Initial Coin Offerings in Plain English
So what exactly is an Initial Coin Offering? And what do Jamie Foxx, Paris Hilton, Floyd Mayweather have to do with them?
You’ve probably heard of an IPO (Initial Public Offering). It’s when a company goes from ‘privately’ owned to ‘publicly’ owned by offering shares on the stock market in exchange for capital.
More recently you have probably also started hearing about a thing called an Initial Coin Offering (ICO). This is when a startup raises money from people via selling them their own custom cryptocurrency tokens.
In essence, they sell ‘cryptocurrency tokens’ in their company to anyone in the world, which can then either be redeemed for digital services the startup plans to offer down the line, or sold at a higher value if the cryptocurrency tokens appreciate.
These cryptocurrency tokens have no value when they are created, much like the letters on this page you're reading, however because there is a finite amount of the tokens + they can be redeemed for services as long as enough people buy them it creates a demand, and they suddenly have a value.
The increase in the number of ICOs has been driven by the growing popularity of cryptocurrencies like Bitcoin and Ethereum. Over $2 billion has been raised through this method so far in 2017.
As with any ‘hot’ new asset there is the inevitable likelihood that it will end up in a ‘bubble’ much like the ‘tulip bulb’ mania that gripped The Netherlands in the early 17th century.
By way of comparison, Bitcoin was trading at around $1000 (in early 2017) and as of mid-Oct 2017 it's over $5000.
There is also the hard to ignore fact that they are not currently subject to regulatory approvals which means ICOs carry great risk.
The fact that many celebrities including Jamie Foxx, Paris Hilton and the boxer Floyd Mayweather (all of whom last time we checked had no previous background in finance) have been tweeting enthusiastically about cryptocurrencies and ICOs, is a clear indication that this is going to be something that we will inevitably be hearing more of for some time to come.
ICOs at a glance:
The Good - Offers startups a new way to raise funds without giving away shares or having to do deals with VC firms, it also gives regular people a new way to invest.
The Bad - Likely to lead to bubbles, little to no regulation, asset manipulation and fraud.
The Future - Potential for some VCs firms to find themselves sidelined by startups. Likelihood of a global regulatory crackdown on what is and isn’t allowed with ICOs.