Initial coin offerings, or more popularly known as ICOs, is a type of fundraising that makes use of cryptocurrencies. It has been considered as the cryptocurrency version of an initial public offering.
ICOs are usually done to raise capital for new cryptocurrencies and has been considered as a possible source of capital for startup companies.
It has been considered as one of the biggest trends in the cryptocurrency market, but it has also been the reason behind the criticisms and skepticisms raised against cryptocurrencies.
An initial coin offering usually starts with a startup company creating a new cryptocurrency or a digital token to represent their intended product or service. A public initial coin offering is then held wherein the newly created digital token is offered for sale to investors in the hopes of raising capital.
The tokens offered in an ICO could be purchased using fiat currency or with other cryptocurrencies.
Usually for initial public offerings, companies offer shares for sale to investors. Owning such shares means that the investor owns a part of the company and is granted stakeholder rights.
However, for initial coin offerings, investors only buy the digital token created by the company and does not entitle them to ownership in the company. However, they can use the purchased digital tokens to avail of the company’s products or services once they become available. There is also a chance that these digital tokens would gain value and can be traded for fiat currency or other cryptocurrencies.
Initial coin offerings have been a growing trend in the cryptocurrency market. The reason for this can be attributed to its use of the blockchain technology which allows for fundraising without the need for regulations and intermediaries. This means that ICOs could be seen by both startup companies and investors as an easy way to get money.
Initial coin offerings are a multi-billion dollar trend on the cryptocurrency market. In 2017 alone, 456 ICOs have raised a total of 6.6 billion USD, with 2018 already surpassing those numbers at 967 ICOs and 22 billion USD in raised funds.
Individual initial coin offerings are known to have raised millions of dollars on their own, with the largest ICO being for the open-source digital payment system Filecoin which raised a total of 257 million USD in 2017.
This is a far cry to the 600,000 USD raised on the first ever ICO back in 2013 for the cryptocurrency Mastercoin.
While this trend had provided a quick way for companies to raise capital and for investors to get profits, it is for these same reasons that there have been criticisms and skepticisms not only for initial coin offerings but also for the whole cryptocurrency market.
Initial coin offerings have been used to pull off scams where companies run off with money from investors without materializing the products and services that they are supposedly developing. For example, the Chinese company Shenzhen Puyin Blockchain Group is responsible for the theft of a total of 60 million USD through 3 different ICOs whose ventures never materialized.
Another form of scams through ICOs are Ponzi schemes. These are investment scams that promise high rates of return in exchange for acquiring new investors with returns for older investors being generated through funds from new investors. This was the case for DBTC in China where it launched a Ponzi scheme disguised as an ICO that generated 13 million USD from investors who were promised high returns on their investments.
While there are now fears among investors in engaging in initial coin offerings due to scams, there are still a lot of legitimate ICOs that go on with their promise of developing their products and services in exchange for funding from investors.
One can know if an initial coin offering is legitimate by checking a project’s white paper, which usually lists down how a certain project solves a certain problem that it had pointed out, the people and company behind the project, the project’s roadmap, the details regarding its token and how the raised funds are going to be used.
Another issue for initial coin offerings is its legality. Not all countries see ICOs the same way, with some countries being lenient about it such as Singapore, Switzerland, and Russia, with some wanting regulations for it such as the United States, and some outright banning them such as China.
The reasons behind the debate on whether or not governments should regulate initial coin offerings include the unregulated nature of it that makes way for scams and the classification of some ICOs falling under relevant securities laws in some countries.
Initial coin offerings have provided an innovation in how companies raise funds and investors easily get profits from their investments. While it is true that the ICOs’ unregulated nature is is something to be skeptical about, it also cannot be denied that initial coin offerings would continue to be a major trend in the cryptocurrency market over how it has changed how innovations work.