There is no denying that cryptocurrencies have taken the world by a storm, its popularity further fueled by the media frenzy and the speculation surrounding it. While there is volatility abound, a closer look into the world of crypto-currency and blockchain technology shows the rise of ICOs in the past one year.
So, what is an ICO?
An Initial Coin Offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin, and other crypto-currencies. The ICO concept is attractive to investors as a share of the value appreciation of the entire network is given to token holders. In its absolute basic form, ICOs’ can be thought of as a crowdfunding mechanism that many startups are opting for, to raise funds for their ventures.
The ICO tokens generated and exchanged can be used as:
- Monetary Store of Value
- Dividends to share profits amongst token holders
- Utility purposes like development of platforms & transaction fees
Is there a real need for ICOs?
While ICOs may be viewed as yet another tool for fundraising, there is something different about an ICO. The common analogy is that ICOs are to cryptocurrencies, what IPOs are to fiat currencies. When an ICO is launched, the public has access to buy into the company’s business and see it appreciate over time. The difference is simply in how equity is treated; ICO buyers in most cases do not own any equity in the startup and need to exclusively trade coins in a secondary market. ICOs are also viewed as democratization of wealth creating opportunities. The incentive is huge when one thinks about it as a ‘new way’ of doing business, with early adopters reaping potentially huge benefits for participating in an ICO.
While the new world with a democratic currency is ideal, is it really flawless?
Naturally not… There are still vulnerabilities and loopholes in ICOs and cryptocurrencies, but this hasn’t deterred investors, with nearly USD250 million having been invested in ICOs in the last year alone.
However, one must proceed with caution. The nature of ICOs and the lack of regulation makes it an easy target for hackers, with a growing list of ICOs being hit by fraudulent transactions. Simply put, investors could lose their hard earned money, with no avenue for recourse.
Governments have been wary to regulate ICOs and most of them currently stand unregulated & unregistered by governments and banks alike, thus making them a high risk investment. In fact, China has completely rid itself of ICOs, citing them as a threat to the financial stability of the country.
While there are two sides to any coin, it truly depends on the individual investor and his appetite for risk whether cryptocurrencies and ICOs work for him.