If you’ve been paying interest to the technology and finance industry the last few years, you’ll have heard the term ICO circulating rather frequently. It’s a new idea that’s creating waves in Silicon Valley, and many of the world’s biggest technological institutes are struggling to grasp what it is.
To start, it stands for an ‘initial coin offering.’ While this now makes it slightly easier to guess what it revolves around, the answer still isn’t clear. In short, it’s a method of raising funds for a project by using cryptocurrency. Primarily, initial coin offerings serve as a way of creating completely new cryptocurrency – Ethereum and ZCash are two examples of cryptocurrency that was developed this way. Furthermore, an ICO has also proven to be a popular method of funding a new business idea.
A business can offer tokens as part of an ICO. Investors give them something valuable like Bitcoin, Ethereum and they present them with a token which is sometimes paid out through a smart contract as a guarantee. This token could represent a share in the company, or it could be a service such as storage space. It’s used as an incentive to get people to offer their valuable cryptocurrency.
Lots of companies are launching initial coin offering events, various resources exist where you can find the top ICO lists for researching firms you may want to invest in. We recommend that you use news aggregation tools for finding cryptocurrency news tool as soon as it is released, this will allow you to find new and exciting ICO’s launching.
If this sounds confusing, then you’re not alone. It can be a difficult concept to get your head around, but many companies are finding success by using ICO’s. In fact, there’s been approximately $1.5 billion raised by this method to this day. Some big-name celebs have gotten in on the act too such as Paris Hilton, it’s starting to become a very popular idea.
What’s interesting is that it’s a separate entity to regular funding methods. Financial publications have deemed it as ‘unregulated’ which is partially true. It is regulated, but it’s regulated by itself in its own little bubble. As of yet, the Government doesn’t actually know how to regulate it. There are terms in ICO’s that are specific to this concept, and there are people that solely dedicate their life to this cryptocurrency funding platform. In essence, the ICO market is creating a new financial subculture before our very eyes.
The question is, how?
How has the ICO market suddenly managed to develop this new financial subculture when there are plenty of other options available. Why are companies choosing this as their funding method compared to regular crowdfunding or traditional venture capital?
Primarily, it comes down to the newness and innovation surrounding this market. Why crowdfund using real money when you can use cryptocurrency? It’s an incredibly popular way for companies in the tech industry to gain funding as people with enough bitcoins to donate will typically already have an interest in the tech industry. Plus, take into account the point raised earlier; the government isn’t regulating ICO’s. They don’t know how, and this means you don’t have to adhere to the same regulations and rules that you may get with traditional funding methods. There are no banks involved, no ties to investors, everything is completely separate – and people love that.
Couple all of this with the rise in value of certain cryptocurrency and you can see why this subculture is fast developing. As things like bitcoin become more and more valuable, it makes them a desirable resource when funding a company. Not only that, but the fact you can develop new cryptocurrency through an ICO is also fuelled by this increased market popularity. People want to see more and more options other than the classic bitcoin. The more currencies that are created, the more this financial subculture grows.
There’s no denying that ICOs are popular, and here’s where things get more interesting. Ideally, the process should go a little like this;
- Step 1: An entrepreneur/business comes up with a new idea and promotes in online.
- Step 2: People on the ICO market buy tokens if they’re interested in the idea.
- Step 3: The company uses their funding to develop their idea.
- Step 4: The people with tokens can now use their token on this new platform.
The problem is that these ‘tokens’ grow in value if an idea is particularly popular. As a consequence, all hell breaks loose. People are now contributing to a funding project, getting a token, then selling or exchanging these tokens with other people.
As a result, you have a situation where incredibly wealthy people/organizations will buy loads of tokens to fund a popular idea, then sell them to the community for much more than what they paid. From this, new companies have spawned to try and prevent issues where the wealthy get in ahead of everyone else. They charge entrepreneurs money to put rates on their ICOs, meaning people can only buy a certain amount for a certain price, etc. You even have brokers looking to work in this space too.
Things don’t end here as you have this idea of ‘bounty hunters’ in the ICO market. While it may sound menacing, their job is purely to help entrepreneurs in exchange for some tokens. Their tasks vary, but they’re mainly centered around promoting the idea and generating as much interest as possible. From this, you have ‘bounty managers’ who look after all the bounty hunters and ensure everyone is doing their jobs.
Needless to say, it’s a subculture that runs incredibly deep, and everything is carried out using cryptocurrency instead of real money. What will the future hold? No one knows for certain, the subculture could grow, or it could eventually get hit with government regulations. For example, China banned all ICOs earlier this year, so it’s clear some governments don’t want it to develop much further.
The Financial Conduct Authority in the UK recently issued a warning regarding ICO’s so please take their advice and invest wisely.
Jenny has been reporting on small business issues since 2001 where she held a number of freelance positions across the leading SME publications in the UK. Specialist subjects included SME financing and tax.