What’s in this post?
What is an ICO?
An Initial Coin Offering (ICO) is the cryptocurrency equivalent to an Initial Public Offering (IPO), in which investors purchase shares of a company. Typically, an ICO is an opportunity for a new cryptographic asset to raise a really large amount of money from a global pool of investors. Anyone wishing to put money into a new cryptocurrency would send funds to the company via a smart contract, usually in the form of Bitcoin or Ether, but it could also be in fiat currency. The very first ICO was Mastercoin launched in 2013, which raised a heft half a million dollars at the time, kickstarting the whole process.
The benefits of an ICO
Actually the benefits of an ICO are actually really clear. Imagine you wanted to create your own cryptocurrency based on an idea for digitising payment within a system. Let’s pretend that the system you wanted to create was to
streamline payment of milk deliveries and we’ll call it Digital Dairy. People could send requests via a smart contract, and payments would be made accordingly. You could even make it possible for people to detail when they’re away on holiday or when they require extra milk around Christmas time, say. This all sounds like a great idea, but how can you set the wheels in motion? Well, first of all you need some capital.
The problem with acquiring capital is that it’s not always that easy. You could go to a bank and ask them to invest, but the problem here is you almost certainly will have to sacrifice some fraction of ownership to the investors. This is your company and you don’t want to give up ownership of any of it, if at all possible. The solution is to produce a token, a
cryptocurrency, let’s call it DairyCoin, that has an initial value of zero, but you’re banking on the fact that the value will increase. You then create a white paper, and a good website and sell your DairyCoin to investors that are willing to invest in Digital Dairy – gathering significant amounts of capital without sacrificing ownership. Victory!
Are there any drawbacks?
However, in recent times the popularity of ICOs has waned, the main reason is people have been stung. Because ICOs give access to a lot of money quickly, people began realising that if they could make a product that sounds good, but with little technical backing they could make money without having to do much hard work. Even if the project doesn’t get off the ground, all the money has already been made, or lost in the case of the investors. Furthermore, there has been very little in the way of regulation and more or less anyone could set up their own ICO. Eventually the U.S. Securities and Exchange Commission (SEC) has had to take action and provide regulation. Around 800 cryptocurrencies are now defunct, because they didn’t meet with regulations – doesn’t sound altogether promising.
Since the market flooded with new coins, and so many have been subsequently shut down, people have been saying for a little while now that the ICO is dead. There are however alternatives. People have been discussing an ‘ICO 2.0’, in which regulations are much stricter and will often require an attorney. Another alternative is a security token (STO) and that will be the main feature of a future post. In conclusion, making money from a similar setup to an ICO is still possible, but now it is much much harder for fraudsters to get away with making quick money.