Efficient technology entrepreneurs are discovering a new way to raise capital: Initial Coin Offerings, i. e. public offerings for the purchase of digital coins.
In 1720 the South Sea Bubble, one of the first documented stock market bubbles in history, was in full swing in Great Britain. Encouraged by the hope of gigantic profits from new trade with countries in the South Seas, early investors paid enormous sums of money for dubious securities. An entrepreneur advertised for capital with the words "for a company of great advantage, but no one knows it" - and managed to bring 1,000 shares to the excited people within five hours. Afterwards, he took off.
The year of the ICO
In retrospect, it is easy to classify such events as irrational - in fact, the South Sea bubble burst in the same year. However, this does not change the fact that similar financial exaggerations occurred again and again. And even after the bursting of the huge dotcom bubble at the beginning of this millennium, things are still going well: 2017 is well on the way to becoming the year of Initial Coin Offerings (ICOs). A good part of this could be seen as more or less skillful attempts to take away money from good faithful people with the help of big words.
The fact that Initial Coin Offering is very similar to Initial Public Offering (IPO), the English expression for an IPO, is by no means a coincidence. As with an IPO, ICOs are all about raising capital, and just like an IPO, theoretically everyone can participate.
The value of the coins
Instead of shares, however, ICOs only sell cryptographically secured "coins" or "tokens". They can have a certain value because they represent, for example, rights of use to a (usually yet to be created) product. In some cases, however, the providers explicitly state that buyers do not receive any rights for their tokens. The only reason for a purchase is the hope that the newly issued tokens will become more and more important, which would increase their price.
Also practical from the issuers' point of view: for an ICO, they don't even necessarily need an official company and, because they don't officially sell shares, they don't have to deal with the complicated regulations for it - even if lawyers are already warning that skillful wording alone is not necessarily enough to keep the securities supervisory authorities off their backs. In fact, the SEC stated at the end of July that the offered coins and tokens could well be securities.
Acquiring a piece of the future with Bitcoin and Ether
Typically, an ICO works as follows: A group publishes a white paper outlining its technical approach and projects based on it. Later on, social media and allegedly exclusive information will be used to attract attention to specialised news media and bloggers. Then comes the sale - usually against the digital currencies Bitcoin or Ether, interested parties can acquire an alleged piece of the future.
The approach works very well. Several current ICOs were terminated within minutes because all available tokens had already been sold. According to a report by the market research company Autonomous Research, 1.2 billion dollars were already collected with ICOs in the first half of 2017, more than half of which was collected in June alone. By way of comparison: In the same period, there were classic IPOs on the US stock exchanges with a volume of around 22 billion dollars.
ICO tops and flops
Two of the largest ICOs this year came from EOS. IO, a team that is building scalable blockchain technology for decentralized applications and selling tokens for a good $185 million, and from Tezos, a start-up that even earned around $230 million to develop a blockchain with built-in governance mechanisms. However, not all ICOs are that successful. For example, the Dao. casino project for new online arcades, according to an overview, only raised $110 by the end of July, just before the ICO closed.
Both EOS and Tezos are considered serious by observers - which does not necessarily mean that their tokens become really lucrative. Apart from that, however, according to Autonomous Research, there are many "fraudulent" ICOs that are primarily aimed at benefiting "from the excitement in the ecosystem". So anyone hoping to benefit from the current ICO boom should at least take a close look at what they are getting involved with.
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