Raising Capital in Crypto Markets: The Initial Coin Offering

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Cryptocurrencies and the blockchain are disrupting business in every conceivable way. It’s a radical new paradigm that levels the playing field for all parties involved.

It might even give newcomers and smaller organizations an advantage. They’ll be able to incorporate new technologies and adapt more quickly than their competition.

It’s little surprise that business owners have been leveraging blockchain technology in new ways. These include ways to raise capital and fund businesses without having to be beholden to big-box investors.

This is where initial coin offerings come into play.

Initial coin offerings (ICOs) bring together venture capitalists and innovative startups. This is clearly to everybody’s benefit, as ICOs raised a total of $11.4 billion in 2018.

The number of ICOs continues to increase, as well. There are currently 5729 ICOs listed, at the time of this writing.

But what is an initial coin offering? And why is it causing such tremors through the world of finance? Let’s find out!

What Is An Initial Coin Offering?

Many investors didn’t take Bitcoin seriously when it first hit the market. At first, Bitcoin and cryptocurrencies, in general, were treated as a novelty. It was rare to the point of being unheard of to see businesses that would accept cryptocurrency in real life. So much so that it was newsworthy for a business to accept cryptocurrency payments, like this food cart selling grilled cheese in Seattle, Washington.

Even among the technological elite, there was doubt about whether Bitcoin and cryptocurrencies would ever be able to catch on. This skepticism caused Bitcoin to not be worth very much when it was first being traded publicly, averaging between $.0008 and $.08 per Bitcoin.

Imagine investors’ surprise when Bitcoin not only stuck around but skyrocketed over the ensuing decade. The current going rate for Bitcoin is around $32,000 each.

Those kinds of returns are blood in the water for potential investors and venture capitalists. This gave birth to a whole new industry. It put the creators of new cryptocurrencies in touch with potential investors.

This is an initial coin offering.

How An Initial Coin Offering Works

Process of Initial Coin Offering (ICO)

ICOs begin with someone having an idea for a new form of cryptocurrency. First, they’ll need to differentiate it from other cryptocurrencies that are already on the market. The specifics are written up in a white paper in as much detail as possible, which is intended for potential investors.

The white paper is then posted to a website and the ICO campaign is live.

The company that’s starting the new cryptocurrency can then create tokens using the blockchain. They can then issue tokens based on financial contributions. These can be paid for with forms of cryptocurrency or with fiat capital. These tokens can then be traded on cryptocurrency exchanges like any other crypto offering. These tokens can be for a variety of different functions. They fall into two main categories – security tokens and utility tokens.

Utility Tokens

Utility Tokens

Utility tokens are often referred to as “user tokens” or “access tokens.” They represent access to a business’ future service or product. This allows business owners to fund their future projects in exchange for investors getting early access.

Utility tokens are not intended as an investment opportunity or as a share of the company. This shields them from the regulatory oversight of federal regulatory committees.

Think of utility tokens as similar to pre-orders for a product or service. This approach can be wildly successful.

Consider the case of Filecoin, an open-source, public data storage marketplace. Filecoin was able to raise $257 million by offering utility tokens for their cloud storage platform.

Businesses that offer utility tokens often refer to them as “token generation events” get around regulations for ICOs.

Security Tokens

Security Tokens

If a token gets its value from an external asset or it can increase in value-based upon external factors, it’s classified as a security token. This makes it susceptible to federal regulations and guidelines. Non-compliance with these guidelines can result in hefty fines. This can completely stop a new cryptocurrency project in its tracks.

Once a security token has been verified, however, there’s a wide swathe of activities that they can be used for. One of the most common and popular is shares of future stock in a new company.

Many investors feel that one day companies will issue stocks themselves through ICOs.

ICOs Vs IPOs

Initial coin offerings are a cross between an initial public offering (IPO) and a crowdfunding campaign. They’re not identical to IPOs in that there’s less regulatory oversight, which can be both a blessing and a curse. IPOs require a legal document to be drafted, which is known as a prospectus.

