A BEGINNERS GUIDE TO ICO’S

The world is changing and evolving each day. Services like radio and TV are becoming obsolete as newcomers stomp their way into the places they once occupied. The banking and finance world is no different, just look at Bitcoin for proof. Bitinfocharts gives us a glimpse into the popularity of bitcoin by showing the number of wallets which contain at least small amount of bitcoin. The numbers are staggering. All signals are pointing to the fact that crypto will be the way of the future.

Therefore, when terms like ICO start to pop up around us, we should pay attention because ICO’s might not only put venture capitalists out of business and change the face of finance forever, but they also have the potential to change how we develop as a society because ICO’s have the power to democratize the funding of ideas better than any technology that has come before it.

What is an ICO?

ICO stands for Initial Coin Offering. The term refers to a time period where funds are raised to launch a new cryptocurrency project. Project founders can launch their ICO on blockchains such as Hukaii. They can set a condition (i.e. smart contract) that their coin will not be created until a certain fundraising goal is met by a certain blockheight (i.e. time).  After the token is created on a blockchain, these projects are usually presented on a whitepaper with all the parameters of the ICO laid out for those wishing to participate. For example, the whitepaper might contain a summary about the project itself, technical specifications, the potential reach of the project, the amount of money sought for development and so on.

People who wish to support a project are presented with an opportunity to buy the project’s uniquely named internal coins or tokens. The quantity of tokens released to the public will vary from one project to another and the money raised, will often be directed towards the furthering of project goals.

One of the first cryptocurrency projects launched via ICO was a project known as Ripple. Ripple decided to tackle the big problem of cumbersome and slow international money transfers. Sending a wire transfer overseas is an expensive and time consuming process. In fact, the CEO of Ripple has pointed out that in some cases, it’s faster to get on a plane with a suitcase full of cash and deliver the money yourself, than it is it send money through the international banking system.

The Ripple project started in 2012 to solve this problem. They started by creating around 100 billion tokens called XRP, which were sold to fund Ripple. However, XRP are not “shares” of Ripple. Although they fluctuate in value and represent both real and perceived value of the Ripple network, they also serve functions within the Ripple network itself. For example XRP is used to pay transaction fees and they are also used as a bridge currency for the completion of transactions. As you see, the tokens have utility and use within the system itself. To help you understand this better, take a moment now and watch the introduction video to how Ripple works below.

OTHERS REALIZE THE POWER OF ICO

Since then, many cryptocurrencies followed Ripple’s lead, the most prominent being Ethereum. The Ethereum Foundation managed to become one of the biggest ICOs ever, and still serves as the base of the development of the platform. This opened the door of a whole new generation of ICOs (many of which run on the Ethereum network and can be found on our ICO calendar).

This concept of an ICO is often referred to as a hybrid between a crowdfunding campaign and an IPO (Initial Public Offering). Funds raised, are released to the startup to launch their ideas. However, the major difference between ICO’s and crowdfunding campaigns is that people who contribute to an ICO are not necessarily making making a simple donation or hoping to get some stickers in return for their money. Instead, they are buying into the future success of the project. in this sense, they look a look a little like a share sold to an investor in an IPO.

However, there are some fundamental differences between ICO”s and IPO’s. As we mentioned earlier, tokens are not “shares” or “equity” within a company. However, this is where things start to get a little bit grey because no two tokens are conceived or designed to be exactly the same. While some tokens do nothing more than represent the value contained within an asset, other tokens are designed to serve as an asset’s internal digital currency or network fuel. For instance, because tokens are often nothing more than digital code, they can do much more than just represent value. They can give users voting rights, they can serve as access tokens, they can execute programmable tasks and much more.

Benefits

ICO’s have the potential to be game changers. The Ethereum ICO, which launched its project in 2014  raised around $18 million in Bitcoins, and the Ether (their token coin) had an initial value of $0.40. They launched the Project in 2015, and in 2016 the value of 1 Ether (ETH) was $14. Today (Aug 18th, 2017), during the time I write this sentence ETH is valued at $300.

The Ethereum project was a wildly successful ICO for it’s time (back in 2014). However, in 2017 we’re seeing projects like Tezos raise 232 million dollars and Bancor raise 153 million dollars. The speed at which these companies raise their funds is phenomenal. TenX, for example, just raised around 80 million dollars in 7 minutes. Gnosis, an oline prediciton market, raised around 12 million dollars in 10 minutes.

There are no gatekeepers in the world of Initial Coin Offerings and this has paved the way for entrepreneurs, who may have been having a hard time raising funds through more traditional VC financing,  finally having a shot at getting their projects off the ground.

Although ICOs are breaking ground, the system is still pretty underdeveloped. Most projects are simply done by replicating previous ICOs. Even the websites of many ICO’s look shockingly similar (i.e. see futuristic moving polygon backgrounds and lots of images of network “layers”).

The Potential To Disprupt

ICOs are poised to be disruptive innovative tools not just for programmers and investors, but for anyone with an idea.As we stated in the beginning of this article, ICO’s have the ability to democratize the funding of ideas better than any technology that has come before it.

However, ICO’s are still so incredibly early stage and therefore we don’t even really fully understand the implications of this fairly new technology. This is part of the reason why investors are cautioned to be careful when getting involved with an ICO. The ICO concept is still very immature, there is a lack of regulation and no very little oversight. Not that that’s a bad thing, after all the world needs less gatekeepers, not more, but the newness of the technology paves the way for a whole host of problems.

Beyond the regulation problems, potential investors face the question of whether the token offered will have functionality outside of the project itself. is the token only used as an “appcoin”, is it backed by real value, can investors exchange it for other assets (digital or otherwise) of value? Teh list of questions can go on and on.

Similarly, a high level of risk is put on the shoulders of investors because most ICOs operate by launching the funding stage without any product to show. In other words, people are investing in an idea and a whitepaper. There is often nothing tangible to back it up. As successful as someone may think a project will be, the truth is it can still flop once it launches. This makes funding an ICO even less safe, with the risk of it not achieving the goals.

We have mentioned a couple of times the success of the Ethereum ICO, but, on the other side, many ICOs have ended with losses. Returns if ICOs have been mixed, some fail and investors lose all of their money, while other projects see returns of over 2000%. For example if you had invested $2000 in Ethereum when ETH was worth .40 cents earch you’d have $1.5 million dollars worth of ETH today.

Another problem the public faces is the complexity of getting involved in ICO. It is complicated and non-intuitive, it requires some level of knowledge and experience that the average user simply doesn’t have. For ICO’s to grow and truly become the next big thing, they have to become more accessible to the public and user friendly. Technical limitations get in the way of engaging with new users that are not familiar with blockchain.

As we mentioned before, the ICO concept is still in its early stages of maturity, and most of the problems addressed will, hopefully, be eradicated eventually as the market evolves and steers into this direction. Starting with Bitcoin, the rest of the world is following and going towards the future of the finance world. Welcome to the future!