Ten Toes Down In An ICO Part 1

Posted By : Neeraj Kumar | 15-Nov-2017

Initial Coin Offering (ICO): The Concept

 

 Initial Coin Offering (ICO) is a means of crowdfunding in which a percentage of the newly mined cryptocurrency tokens are sold to its early investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. ICO can be a source of capital for startup companies or medium or small companies looking for expansion. The term 'token sale' or crowdsale refers to a method of selling participation in an economy, giving investors access to the features of a particular project starting at a later date. Startups use Initial Coin Offering (ICO) to bypass conventional capital-raising process such as IPOs (Initial Public Offering) required by venture capitalists or banks.

 

Initial Colin Offering (ICO): The Campaign

When a cryptocurrency startup firm wants to raise money through an Initial Coin Offering (ICO), it provides a white paper to define the idea of the project, need(s) this project will fulfill upon completion, how much capital is required for the project, how much of the virtual tokens the founders of the project will  keep for themselves, what currencies are accepted, and how long the ICO will run for. During the ICO supporters of the firm’s initiative buy some of the distributed crypto coins with currency supported by the ICO. These coins are referred as tokens similar to shares of a company sold to its investors in an IPO. If ICO campaign unable to raise enough money required for the project then the money is returned to the backers and the ICO is deemed to be unsuccessful. If ICO raises enough funds required for the project within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.

Early investors are motivated to buy the crypto coins in the hope that the plan will become successful and the value of its crypto coin will go high from the price when the project was initiated. An example of successful ICO is Ethereum which is a Smart contracts platform and has Ethers as its coin tokens. The Ethereum project was announced in 2014 and Ethereum ICO raised $18 million in Bitcoins or $0.40 per Ether. The project went live in 2015 and in 2016 and ether’s value went up as high as $14 with a market capitalization of over $1 billion.

 

ICOs are similar to IPOs and crowdfunding. Like IPOs, a stake of the startup/company is sold to raise money for the project during an ICO operation. As IPOs deal with investors, ICOs deal with supporters those whom are willing to invest in a new project similar to a crowdfunding event. But ICOs differ from crowdfunding in that the investors of IPOs are motivated by a prospective return on their investments, while the funds raised in the ICO campaign are donations. This is why, ICOs are referred to as crowd sales.

 

ERC20, ICO whitepapers

Launching an ICO has become a much easier today with ERC20 protocol standard and services that let you issue tokens even when you are not a ninja in coding. ERC20 protocol provides specifications an Ethereum-based token needed to comply. “Developing a token based on the ERC20 standard requires very less amount less amount of programming. Also, an ERC20 standard can be transferred to a future compatible blockchain,” says Sunil Aggarwal, director at Theory Frames Knowledge Networks and author of ‘Bitcoin Magnet’.

The whitepaper is a roadmap on how the issuer will develop the business and execute the project. “All white papers should have three major components. The first one being the technology model being used. The second one is the business model and the third component is the community model,” says Aggarwal.

 

Several ICOs have failed due to the lack of community support. “Currently, because of the huge interest in ICOs space by the venture capital players, some of them are getting funded by a couple of dozen investors and the community is absent,” says Aggarwal. “The success of a project is quite dependent on the community appreciation of the project.”

A high degree of VC involvement in an ICO can bring about a false hype about the project, Aggarwal says. This is one reason that some projects that initially got a very good response are now back at the issue price, he adds.


Several scams and MLM schemes are also operating under token launches. As this market booms, users have to be very careful in understanding and vetting an ICO project and the team behind it. Websites, like ICOTracker lists old and upcoming ICOs with details regarding their business model, team and token details.

 

The Benefits Of ICOs

Potential to be a powerful force in the development of open-source blockchain technologies. ICOs are popular for multiple reasons.

For organizations who issue tokens:

  • Positive network effects. When an organization starts an open ICO for the development of a decentralized application, the process can automatically generate a large user base that can sustain the operation, security, and vitality of the decentralized network, these users or token holders will be investing for the growth and success of the network.

  • Fast and easy fundraising mechanism. Anyone can initiate an ICO with customized tokens can be easily generated through a number of platforms, including Ethereum. Transaction costs associated with marketing and contribution settlement are significantly lower than other traditional fundraising mechanisms like IPOs.

  • Primarily online marketing: As ICOs conducted over the internet their tokens are marketed to a large, general audience. Potential buyers can learn about the ICO through the organization’s website and many other portals.

  • Settlements over the blockchain: Confirming contributions and distributing tokens simply requires monitoring and updating the distributed digital ledgers. This requires less effort and resources than the traditional fundraising process of accepting checks and wire transfers, sending out standardized contracts, managing contracts and more.

For investors and consumers:

  • Liquidity: Popular tokens have liquid markets on cryptocurrency exchanges. Popular tokens like Ethereum can exceed over million dollars within a significantly short period.

  • Democratizing investment: The ICO method generally allows anyone from anywhere on the globe to raise money ass it generally permits anyone to contribute required to register for a cryptocurrency wallet.

  • The potential for rapid growth in gains: Cryptocurrencies can appreciate quickly in price. Ether traded in August 2015 for under $1 and was trading at around $250-$350 in early September 2017. The price of bitcoin was almost $100 in June 2013 and was trading at $4,000-5,000 in early September 2017. Investors hope to find a token that can be “the next bitcoin” in terms of economic growth and benefits.

 

In the next part of this blog I will discuss the followings:

  •      The Risk of ICOs
  •      Regulatory Outlook on ICOs
  •      Beneficial Regulatory Measures for conducting an ICO
  •      Future trends of ICO
  •      Some Successful ICOs 
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