Initial Coin Offerings (ICOs) appeared on the horizon in the blockchain world with the first ever such issuance by a company called Mastercoin in 2013. The name has been changed to Omni since 2015. It’s built on the Bitcoin blockchain with a focus on developing a decentralized exchange, smart property implementation and savings wallets. This project involved a month long fundraising activity where investors would flip (read as send) their Bitcoins to a predefined special address termed as Exodus address. The anticipation by investors was that as the Omni platform was being developed, the Omni tokens will increase in their value and they could be sold to realize a return. Over 500 people traded 5000 Bitcoins (amounting to USD 500,000) in exchange of Omni tokens even after a warning that this could just be a scam. Later, Factom and Maidsafe collectively raised USD 1.25 million through the sale of Omni tokens. Today, Omni tokens command a market capitalization of USD 21.8 million with 560,000 tokens in circulation.
Rapid rise in ICOs
In 2016, there were 64 ICOs raising over USD 103 million. In 2017, USD 327 million was raised through ICOs during the January-to-June time frame; it surpassed the total VC investments that stood at USD 295 million. There have been blockbuster ICOs like SingularDTV (USD 7.7 million), Golem (USD 8.5 million) in less than 20 minutes, Brave (USD 35 million) in less than 30 seconds by issuing BAT (Basic Attention Token), Storj (USD 30 million) in 7 days. The curated list of ICOs, both issued and upcoming, maintained by Smith + Crown suggests that ICOs have become all pervasive in logistics, payments, banking, financial trading artificial intelligence, sports events gamified betting, and augmented reality.
Demystifying the ICO
Sounds exciting! Before you rush to source a Bitcoin or Ether and flip them to for any ICO token, let's fully understand the concept of ICO their upsides and downsides.
Crowd Sale with a Difference – It involves retail or corporate investors buying digital assets from Distributed Autonomous Organizations by investing either Bitcoins or Ether. It has benefits of a Crowd Funding like:
- Catering to a global investor base,
- Providing access to retail investors,
- Extending low deal fees and
- Facilitating a faster execution
In addition to the above, ICOs score over Crowd Funding by providing:
- Secondary liquidity/transferability
- Low trading/transaction fees &
More and more companies are justifying the issuance of these tokens as they believe that they will create significant value in the future. Also, it may be a good idea to start early and be a part of the system before it becomes pretty big.
Changing ICOs Landscape
While it is true that there has been virtually no legally compliant token sale till date, one token offering (Adel with the issuance of Adelphoi token) has made an effort to come close to being compliant with securities law. Of course, law and enforcement will catch up.
Additionally, ICOs world has seen the emergence of world’s first underwriter to root out unverified coin offerings in the form of CoinQX Exchange Limited. Also, a couple of other entities have been established to protect ICO investors and ensure adherence to best practices by blockchain entrepreneurs. These organizations are Wings, ICONOMI and Adel.
Answering the Million-Token Question: Should I become a VC by flipping a Bitcoin or Ether?
The fact is ICO culture will stay and will far exceed investments through traditional VC. So the focus should be more on ‘How should I invest?’ rather than ‘Should I invest at all?’
To answer the ‘How?’ aspect, as an investor, one should focus on the following:
The team behind the ICO, their credentials, and their ability to execute the vision. With respect to
Brave, the business itself is more interesting to make use of the blockchain. Brave’s founder Brendan Eich who created Java Script while being the CEO of Mozilla believes that the current internet advertising system is inherently broken and would like to use Blockchain to make things more efficient for advertisers, publishers, and users. The pitch to end users is tighter privacy controls, faster loading times and the potential to earn money simply by reading the content.
Limited raising of funds, controlled release of funds, and a much longer time period for the founder to unlock the value.
This is very important to safeguard the interests of the investors as well as the entire community. The recent crash in Ether prices was primarily on account ICOs founders cashing on the funds raised through Ether post the completion of the sale.
Essentially the focus should be on fundamentals of underlying ICO issuance rather than the hype. Even if one would not like to invest regularly in ICOs, the periodic scanning of ICOs market provides an opportunity to discover newer businesses being built on Blockchain there by keeping a tab on the emerging and changing trends. Obviously, if any of the ICOs is too compelling, it's not a bad proposition to occasionally flip a Bitcoin or Ether and gamify the investment as a gain or a loss is inherent in every game!
And, if you think that the risk of losing investment is only endemic to Blockchain and digital businesses, recent history reminds us of the failure of Pebble, which involved making smartwatches even after raising USD 14 million on Kickstarter.
In order to assist the numerous players of cryptocurrency and the wider blockchain ecosystem, Let’s Talk Payments today releases its report titled “The Evolution of the ICO.” This report, while mapping the evolution of the Initial Coin Offering, not only dwells on existing organized investment approaches to ICOs for retail and institutional investors but also talks about the procedure to conduct ICOs for companies.
Table of Contents:
State of the Global Crowdfunding Market
- Token Sales & Crowdfunding
- The Gap
- The Geographic Reach
Introduction to Tokens
- What Are Blockchain Tokens?
- Legality of Tokens – The Howey Test
- Regulating authority in the US – SEC or CFTC?
- ICO Legality & ICO Havens
Introduction to Conducting Initial Coin Offerings
- The 5 Essential Elements
- Legal Partners & ICO Enablers
ICOs Over Time
- Volume Vs. Venture Capital Funding
- Value Raised
- Blockchain Vs. Non-Blockchain ICOs
- Token Sale Case studies: BAT & CIVIC
- Prominent ICOs
The Way Forward
- Experts Speak
- VCs & Hedge Funds Mulling ICOs
- Prominent Crypto Hedge Funds