If you haven’t been living under a rock in the last year, you might have heard that bitcoin has grown 17X in the last year. In other words, if someone invested $100 dollars into bitcoin just one year ago, that would now be worth $1,700, and who knows what it will be worth in another year. The rapid growth of bitcoin has spurred the world into some sort of “cryptocurrency frenzy”.
Thousands, and maybe even millions, are purchasing bitcoin through exchanges like Coinbase and others. In addition, many individuals are educating themselves on best practices so that they can make huge returns on their investments. The rapid growth of bitcoin, as well as ethereum and litecoin, which are two other popular cryptocurrencies, have given rise to a new means of fundraising for organizations — Initial Coin Offerings (ICOs).
What Are Initial Coin Offerings?
An ICO is a way for a company to raise funds without going through an institutional fundraising round from a venture capital firm or taking money from a bank. The name “ICO” mirrors “IPO” (Initial Public Offering), but the mechanics of the two are quite different.
An ICO is when a company offers a new cryptocurrency to the market, and investors can purchase that currency at a discount with bitcoin. You do not need to have a certain net worth to invest in an ICO. Anyone can invest.
Some might be wondering what is the purpose of an ICO? The short answer is that investors are trying to make huge returns in a short period of time. Due to the cryptocurrency market being so volatile in the past year, people want to buy new cryptocurrencies through ICOs in the chance that what they are buying will appreciate in value, and they can sell if for a profit.
So, for example, if WebiNerds wanted to raise funding, we could issue an ICO for “WebCoin”. Let’s say that we sell 30 million worth of WebCoin. Over time, the hope is that the value of WebCoin would increase, and the early investors can make their profits.
Who is Doing an ICO?
There are many companies doing ICOs these days. In fact, in Q2 of 2017, a total of $800 million was raised through ICOs. The scale of these ICOs are staggering, as companies like Filecoin and Tezos both raised over $200 million EACH in their fundraising.
ICOs are becoming a fairly normal practice of raising funding, but if it is such a simple way to raise money, then why is everyone not doing an ICO? The best answer is the Securities and Exchange Commission (SEC).
What About Regulation?
ICOs are not being regulated right now, but due to the sharp increase of ICOs in a short period of time, the SEC has raised their eyebrows (and for good reason). In the past, there has not been a need for regulation, as it was just a speck on the SEC’s radar, but as of Q2 and Q3 of 2017, there have been an influx of ICOs.
On December 11th, the SEC issued a statement talking about ICOs and how professionals in the field should treat them. It is a long read, but an important one because it shows that the SEC is watching and hints at the idea that ICOs could become regulated in the future.
No one knows the timeline for when ICOs might get regulated and what that would do to the their growth. Only time will tell how the government will regulate them and if that regulation will even be effective.
Who is At Risk With ICOs?
The ICO Investors
When certain parties are winning, other parties are losing. In the cryptocurrency space, it is no different. With ICOs, the biggest risk takers are those that are investing their money into them. Everyone wants to invest in the next bitcoin, but it is likely that two years from now, 90% of the tokens that were bought through an ICO in 2017 will be worth $0. There are plenty of scam artists trying to cash in on this trend, and the uneducated investors are the ones that will take the hit.
Venture capitalists are also at risk. If ICOs raise more money year over year, they will become a more viable model to fundraise for a company than through venture capital. Instead of founders going through a grueling process of raising and giving away part of their company, ICOs may start to seem like the more viable option. Some VCs might adapt, and some may not.
To sum it all up, an ICO is when a company raises funds by issuing a digital coin that people can purchase (at a discount) in the hopes that it increases in value over time. This is not guaranteed and makes investing in ICOs even riskier than investing into startups.
ICOs have not yet been regulated, but the SEC is watching carefully and could do something at any point. At the end of the day, no one really knows what is going to happen. It is the wild wild west, and only time will tell what ends up happening with the ICO boom.
WebiNerds is starting to get into emerging technology spaces such as AI, chatbots, and, one day, maybe cryptocurrency. If you want to make use of some of these technologies, feel free to reach out —> sales@WebiNerds.com