What is an ICO?
Bitcoin remains the world’s most recognized cryptocurrency, but new digital tokens appear almost every day. These altcoins are most often launched with an Initial Coin Offering, or ICO. The name is derived from the term Initial Purchase Offering (IPO) which when a physical company makes shares available to the general public for the first time. There are numerous differences, however, when it comes to launching a cryptocurrency with an ICO.
What is the Purpose of an ICO?
An ICO is first and foremost a fundraising endeavor. The developers of a new crypto asset sell the new token in exchange for mainstream tokens like Bitcoin or Ethereum. The first and most important difference between an ICO and an IPO is that an Initial Coin Offering allows the developer of a coin to raise money without surrendering any ownership or controlling interest in the platform.
While a digital token itself is not a company but an asset, there are companies behind the launch of every new cryptocurrency. These companies employ people who develop the source code and implement the blockchain technology that brings the digital coin into its virtual existence. These individuals have to be paid for their work. An ICO allows a development team to finance their cryptocurrency venture.
This fact has caused a fair amount of controversy. ICOs began to attract cryptocurrency investors after some tokens exploded in value after their release. During the ICO these tokens could be purchased for a small sum and then later exchanged for a profit. It should be noted that this isn’t the case with all new altcoins, but it has happened frequently enough to entice speculators. Everyone is looking for the next Bitcoin, and an ICO offers a literal opportunity to get in on the ground floor.
Unfortunately, this has encouraged the unethical use of ICOs to raise vast amounts of capital. Since cryptocurrencies are a decentralized and unregulated method of exchange, in most cases the individuals behind the ICO are not required to explain how the money raised during the offering will be used. In 2018, the founders of a digital asset known as Centra were arrested in the United States for securities fraud. Investigators claim that the founders bilked investors for millions of dollars on the false pretense of linking their digital coin to VISA/MasterCard debit cards. Their case is currently pending before the courts.
These issues are the exception and not the rule. In most cases an ICO is handled ethically by the developers of a digital coin. It is important to remember that investors are not purchasing shares in a company that develops a cryptocurrency during an ICO. They are purchasing units of the token. Those who participate are engaged in speculation. They are essentially betting that the tokens they purchase will rise in value once the ICO is completed and the coin is formally launched.
The History of ICOs
It’s hard to pinpoint the precise moment at which the ICO became the preferred way to launch a new cryptocurrency. Most tend to agree, however, that the launch of the Ripple token in 2013 was crucial to the evolution of ICOs as a fundraising method. Ripple Labs created the XRT token in 2013 and created 100 billion units. A large number of these tokens were sold with an ICO.
Other successful ICOs followed. A token called Mastercoin raised $1 million with its 2013 ICO, and Lisk garnered $5 million in 2016 with its ICO effort. Ripple and Lisk have gone on to endure and create a place in the cryptocurrency market, while other coins have fallen flat. There is no guarantee that a successful ICO will lead to the development of a successful token.
It was Ethereum, however, that stands as an example of what a successful ICO can accomplish. In 2014, the Ethereum Foundation began an ICO to promote its ETH token. During the ICO, Ether was sold for 0.0005 Bitcoin per unit. The ICO raised a staggering $20 million and led to the development of a token which now rivals Bitcoin in its market capitalization and popularity. The Ethereum ICO was possible the largest ever conducted, and the money raised created a strong platform for the development of the Ethereum blockchain.
What is also unique about the Ethereum ICO is that it opened the door for others to launch their own digital tokens. It did this by enabling something known as Smart Contracts. One use of the Smart Contract feature is to create tokens which can be exchanged on the Ethereum blockchain. While this greatly expanded the potential of cryptocurrency, it also came with some negatives. Suddenly, almost anyone with basic programming knowledge or the willingness to hire experienced coders could design a token and promote an ICO. Some claim that this has led to the market being flooded with digital tokens that have little potential for growth. Some tokens, like Dogecoin, have even been started as a joke.
Today, each month seems to bring the arrival of many ICOs. Some of them are based on a solid principle of expanding the functionality of the blockchain. Others are poorly conceived attempts to capitalize on the popularity of the cryptocurrency market. A few more are outright scams. The investor would be wise to tread carefully with ICOs. You must do your homework to determine which ICO offerings offer the potential for growth.
Are ICOs Legal?
In 2018, Facebook, Google, and Twitter announced that they would no longer permit the advertising of ICOs on their platforms. This step was presumably taken because ICOs are starting to approach a legal gray area. Some contend that they are mere crowdfunding efforts and not subject to regulations. Others state that they constitute an offering for financial securities and are therefore subject to oversight by commissions which regulate financial transactions.
At the present time, ICOs remain legal in most jurisdictions. They are promoted as “crowd sales” instead of investment opportunities. The funding is not regulated, and this is another reason that investors should use due diligence before participating in a token sale.
There are signs that ICOs are heading toward a regulatory structure. The amount of money raised by many recent ICOs has served to throw a light on the process which makes it hard for new offerings to escape the eye of financial regulators. In the meantime, an ICO is legal in most every jurisdiction. It is also legal in most areas for you to participate in an ICO if you choose to do so. You should check with your local jurisdictions to make sure participation is legal.
Will You Make or Loss Money with an ICO?
Participating in an ICO is nothing more than speculation. There is a chance that you will make money from the token being offered, and there is chance that you will lose your investment. Many examples of both exist in recent ICOs.
Ethereum was a very successful ICO for investors. The ICO price of the Ethereum token made it worth about 0.0005 Bitcoin. Today, an Ethereum token is worth about 0.05 Bitcoin. This represents a successful return on investment.
But for every Ethereum there are tokens like Lisk and IOTA which failed to live up to expectations or have struggled to maintain growth. It has become very easy for a group of individuals to publish a white paper, put up a website, and create an ICO. Nevertheless, ICOs still present an opportunity for the wise investor.