The prospectus states that a coin offering will be made public. It also contains information on the company itself, who they are, and what investors they’re working with. This is all towards the goal of investors being able to make informed decisions, but it also mires IPOs down in red tape and bureaucracy.

ICOs are far less restricted. The requirements around ICOs are only if they’re intended as security tokens instead of utility tokens. The lack of requirements makes it harder to research companies that are offering ICOs, however. This means there are risks that you take if you’re looking to get in on a new cryptocurrency on the ground floor.

Advantages and Disadvantages of ICOs

We’ve seen how ICOs give investors the chance to strike it rich on new blockchain-related technology. We’ve also hinted at some of the potential dangers. ICOs can sometimes slip between the cracks and not have the oversight necessary to ensure a solid investment.

Let’s take a deeper look at the pros and cons of initial coin offerings for both companies and investors.

Advantages of ICOs

The first advantage of ICOs is that absolutely anybody can buy tokens. This frees new businesses from having to rely solely on and appeal to investors and venture capitalists. Financial institutions can sometimes be lacking in imagination, wanting only a solid return on investment in a relatively short amount of time.

ICOs means that you can essentially crowdfund the startup capital to get your business off the ground. This could be a major benefit for businesses offering more humanitarian or visionary products or services. It also makes the pool of potential investors far, far greater. IPOs are generally reserved for investors with at least $1 million.

That’s only about 3% of the population of the United States, to put that figure into perspective.

It also means that business owners are not tethered by geography in any way, shape, or form. You can sell ICO tokens to anyone on Earth, no matter where they’re located. This makes a business far more accessible than if it had to rely solely on local interests.

This also means that ICOs are always open for business. An IPO receiving hundreds or thousands of transactions from all over the Earth would likely be frozen, at least until it could be assessed. There’s no such concern with ICOs which can essentially collect money all day, every day, no matter where it comes from.

Don’t overlook this benefit. The population of the United States only accounts for around 5% of the entire globe. Limiting your investment pool could mean missing out on a vast swathe of potential investors.

Unlike IPOs, ICOs also have worth in-and-of-themselves. With an IPO, you may have to wait for it to come to maturation before you can recoup your investment. This is not the case with an ICO, which could theoretically be sold or traded the second it comes into your possession.

Granted, IPOs will likely return a much greater return on investment. The ability for ICO tokens to remain part of the greater cryptocurrency ecosystem means that there’s a lot more capital running through a new company, funding is much faster.

ICOs also take the concept of decentralization inherent to blockchain technology to its ultimate conclusion. For all of its philosophical bluster, much of the tech industry remains troublingly beholden to Silicon Valley, if only for the fact that’s where they’re located. Offering an ICO means a company can offer a good or service that speaks to the rest of the population and not just ventures capitalists from the Bay Area of California.

Disadvantages of ICOs

The main downside of initial coin offerings is also part of what makes them such an appealing investment. The lack of regulatory oversight means that innovative new coin offerings are able to make it to market with a minimum of red tape to slow them down. It also means that some less-than-stellar investments and shady offerings could also end up being traded.

ICOs can also be a little less-than-secure. This can make their register more susceptible to being hacked, which somewhat defeats the purpose of using blockchain technology in the first place.

The ease of entry and access to a wide pool of investors, who may be blinded by the potential of the next big payoff like Bitcoin, means that ICOs can sometimes attract under-qualified companies and fly-by-night organizations who will never see their cryptocurrency hit the market let alone flourish for the investors to reap their rewards.

Laws & Regulations

Initial coin offerings are quickly becoming known as a valid fundraising setup and investment opportunity. Rules and regulations around them are becoming more established, making ICOs more of a safe bet for investment but there are still risks.

