Initial Coin Offering is the hot trend booming in the Blockchain world. Consider it as a funding catapult for new-born cryptocurrencies to come alive into the digital world. Simply speaking, an initial coin offering (ICO) is more or less like a fundraising platform on which investors can buy some or many units of latest cryptocurrencies in exchange of older and higher-rate cryptocurrencies like Bitcoins and Ethereum.
As risky as this may seem, people are putting faith in the system by investing heavily. According to a post by Economist: “Nearly $250m has already been invested in ICOs, of which $107m alone has flowed in this year,” which is indeed a huge number. Moreover, with the success of Ethereum ICO, the approach has gained even more strength. This heated up space has opened funding opportunities for startups around the world.
Cumulative Blockchain Investment 2017 YTD (Source- Coindesk)
But here comes the twist! Lately, in the month of September, China has banned ICO fundraising thus, seriously disrupting the economic and financial order. While the SEC in the U.S. has released warnings about the risks of token sales, China has already implemented regulations around it.
What’s the frenzy all about?
The question here is that the recently ballooned initial coin offering market going to stay or burst out as a bubble? Is it ready to replace the traditional funding approach for startups out there? Well, let’s look on some facts and conclusions here.
The Risk Part
What makes the initial coin offering approach “risky” is that the coins being exchanged in the markets are serving the purpose for businesses that don’t even exist yet. The process is more or less to look at whitepapers and judge which idea is going to work out the best and eventually invest in it. Investors interested in the marketplace are depending on the chances and betting on the business ideas that capture their interest and trust.
Another drawback of ICO investment is that it isn’t very tax-efficient on issuers’ end. Consider the scenario where a startup successfully raises money via token sale. For the final revenue generated, they’ll have to pay tax according to the money raised. Whereas in the VC funding approach the process is inexpensive, uncomplicated and less risky.
While giving an interview to CNBC, Wikipedia’s founder Jimmy Wales said, ““I think blockchain is a super interesting technology but there are a lot of fads going on right now… There are a lot of these initial coin offering which are in my opinion are absolute scams and people should be very wary of things that are going on in that area.” However, he added that, “blockchain will be with us for some time to come.”
Since ICOs are unregulated, they fail to provide protection to investors thus, resulting in fraud or loss. The recent Tezos ICO controversy is an outright example. The dispute has highlighted the risks in the current frenzy over initial coin offering (ICOs) which have raised more than $2 billion this year. Therefore, it becomes highly important to judge an initial coin offering rightly before investing in it.
How to access an ICOs worth?
Keep an eye on the product dimension. In the case of ICOs many people try to follow the approach of investment of that of an IPO as they both seem similar investment options. However, that’s not the case. You should be able to judge the product idea on the basis of the following categories:
- No product- High risk as there is no face value to the idea. Example- Waves Platform. Even though it raised 20 million USD there’s no such existing thing yet.
- Initial-level product- Can be considered as an option for investment. Example- Iconomi. Though the technical code for the face product doesn’t exist the company doesn’t hide it. They gained people’s confidence via their existing product Cashila- A reliable product that is in the markets for about a couple of years.
- Fully-functional product- Super rare but promising product category. Example- Ethereum
The Advantage Part
Launching an ICO however, is an attractive model as huge amount of money is being invested by people despite the risk factors. The incredible price rise of not-so-old cryptocurrencies like Bitcoin and Ethereum is another fact that strengthens the concept.
Consequent market price rise of Bitcoin (Source- blockchain.info)
Besides, when compared to traditional investments and VC funding for startup ideas, the ICO launch approach stays ahead in the game. Contrary to the traditional system, you don’t lose time in raising, nurturing and proving your startup idea on your own, rather you save a lot of time as you get the money in the initial-most stage.
Also, with token sales, the supporters of your startup idea believe in it and thus, eventually turn into early adopters and campaigners.
There’s no doubt in saying that the ICOs have worked extremely well in the past but in order for them to maintain the success rate in the future, it’s necessary to persuade potential investors.
As long as people see digital cryptocurrency as an asset, the valuation of new coins will keep on increasing. All that the market needs in order to grow is more investors and even more impressive projects in the years to come. The ICO market space has the potential to expand not immediately but eventually.