Bitcoin was first conceived by Satoshi Nakamoto back in 2009, but it leapt into the mainstream in 2017. In the twelve month period from November 2016, the value of a single Bitcoin rocketed from $710 to $7365. Bitcoin is far from the only digital currency, or application of the underlying blockchain though. Other mainstream cryptocurrencies like Ethereum, and Litecoin have also gained a substantial following.
Litecoin and Bitcoin Gold formed as a result of a hard fork from the main Bitcoin blockchain. They are still cryptocurrencies but differ in their implementation of the blockchain.
Other blockchain platforms like Kin, or Ethereum are built with other uses in mind. Ethereum’s smart contracts and tokens have opened up a new method of crowdfunding known as Initial Coin Offerings (ICOs). However, it’s not immediately clear how the blockchain supports crowdfunding, or why 2017 is shaping up to the be the year of the ICO — for better and for cworse.
Enter the ICO
The term Initial Coin Offering refers to the act of crowdfunding using cryptocurrency. Cryptocurrencies operate on the blockchain, a distributed network of records secured with cryptography. Bitcoin is currently the most well-known and successful cryptocurrency, and its decentralized nature removes the need for third-party involvement. This means that it is well-suited to crowdfunding activities.
The first major ICO was for the cryptocurrency and smart contract platform Ethereum. The development of Ethereum was funded by the issuing of Ether, Ethereum’s value token, in return for Bitcoin. This ICO allowed investors to trade one cryptocurrency for another, ultimately raising over $18 million. Alongside the explosion of ICOs, Bitcoin’s value has risen significantly, thanks in part to its role in ICOs.
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However, the development of the Ethereum Virtual Machine (EVM) allowed the creation of smart contracts. These also utilize the Ethereum blockchain, but are separate to the cryptocurrency. The EVM allows anyone to develop applications or contacts on the platform, as well as tokens that are similar to digital shares.
This combination made Ethereum the platform of choice for ICOs, as it allows anyone to crowdfund a new project, without third party involvement. All that is needed to set up an Ethereum ICO is a new smart contract and a set amount of tokens, with their price pegged against Ether or Bitcoin.
As these ICOs issue tokens as a digital alternative to shares, they are sometimes referred to as token sales. However, the terminology is applied loosely, with ICO and token sale often used interchangeably.
ICO vs. IPO
You may have come across the term Initial Public Offering (IPO) before. This is where a company “goes public” by issuing shares to investors in the hopes of raising funds. There have been some notable tech IPOs in recent years including social networks Facebook, and Snap, along with e-commerce giant Alibaba.
In most instances, a company will have been operating for a reasonable period of time with success before going public. ICOs are often compared to IPOs, but there are some fundamental differences. The first major difference is that an ICO is not regulated. Blockchain, cryptocurrencies, and ICOs are all relatively new concepts which regulators have not had time to fully process.
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Jordan Belfort, the trader portrayed by Leonardo DiCaprio in The Wolf of Wall Street, recently stated that “promoters [of ICOs] are perpetuating a massive scam of the highest order on everyone.” He said that many were using “pump and dump” techniques to pique interest, then sell before the coins lose value. His statement should be taken seriously — this is a technique Belfort’s firm Stratton Oakmont indulged in, which culminated in his 22-month prison term. (In that sense, altcoins and ICOs have become the modern penny stock.)
The Sky Is an ICO
Crowdfunding has changed the relationship between companies and their customers. By talking directly to those willing to invest, many projects have been brought to life that may have never otherwise had the chance. Likewise, ICOs are having the same disruptive effect in blockchain world. Ethereum is proof that ICOs are able to produce valuable projects, and there will be likely more success stories among the two hundred plus Class of 2017 ICOs. Over the years, crowdfunding has been heavily criticised for its minimal regulation and lack of protection for investors. As the market has matured, sites like Kickstarter, and to a lesser extent Indiegogo, have begun to clamp down on rogue or fraudulent campaigns.
ICOs, and indeed cryptocurrencies and the blockchain, are still in their infancy. Teething problems are inevitable as people learn how to maximize their potential, whilst figuring out how to regulate against scammers. ICOs are the latest manifestation of our increasingly borderless digital world and governments are struggling with how to regulate this new world. The recent ICO bans in China and South Korea, alongside proposed regulation in the US shows that regulators have understood the danger an unregulated ICO market could pose. However, regulation also shows a willingness to embrace innovation within a framework that makes it safe for investors.
Source: MUO