What is an ICO?

Intermediate Guides
January 2, 2018 by Matt Cummings
270
What is an ICO?  An initial coin offering, or ICO, is a fundraising system that utilizes blockchain technology to create crypto tokens which can be bought and sold for bitcoin and other currencies to help fund and develop projects in the blockchain space. It is the cryptographic equivalent to an Initial Public Offering in the
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What is an ICO? 

An initial coin offering, or ICO, is a fundraising system that utilizes blockchain technology to create crypto tokens which can be bought and sold for bitcoin and other currencies to help fund and develop projects in the blockchain space. It is the cryptographic equivalent to an Initial Public Offering in the equity market, but instead if shares in a company, investors buy the coins running on the specific blockchain to show support for the specific project.

To keep up with upcoming ICO’s visit our ICO Watchlist.

There are mixed views on ICOs, with some suggesting they are too similar to multilevel marketing schemes as they allow project developers to raise large amounts of money before there is an operational product built from the proposed whitepaper that outlines the project details. However, there are many in the community who recognize their potential to revolutionize the venture-funding models that have previously been employed.

Regulation on ICOs has been slow to develop and unevenly implemented, allowing some ICOs that have been proven to be scams to operate in the open and hoard hundreds of millions of dollars in investor funds. The Securities and Exchange Commission (SEC) uses a Howey Test to determine if an ICO constitutes a security and if it meets these qualifications then it is subject to the full extent of the SEC regulations governing securities.

 

ICO Background and Foundation

One of the first ICOs was Ethereum’s ICO back in early 2014. The Ethereum project raised over $18 million to fund the development further and now Ethereum retains its spot as the second most valuable cryptocurrency and underlying network to this day. Once it was discovered that the Ethereum platform with its ECR20 standard token was the perfect foundation for projects of many types to be built on, the ICO industry exploded, giving us the hundreds of what are known as “Altcoins” to the cryptocurrency community.

One of the first attempts on the Ethereum Network to run an ICO was with a project called DAO that wanted to fundraise for a new token based on the Ethereum blockchain. While it was successful in raising an astonishing $150 million, a hacker was able to infiltrate the system through a vulnerability in the program and siphon out millions of dollars from the ICO account. In a response to the loss of investor funds, the Ethereum Foundation proposed a hard fork to recover the lost coins by airdropping the new version of the token and migrating consensus to the new blockchain.

Although the first attempt at launching a successful ICO ended in mostly failure, since then the ICO market has expanded exponentially with the help of the ERC20 standard making it easy for developers to make their own tokens for a number of different projects and applications.

A drawback to the ease at which money can be raised is that there is a trend to launch an ICO pre-project, which essentially amounts to investors betting that the future success of the chosen blockchain project will return on the investment. This has caused the SEC to intensely scrutinize the ICO market and hold these crowd sale projects to the same standards that IPOs are in the interest of protecting investors.

 

ICO Speculation

Since ICOs are funded through token sales and can sometimes be based on tokens that resemble securities more than simply a way to access a certain protocol or network, the regulations around them have started to mirror that of securities. Some ICO tokens, or Altcoins, can be traded on exchanges like bitcoin and Ether but are tied specifically to the project that created them and thus can act as stocks in a company. However, the speculation that drives the price of some altcoins is not based on any real fundamental development, but rather the desire for short-term exponential gains driven by a successful marketing campaign for the project itself, whether it is legitimate or not, also known as a Pump and Dump.

Most people invest in ICOs with the hopes that the crowd sale will successfully raise enough to develop and launch a product or network so that the originally purchased tokens appreciate in value and can then be used on the system that has been built. The problem with wild speculative investment in ICOs is the pervasiveness of scams and Ponzi schemes that prey on unsuspecting investors who might not have looked to closely at the project whitepaper.

As regulations are developed for ICOs to give the market some semblance of order and structure, the frequency of scam ICOs will decrease significantly as poorly managed projects will not meet the SEC standards to launch. But until then, the ICO market remains a veritable Wild West in the blockchain industry where entrepreneurs are taking advantage of this innovative and revolutionary way to crowdsource funding for future projects.

 

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