IT technologies are developing rapidly nowadays in order to cater to our demands and needs. In 21st century, every day brings us new inventions designed to make our life easier. Today we want to tell you about a hot trend that has become extremely popular among Bitcoin enthusiasts.
ICO (Initial Coin Offering) is a new way of crypto-token crowdfunding. Its a modern opportunity for Bitcoin startups to raise funds allowing them to proceed with development. Such fundraising model creates an opportunity to invest outside the accredited system.
How does ICO work?
Any company interested in fundraising via ICO is supposed to release its own crypto-tokens. The tokens are meant to be sold to those willing to invest in a project, in exchange for Bitcoins or fiat money. As a result, the company receives financial support in exchange for giving the buyers their crypto-token shares. The more tokens are being sold, the more expensive the shares become. The contributor can either keep these crypto-tokens and help run the service once it’s up and running, or sell them for profit.
Alternative to crowdfunding
History knows many successful projects that have raised funds via ICO. As an alternative to the traditional IPO, it’s an easy and effective way to attract investors. Last year, the companies have raised $260 mil with help of ICO. Since the beginning of 2017, over $560 mil have been invested in the startups.
ICO is an alternative to crowdfunding and effectively changes the way startups capitalize themselves. Basically, it’s a way of finding investors without the traditional financial institutions. ICO investors often aren’t professional traders. They are enthusiasts who support a certain startup and believe it will be a success.
Tokens can’t be considered the same as equity stakes, even if they both operate on the same principle. Anyone who’s willing to sell securities needs to register them with the Securities and Exchange Commission first. When it comes to tokens, there is no government regulation. Any startup can release tokens relatively quick and without much paperwork. While such approach provides the companies with lots of new opportunities, there’s always risk of being scammed.
Successful projects and records
In 2013, Mastercoin was one of the first startups that attempted to raise money via ICO. Despite the skeptics who called it a scam, the company managed to raise $500,000.
Ethereum was another notable project successfully supporting the trend. It managed to raise $18 mil. Ever since then, ICO kept setting new fundraising records, until the infamous DAO managed to raise $150 mil. The company then got hacked and lost $50 mil.
No rules
Due to lack of regulation, the authorities are unable to react to events similar to what happened with DAO. Not having a determined legal status makes ICO a quite risky investment.
Nobody provides any legal guarantees for the protection of the contributors. Buying crypto-tokens allows the investor to own part of the future company’s assets and have a claim on profit. However, if the project never materializes, or the founder simply runs away with your money, there isn’t much you can legally do to fix the situation. The money is being transferred to the founder’s electronic wallet before the entity obtains any legal status. The corporate structure is being built after the funding has been acquired.
Where to invest?
Looking at the startups that managed to raise funds via ICO, you won’t find many that became complete projects. Of course, it takes time to build a successful global company. But big wins would certainly give the investors some extra motivation.
It is sometimes hard to distinguish a brilliant project from a scam. Experts ask the soon-to-be investors to do their due diligence and to get familiar with the startup before contributing to it. Some IT startups have a great potential, but it isn’t always easy to tell which one will become the second Google, Apple or Facebook.
Sometimes, the scammers try to inflate the price of the stock they own by providing false statements, in order to sell it at a higher price. Another possible risk are the cyber attacks aiming to lower the price of crypto-tokens and benefit from it.
ICO is here to stay
Despite the risks that come with using ICO, it’s a simple, yet effective way to raise funds that is open not only to professional traders, but to regular contributors who share sympathy for a certain startup.
A need for new investment opportunities outside the accredited system has become more obvious than ever. There’s still startups that look like an outright scam, however, the ICO community itself has developed crowdsourced due diligence strategies to protect the users. In 21st century, ICO is more than just a way to raise funds. It indicates the world entering a new era of blockchain capitalism.
