinions expressed by the author in this article do not necessarily state or reflect those of the website.
The financial world has changed over the last decade. The blockchain technology is among the key drivers of this transformation. The days when startups would resort to Kickstarter campaigns are long behind us. The new wave of ICOs has taken over. Startups now raise funds from both individuals and institutions through offering tokens as opposed to shares. For some, it’s a process that’s easier, more transparent and more effective for the startups.
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What is an ICO?
Those of us who may not be as informed about cryptocurrencies may be wondering exactly what an ICO is. An Initial Coin Offering (ICO) is the process by which startups, usually in the cryptocurrency industry raise money from investors in exchange for tokens they create.
A startup needs money to develop their product or their technology and to hire the best talents to do this. The startup proceeds to create a token (this is done mainly over an established blockchain platform, with Ethereum being the most popular) which it then sells to investors. The investors, in turn, give fiat currencies such as the US Dollar or the Japanese Yen or exchange it for other tokens such Bitcoins (BTC) or Ether (ETH).
The investors do this in the hope that once the platform or the cryptocurrency gains more users, the tokens they have purchased will appreciate in value. They can make a profit in this way. Buying tokens during an ICO does not get you any ownership stake whatsoever in the startup.
Why hold an ICO?
An ICO is fast becoming the preferred method of crowdfunding for many companies and for good reasons.
The first is the relative ease of holding an ICO. In traditional fundraising methods, companies had to go through tedious processes which involved tough regulations. These could take months to put together, delaying the plans of the company.
The second is the amount of money that’s being raised from ICOs. In traditional fundraising methods, the most money a company could raise was a few million dollars, mainly from high net worth individuals and institutions. While this was sufficient for some companies, there were many that fell short of their targets and were forced to cut back on some essential processes. ICOs have been known to not only raise tens and even hundreds of millions but to do so in record time. Some ICOs have raised millions of dollars in minutes, such as Gnosis, a cryptocurrency prediction startup which raised $12 million in 10 minutes.
The third reason many startups are turning to ICOs is because the investors who take part in ICO don’t take any equity in the company. The investors only receive tokens developed by the company. It may represent little value at first but whose value rises with an increase in the number of product users. Relieving the pressure of making quick profits from the shoulders of the founders is yet another reason ICOs are becoming the preferred method of raising funds. This gives the founders the opportunity to focus on delivering on their long-term targets and not just on short-term profits.
Beware of frauds
While ICOs have opened new opportunities for many companies which would never have raised as much capital in the traditional crowdfunding setup, there are still some few companies that have taken advantage of the ever-increasing ICO popularity to defraud investors.
The field of ICOs is still relatively new and therefore largely unregulated. This makes it possible for some unscrupulous individuals to exploit investors’ faith and ignorance and accept investment without delivering the promised products or services. This has led to ICOs being banned by some governments such as in China and South Korea. Some of the ICOs that have become involved in controversy and even class action lawsuits include Centra, an ICO that was endorsed by boxing champion Floyd Mayweather and LydianCoin, a cryptocurrency whose ICO was endorsed by media personality Paris Hilton.
What’s the future for ICOs?
ICOs are here to stay.
While at first there was a lot of pessimism regarding ICOs, they have proved to be a sustainable model of crowdfunding that has immense advantages over the traditional models. In the past year alone, over 200 ICOs were held, raising over $2 billion worth of investment. Filecoin, a decentralized storage network had the biggest ICO, raising $257 million. Closely following behind was Tezos which raised $232 million. EOS, Bancor, Status, and Aragon were among the other big ICOs.
As ICOs continue to dominate the crowdfunding sector, governments will formulate regulations that will make them more transparent and accountable to investors. This will make the ICOs even better as the confidence of most investors will be stronger and they will be willing to invest more in ICOs than they currently do. ICOs are the future of crowdfunding.