If an ICO is intended to be a security token, it may need to be registered with the U.S. Securities and Exchange Commission. Simply calling a token by another name does not mean that it doesn’t still qualify as a security token so it’s a good idea to check if you’re unsure how your ICO qualifies.

For potential investors, rules and laws are coming into place to help ensure an ICOs validity, but there are still grey areas where things can slip through the margins. Not all ICOs are based out of the United States, for instance, meaning they fall under the jurisdiction of other countries.

For investors looking to invest in an ICO, it’s highly advised you do your due diligence to the fullest extent of your ability before investing any money in a new coin offering.

Examples Of Successful ICOs

Consider the case of Overstock.com. The popular website announced tZero, which offered an ICO to fund the development of a new security token trading platform.

tZero tokens adhere to federal guidelines. This means that token owners receive quarterly profits. This is just another example of the blurred lines between security tokens and stocks.

Even some of the most successful cryptocurrencies started out as an ICO. Ethereum started out being sold for .31 a token. It’s currently going for around $700.

This is a 200,000% profit!

ICOs IN 2021

Considering the shakeup of the last 12 months, it should come as no surprise that more and more companies are embracing initial coin offerings as 2021 gets underway.

There’s one called Point Pay that looks promising, bridging the gap between cryptocurrency and fiat currency by integrating traditional banking and cryptocurrency trading platforms.

Or there’s another called Offshore Bitcoin, which will make cryptocurrencies even less beholden to the United States. Offshore Bitcoin is said to be offering its ICO until July 2021.

Finally, there’s a new platform called Feedback Token. Companies can receive feedback tokens in appreciation for quality service. These tokens can then be spent to further improve a product or to enhance the customer experience even further.

These are just some examples of how blockchain technology is being integrated into the business. If the last 10 years are any indication, this barely begins to scratch the surface.

Looking To Start Your Own ICO?

At iMi Blockchain, our consulting and coding services offer everything you need to get your blockchain project off the ground. Whether you’re looking to launch your own initial coin offering or want to leverage blockchain technology for Industry 4.0, contact us today to schedule a consultation

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FAQ ABOUT INITIAL COIN OFFERINGS

What is initial coin offering?

An ICO (initial coin offering) is equivalent to an IPO (initial public offering). It is used in the crypto industry and just like a new type of crowdfunding. To develop and launch a new product or service a company can raise money. Investors will get a newly formed cryptocurrency or token in return.

How to make an initial coin offering?

As a start-up, you typically publish a white-paper, explaining the business idea. Furthermore, you will provide the number and price of tokens you plan to sell. Finally, define the sales period, the sales cap, and all other details related to your business case. You may find investors to fund your company, product development, or service offering.

How do ICOs work?

An initial coin offering (ICO) works similarly to online crowdfunding. Compared to initial public offerings (IPO) it is all about cryptocurrencies or tokens. Investors can fund a project in tokens or cash while they will get a newly created token at a date and price set by the issuer.

Are ICOs regulated?

There is big to no regulation when it comes to ICOs. Currently, a minority of countries and governments have clear rules and regulations. Major countries like the USA or the European Union have clear and strict regulations to follow before you can launch an ICO.

Where to find initial coin offering?

There are several platforms where you can find new ICOs. Major platforms are 1. topicolist.com; 2. icobench.com; 3. coingecko.com; 4. smithandcrown.com; 5. cryptowat.ch. You can use Google search as well.

Did Bitcoin have an ICO?

Bitcoin did not have a classical ICO. But today, in an ICO, a quantity of newly formed cryptocurrency or tokens are sold to investors. This in exchange for legal tender or well-established cryptocurrencies such as Bitcoin or Ethereum.

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Marcel Isler

Marcel Isler

Marcel is a Business Economist and founder of iMi Blockchain. A Consultant and international Keynote Speaker. He studied at the University of Oxford. He helps enterprises to implement Blockchain applications. On our blog, he writes about distributed ledger technology, smart contracts, cryptocurrencies, industry news, and future trends.

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