The shiny world of cryptocurrencies has started to gain a lot of attention lately and for a good reason. Bitcoin price went up four times from the beginning of the year, which launched a new gold rush, as everyone is looking to get a piece of the cake.
Understandably, growing interest of the public has led to massive growth in the cryptocurrency market. With the total market cap of stunning $87 billion, and over 800 different digital currencies, the crypto market has become one of the fastest growing markets in history.
But who funded the development of all these cryptocurrencies? In the majority of cases, the answer is - ICO.
An Initial Coin Offering (ICO) is a way of raising capital through the sale of tokens or crypto coins, which are somewhat similar to shares of a company. The tokens are typically exchanged for other cryptocurrencies, usually Bitcoin or Ethereum. Since the success of Ethereum ICO, ICOs are more frequently used to fund the development of new cryptocurrencies and other crypto-related projects.
An ICO typically sets a minimum amount for the fundraiser and a deadline for reaching that goal. If the funding goal is met within the specified timeframe, the money raised is used to fund the project, and the company behind the ICO can distribute tokens to investors which can be traded on the cryptocurrency exchanges, such as Bittrex or Poloniex.
Many people in the crypto community agree that ICO is a long-awaited solution for non-profit foundations to raise funds, especially if they are looking to build open-source software. This was the case with Ethereum ICO, a decentralized application platform based on blockchain technology. Ethereum raised $18 million in its 2014 crowdsale, the largest-ever at the time, and the early investors have made significant gains, as the coin's price has increased from $0.4 (in ICO) to over $280 at time of this writing. By the end of the 1st quarter 2017, almost $400 million has been invested through initial coin offerings.
The key characteristics of an ICO include:
The first ICO was held by Mastercoin back in 2013, which raised approximately 10,000 Bitcoin, worth around $1 million at the time. It was a project aimed to create a Bitcoin exchange. Early investors made huge profits, starting the ICO hype. Later Mastercoin merged with Omni and Counterparty, two coins with a similar purpose.
After Mastercoin, Ripple was created as a cheap and fast way for transferring funds. The company sold 100 billion Ripple tokens to fund the development of the platform.
Next ICO closely followed Mastercoin and Ripple, selling 1 billion tokens to early investors. The ICO barely gathered the double-digit amount of Bitcoin. Today, the NXT token is worth much more, and Next has become a stable and relatively prosperous digital currency.
In 2014, Ethereum made history by gathering 31,500 Bitcoin in the biggest ICO at the time. The Ethereum investors made massive profits, and since then ICOs became an increasingly popular way of gathering funds.
While cryptocurrencies have made progress in the regulatory landscape with countries such as Russia and Japan recognizing them as legal tender, ICOs have yet to pass the regulators. The legal status of ICOs is undefined in most countries.
The Securities and Exchange Commision (SEC) has publicly announced that ICOs should be required to protect the investor and, considering the size of the market, ICOs have certainly caught their attention.
Considering the rising number of ICOs and the risks associated with investing in startups and how both the companies and the investors respond to the magnifying glass of regulators will probably decide the fate of ICOs, which are able to raise considerable sums as a result of the high interest in perspective crypto projects.
One thing is certain, a legal recourse that would enable enforcement agencies to take action against startup scammers and fraudsters would be a great start.
Besides the positives, there are also some negatives to be aware of when it comes to ICOs.
Many ICOs were a failure, with too many copycat projects or developers merely failing to reach expected levels, driving the price of initial coins to zero. A lack of governance tends to leave investors open to Ponzi schemes and other scams. As regulators lag behind the segment, it is likely that the number of fraudulent ICOs will be on the rise in the following years.
So, while some level of control starts to appear on the market, the question remains on whether this is another investment bubble. The skeptics have been all-present since the Global Financial Crisis, labeling even Bitcoin as a financial bubble waiting to burst.
The reality is that ICOs have proven their value, as they brought to life many useful projects, and not to mention investors who earned substantial profits along the way.