A New Way To Raise Money: The Initial Coin Offering(The way in which startups have raised millions in seconds)

Over $380M has been invested into Initial Coin offerings(ICOs) till May 2017. Many companies are raising millions of dollars with mere white paper and a crypto coin dependent on small networks of the node running their blockchain. This idea for raising money is not only promising for entrepreneurs but it attracts investors too as it gives easy returns. Let’s get deeper into this and find out the ins and outs of Initial Coin Offering(ICOs).
The fundamental idea for an ICO is to create a digital coin or token and then to offer this coin or token for sale in an initial offering. An ICO is in some ways similar to an Initial Public Offerings(IPOs). Both are done to raise funds, but, instead of stock, ICO purchase includes a new type of coin or token, an asset rather than a security.
The token can represent some sort of value or be of value itself. An ICO might involve attributing equity to a token so that ownership gives buyers voting privileges and access to dividends. The typical use case of a token issued in an ICO is the creation of an asset that gives buyers access to the features of a particular project. Instead of having cash or Bitcoin as the way to pay for goods and services from the ICO offered, buyers use their token. Buyers can think of these tokens as being similar to a store-specific loyalty point, something one purchases with a general purpose digital currency and uses at a specific location.
The reasons for which these points are so special are it’s tradability and used in decentralised applications. These tokenized loyalty points are put onto a public blockchain,
the points are not limited to being traded in exchange for services within the platform, but instead can be traded anywhere. If there is enough activity within a given ICO’s environment, their tokens will become globally traded on the various exchanges that handle cryptocurrencies. Successful ICOs
are the product of careful thought on economics and game theory, and as a feature, they intend that their tokens will increase in value as the volume of the activity on their platform rises. As such, these
loyalty points now have a variable value, based on the market perception and growing use of the platform. This creates a very interesting incentive mechanism because now the users of the platform
who are receiving the tokens have incentives to bring other users to the platform in order to increase the value of their tokens. Anthony Di Iorio, co-founder of Ethereum, the most successful ICO to date with over a $35 billion market cap, on the benefits of combining a token with a crowdsale; says “Part of the goal of the [Ethereum] crowdsale was to create a community. Combining a token with an initial offering through a crowdsale allows buyers to build an international network of early adopters and
investors who will actively work to educate and spread awareness of your project. Unlike a traditional crowdsale on a system like Kickstarter, where the users who invest typically only have an incentive to invite others to enjoy the product with friends and family, the users who participate in a token crowdsale have the additional incentive of a gain on the value of their asset. However, this is not as easily applied for typical companies. This on the same token to ensure fair behaviour and that people are following the protocol rules. This will be done through network specific smart contracts that will incentivise people to behave fairly and punish users who try to cheat the system.”
The Storj system is a bit complex, as it handles two commodities – spare storage space and unused bandwidth of those providing that storage. Unlike Uber, where there is a central company organising
everything, Storj is completely decentralized and all the funds go directly to the storage holders. Lacking a centralised service ensuring that everyone is behaving correctly, there have to be some
means of enforcing the agreed upon behaviour. This is where smart co-chair of Steptoe & Johnson LLP’s Blockchain and Digital Currency practice and head council to the Blockchain Alliance, explains that by calling an ICO a token crowdsale, it helps investors understand that they aren’t purchasing equity or security, but an entirely new asset class. This is important for protecting investors in addition to protecting the startups themselves so that the SEC does not confuse
their tokens with an asset that does not pass the Howey test. That being said, there are many ICO that intentionally act as securities, the most popular of which being Blockchain Capital, which raised $10
million in six hours.
Michael Terpin, who invested in the original ICO, Mastercoin, and has advised 30+ ICOs, including top ICOs such as Ethereum, Factom, Augur, Golem and Gnosis, either personally or through his company Transform Group. Terpin explains that “as an angel investor, you can put 25k into
cryptocurrency for the new native coins. The coins can later be sold and purchased on cryptocurrency exchanges (once listed) or held long term for potential profit. Additionally, and often at times, the
coins themselves could be exchanged or used for the company’s native product or service, like in the case of Steem. After the company creates its own native currency (referred to as coins or tokens), the
price of the new coins varies, from fractions of a cent to hundreds of dollars. ICOs are very attractive to investors, considering the average listed ICO here has more than 1,000 percent return in under a year. What another kind of investment would ever get that kind of crazy return? That’s a 10x return in a year, or sometimes less. The largest ICO return is for a cryptocurrency and blockchain tech company called Stratis (STRAT), which has an 110,912 percent return in about a year till now. That means if you have bought $1,000 worth at their ICO, you have made $1,109,120 to date. Where else can one get such lucrative return?
However, the age-old saying holds true: “Don’t invest something you aren’t willing to lose.” If you’re interested from an investment perspective, then hopefully you will make a lot of money. Considering
the average return so far, investing seems quite tempting. And for entrepreneurs, it’s like raising money via Kickstarter, except you don’t have to ship out physical items and you can quickly fund your startup or company. Bancor reached its $155 million funding in about two hours. Additionally, the money raised can be stored in coins, which have been appreciating in value quite quickly. So, the money you raise also makes you more money sometimes many multiples of what you
raise.
By and large, ICOs are the future way of Investment and Entrepreneurship. They offer a win-win situation for both the parties while clearing all the complexities of physical transactions.