What are ICOs?
An Initial Coin Offering (ICO) is a fundraising method where investors buy tokens similar to how investors purchase shares in an Initial Public Offering (IPO). The developers state how much they need to fulfill their project and what cryptocurrency they will accept as a contribution (usually Bitcoin or Ethereum). This way of raising funds is currently unregulated in many countries. The ICO process allows developers to lay out their technical documents and plans to convince investors of their project’s merits. ICOs have become a standard way for new token platforms to accumulate the funds necessary to sustain project progression and see their project to completion.
The summer of 2017 saw ICOs become an extremely effective fundraising tool; Filecoin and Tezos have been the most successful ICOs to date, raising $257MM and $232MM respectively. Usually, cryptocurrency startups undergoing an ICO will include their project roadmap, whitepaper, and token distribution scheme on their website to provide a good idea of what the end project will entail in addition to making it clear how the firm will use the funds. Investors should be sure to look over the technical documents of ICOs and corollary details to ensure that they fully understand the project they are investing in and verify that the project is worthwhile.
Data as at November 30, 2017.
ICOs have proven to be quite lucrative, enabling startups to raise large amounts of funds at an earlier stage in development. Although the purchased tokens have a potential to appreciate, buying into an ICO does by no means give you the oversight that becoming a significant shareholder would. One should ensure that the token has intrinsic value on the overall platform and that there is a purpose for the cryptocurrency apart from being used to “secure the network.” Due to the massive surge in ICO popularity, many ill-intentioned individuals have flocked to ICOs in search of profit. Many platforms were heavily advertised on social media platforms and sought to con the less-informed into buying useless tokens. Often, the illegitimate scam tokens can be identified by analyzing the documents provided (or lack thereof). To date, there are over 1300 cryptocurrencies, and almost every new crypto is launched using an ICO fundraising platform. Although there have been hugely successful ICO platforms like Ethereum, which raised $18MM selling ETH at $0.40 per unit, many projects fall off the map and do not end up delivering on their initial promises. Several websites like ICO Alert and ICO Watch List track projects in their various stages of fundraising and are useful in exposing oneself to the different upcoming tokens.
ICOs have become a part of the cryptocurrency ecosystem. Due to the sudden rise in popularity, many countries remain completely unregulated while others have clamped down in varying degrees. In the United States, the SEC’s statement on ICOs implies that cryptocurrencies are securities and should be treated as such while Canadian regulatory bodies have explicitly deemed them securities. China, on the other hand, banned ICOs entirely in September 2017, citing issues with economic and financial stability.
ICO Alert. Retrieved from: https://www.icoalert.com/
ICO Watch List. Retrieved from: https://icowatchlist.com/
Clayton, J. (2017). Statement on Cryptocurrencies and Initial Coin Offerings. [Public Statement]. Retrieved from: https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11