In the past year, initial coin offerings (ICO’s) have raised over a billion dollars for blockchain
startups, creating legimate concerns where it is a bubble.These ICO’s can sell out at breakneck speed,
with startups such as Status.im for example, a browserand messaging app, raising $100 million in less
than three hours. With an ICO the founders of thecompany are not giving up equity and investors are
not gaining shareholdings. So what are investorsgaining? And is the ICO market a bubble waiting to burst?
And how do you get involved if you wish?
Cryptocurrencies And ICO Boom
Cryptocurrencies such as Bitcoin and Ethereum are digital currencies that are hosted on the
blockchain, a computer code that allows for the creation and regulation of digital currency by
encryption techniques. Many cryptocurrencies work on a simple basis that if you can solve the
mathematical equations to unlock the currency (Proof of Work), you are then the holder of the Bitcoin
and can use it in the same way that a physical currency can be used.
ICO’s occur in the event of a new currency being created through a blockchain. ICO’s are used by
startups as a means of obtaining funding from various investors to develop their platforms, with the
coins offered under ICO’s generally purchased using more common cryptocurrencies, such as Bitcoin
and Ethereum. According to experts in the area, ICO’s are an unregulated means of fundraising for
cryptocurrency ventures, with developers selling a percentage of the cryptocurrency coins to investors
in exchange for real currency or established cryptocurrencies.
However, the ‘coins’ in an ICO are not necessarily currency. Instead, they could be considered as
being closer in essence to tokens for value that can be exchanged by investors for other tokens. In
many ICO’s, the token holders have no guaranteed rights and often the tokens created have no direct
purpose to the overall project. According to one startup, their token is “not an investment, currency,
security, commodity, a swap on a currency, security, or commodity or any kind of financial instrument.”
Instead, the token can be used by investors to transfer value within the ecosystem in which the coin
operates, or to other currency ecosystems (such as currencies operating through the Ether network).
However, what investors are typically looking for when they purchase coins in ICO’s is a quick profit
from a rise in the market value of the token, such as the huge rises recently witnessed in the value of
Bitcoin and Ethereum.
Ease of Launching an ICO
Since there are no regulations currently in place in respect of ICO’s, it is important to be aware of
scams, and, if launching an ICO, to be aware that potential investors will be wary of scams too. There
have been a number of instances where scam ICO’s have raised hundreds of thousands of dollars
before investors realised the scam. However, despite these headline-grabbing frauds, the vast
majority of ICO’s are legitimate. However, there are a number of recommended steps to take to
ensure that investors are confident in the legitimacy of the product, such as ensuring that companies
arrive on the ICO market with a complete product, sales, institutional investment, SEC and IRS filings,
and transparent due diligence. By ensuring these are in place, it is quick to separate the legitimate
companies from the scammers.
Are we in an ICO Bubble?
The sheer amount of money being raised through ICO’s, as well as the phenomenal rise in price of
Bitcoin and Ethereum, has led to many labelling it a bubble. Although experts agree that there are many
elements of a bubble in play, and that there are risks associated with ICO investments, there are
also opportunities. Although many ventures will likely fail (as occurred in the dot.com boom and bust)
there are likely to be a number of the current startups who will emerge from the pool of ICO’s to
become behemoths of the blockchain world.
Another prevalent issue in the Bitcoin world is the fluctuations in the market. As ICO’s often raise
funds through Bitcoin and Ethereum, the value of the funds raised is subject to the rises and falls that
are inherent in the cryptocurrency sector. For example, Tezos, the largest ICO thus far, saw its
valuation drop by more than $100 million as a result of a drop in the value of Bitcoin. Although its
recovered that value and then some, the risks remain and should be taking into consideration by
Should you launch an ICO
If your product and company are genuine and ready for market, an ICO is a great way to raise funds
fast. However, it is important to keep in mind the likelihood that the bubble will burst at some stage in
the future, and it is worth considering whether any investments received should be stored in a more
risk-averse form, such as a government-backed currency, as opposed to being subject to the rises
and falls of the cryptocurrency market.