Initial Coin Offering; The New Way For Startups

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Every company needs startup money. Whether it’s a lemonade stand you’re setting up or a multinational company, there is always an initial input that is required before any revenue can be generated. If you’re a normal company, the general way to begin raising money is via crowdfunding for a project. Platforms like GoFundMe.com and Kickstarter.com are common examples of places where a company can gather capital and support for their ideas before officially starting their journey.

Another spin on the crowdfunding process is the I.P.O., the Initial Public Offering. This is where a company shows off its latest projects and accolades, and most importantly, sells its stock for cheap. Investors therefore buy stocks then and there for a chance of major profit later on, and the capital amassed is used to fund the company’s later ventures.

But in the world of cryptocurrency, things work a little differently. We shall see exactly how this process goes on below.

How are I.P.O.s and I.C.O.s Alike?

Initial Coin Offerings, or I.C.O.s, as they are commonly referred to, are an alternative form of crowdfunding that has evolved in recent years along the same principles as I.P.O.s, i.e., the concept that investments will generate revenue for later projects. It has proven to be a very effective idea and has led to several successful projects, but more on that later.

The Initial Coin Offering resembles an Initial Public Offering in several ways. For one, they both represent an opportunity to investors to get in on the action and ride the success of the currency for a cheaper price than they would have pay later. Also, the value of that investment would vary directly as with the overall success of the company in the international market. Moreover, the revenue that is generated, as stated before, is used entirely to finance future developmental projects as they come up.

Lastly, in both situations, the company is expected to provide a ‘whitepaper’, a draft paper showing the aims of the company, their expected products and how they plan on carrying them out in the future. Investors can use this document to decide whether the company is promising, and whether the risk they’re about to take in investing is worth it or not.

How are I.P.O.s and I.C.O.s Different?

The key difference is in the methodology of how the whole process is carried out.

In an I.C.O., the company is expected to come up with a type of limited edition crypto coin. This coin is quite valuable to investors, not just because of its monetary value, but because of the powers that come with it. For one, sometimes companies allow possessors of these special coins to have voting rights in the company to be formed.

Moreover, investors can also opt to buy stocks and shares in the company which function the same as normal industries’ stocks and functions. But the company will try to offer its crypto coin as a reward for the investors, to increase the number of users on their network. The worth of these coins will also vary directly vary with the success of the company and their ability to fulfil their promises and objectives as set in the whitepaper.

Are I.C.O.s Effective For Raising Money?

The short answer is yes. The long answer is yes, but the success is not really quantifiable, and all data generated is limited in its applicability because of the nascent status of I.C.O.s as a crowdfunding method.

Those who have researched Ethereum, as I have, may be able to recall that Vitalik Buterin called an I.C.O., a crowdfunding opportunity, for the launch of Ethereum. The campaign overshot its goal massively and had investors like Microsoft, Intel, Samsung SDS, Toyota Research Institute and J.P. Morgan amongst its numbers. With supporters like that and with the massive funds garnered, Buterin had no choice but to go on with his dreams and make them come true.

Similarly, TenX, a company that pioneered the field of virtual debit cards was also started by funds generated by an I.C.O. TenX’s campaign was also extremely successful, and so today the company is the leading service provider for Bitcoin debit cards and as a crypto debit card for Bitcoin as well as Ethereum. Remarkably, Tenx’s particular I.C.O. is notable for raising more than 80 million dollars, all the better to ensure their supremacy in the field they helped create.

So, it can be seen that I.C.O.s are an effective method for raising money and making sure that investors come away with something more than just stocks and shares. It is an effective advertising method as well, as interested entrepreneurs doubtless will attend to see if the prospect of the cryptocurrency bears any serious. Also, it allows the heads of the companies to gauge the public level of support for their ideas as well, and to remove any misconceptions about the cryptocurrency at the same time.

Pump and Dump Schemes

Sadly, wherever a good system comes into being, there also come into vogue those who would abuse others and benefit from the suffering of others. A big problem in the I.C.O. platform is that of fraudulent campaigns, like what are colloquially referred to as ‘pump and dump’ schemes.

A ‘pump and dump’ scheme is where a group of entrepreneurs will create a currency solely for the purpose of cheating the unwary. These entrepreneurs will speculate greatly on the coin, driving its price up to extremely high levels. When inexperienced investors see this, they will think the coin is doing very well, and buy exorbitantly large amounts of the coins. When the campaign is over, the entrepreneurs will cash in their bought coins and take all the investors to split amongst themselves, leaving the poor investors with large numbers of useless coins, and with lighter wallets than before.

The catch is to read in detail the whitepaper provided by the company. If it presents a vague or mundane idea in overly flamboyant language, chances are the I.C.O. is a scandal. Such whitepapers also generally offer exaggerated returns on investment, so keep a sharp eye out for unrealistic promises.

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