Do you remember a game for Playstation 2 called Ico, released in 2001? Well, if not, lets talk about another ICO – Initial coin offering. What is ICO, crowdfunding and IPO, how are they different, what is the history of the ICO market and its prospects? Today The Coin Shark will take a look at this issue.
- What is ICO?
- What is crowdfunding?
- What is the difference between ICO and crowdfunding?
- History of ICO campaigns
- ICO and IPO
- What can happen to ICOs in the future?
Initial coin offering is a form of investment attraction, when a company issues digital tokens and offers users to purchase them in exchange for a certain service that is provided with this token, or in exchange for future growth of token exchange rate. Funds collected during the ICO are used to develop or launch a project, and their distribution, as a rule, is mentioned in the technical documentation of the project – white paper.
Crowdfunding is a model of attracting collective investments. It appeared much earlier than initial coin offerings. In fact raising money from the public for an implementation of a particular significant project has been known since ancient times. The very idea of such financing is based on decentralization of participation in the project, combining efforts of many people to achieve the commonly needed result. Just imagine, for example, that a certain non-governmental organization wants to build an animal shelter. To get enough money, project managers can look for large investors or, if appropriate mechanisms are available, take the advantage of crowdfunding. It will enable the project to receive contributions (let it be even small ones) from a large number of people and the total amount of attracted funds will be enough to implement the project. The key issue here is the availability of these mechanisms or even their existence. In fact, it is rather difficult to collect contributions from thousands or even millions of those who want to back a particular project. That’s why crowdfunding is today closely associated with the World Wide Web, that indeed helps bring people together at least in a digital space and provides effective mechanism to easily raise funds from all over the world.
Although ICO and crowdfunding are quite often used as synonyms, we can say that crowdfunding is basically a more broad term and ICO can be considered a specific type of crowdfunding. Initial coin offering, however, provides different mechanism for such a funding, as it operates on the blockchain technology – a distributed database, where the information about transactions is recorded in ledger of connected blocks. ICO is also based on the issue of project`s digital tokens or cryptocurrency. ICO-campaigns aim to provide more efficient, fast and secure tools to raise money from any kind of investors all over the world.
The very first ICO was held by the project called Mastercoin (today known as Omni) back in 2013. The developers managed to collect about 5 million US dollars. The peak of ICO campaigns was in 2016 and especially in 2017. As the crypto-boom of those years, the ICO-boom was largely inspired by the previous initial coin offering of Ethereum. When this blockchain platform appeared it became easier to launch decentralized blockchain-based applications. Moreover, projects that decided to hold ICOs were already able to use smart contracts. Soon special platforms (Ethereum, Waves, NEM, NXT. etc.) appeared, where users could issue their digital tokens and run their ICO campaigns. In summer, 2017, the project called EOS raised $185 million US dollars in the first few days of its ICO campaign.
In 2018, we have been observing changes on the ICO market. Most of the projects did not manage to reach their hard cap (maximum amount of investment that the developers plan to collect), users began to show less activity, and many companies started targeting large investors.
IPO is an initial public offering of shares, carried out by stock companies when they enter equity market. ICO is, in fact, its digital analogue. ICO does not use shares, as their issue and circulation is strictly regulated by the state. So, instead of shares there are fairly unregulated and easy-to-launch virtual tokens and currencies. A token holder, just like a shareholder, has certain rights. At this point, the US Securities and Exchange Commission, in its struggle to regulate the cryptocurrency market and ICOs, adopted provisions, stating that if tokens confirmed rights to receive goods or services (utility tokens similar to ordinary discount coupons), they were not subject to stock market regulations. However, if tokens provided rights to participate in the distribution of company’s profits or could be traded on cryptocurrency exchanges in order to get profits, SEC treated them as securities, and therefore, state regulation of stock market applied. ICO uses tools similar to IPO, but on the blockchain technology, which is supposed to make this process more accessible, open and secure. However, the actual lack of regulation can increase the risk of fraud.
Today a successful ICO requires huge investments in development, marketing and advertising, legal support, etc. When the crypto-euphoria of the first years of ICO-campaigns passed, the companies began to wonder, whether they really need an ICO to attract investment. One of notable examples is a sensational “ICO” of Telegram. In fact, it is probably better to use a neutral term “tokensale”, as this is not actually a classic ICO. The sale of tokens is private and general public has no opportunity to join it. Telegram aims to collect large investments from large investors instead.
Anyway, the ICO market is not the same as it used to be in 2016-2017. Obviously, it will continue to change. There won’t be hundreds of different projects holding their initial coin offerings, ICO-campaigns will become more regulated and companies will try to advance their campaigns in terms of legal framework and mechanisms of collective investment so as to make it really transparent. The market in general is likely to reduce in size and become more professional.