By Laurent Leloup, Founder and CEO of Chaineum
First introduced in 2014, Initial Coin Offerings (ICOs) have seen a meteoric rise in 2017; resulting in $2.3 billion being raised to date as blockchain startups turn to cryptocurrency to raise funds. Typically described as a cross between an IPO and online crowdfunding using Cryptocurrency, an ICO requires an investor to contribute a certain amount of an existing token, such as Ether, to receive a share in a new currency at a set conversion rate.
As the popularity of ICOs continues to grow, it’s important that organizations understand the range of benefits, both for companies seeking investment and those looking to invest, the ICO model provides compared to traditional investment avenues.
Benefits of an ICO
For organizations looking for investment, an ICO is considered a much faster and easier fundraising method to undertake as anyone can start one. Additionally, the online nature of an ICO means that marketing and settlement costs are significantly lower than traditional fundraising with settlements finalized through the blockchain. This removes many additional costs that are associated with traditional investment which could incur legal fees amongst other expenses.
An ICO-funded startup also benefits from a network of supporters, similar to online crowdfunded businesses, whereby those supporters hold tokens that increase in value based on usage. Essentially, this means that an ICO-funded business already has a customer base in place and is in a stronger position to see faster growth.
As well as offering benefits for companies looking for investment, ICOs also have significant advantages for those looking to invest. Many investors are attracted to cryptocurrencies for their liquidity. Rather than playing the long game and investing vast amounts of money in a startup which could then see your investment locked up in equity of the company, ICOs offer the opportunity to see gains much quicker and can take profits out of the company invested in more easily.
An additional advantage of an ICO for investors is that it has the potential to remove geographical limitations seen with traditional venture financing which typically tends to be tied to global financial hubs such as New York, Silicon Valley or London. ICOs remove this restriction and opens up opportunities for anyone in any geography. This democratization essentially allows anyone to contribute and profit from an investment.
Furthermore, cryptocurrencies can appreciate much faster in value than standard currencies. For example, Bitcoin was worth just $100 in 2013 and in September 2017 was trading between $4,000-$5,000. As well cryptocurrencies from Blockchain startups Monero and NEM both saw huge increases in value at 2,000% increases. Therefore the potential ROI for investors using cryptocurrency is much higher.
What to look for in an ICO?
From an investment point of view, not all ICOs are created equal. Whilst there are apparent benefits to this new investment model, a number of poorly-managed operations have caused some concern within the industry towards the transparency and legitimacy of some ICOs.
However, previous successful ICOs have demonstrated that ambitious blockchain firms can achieve their objective in raising funds through this innovative new model. So what should investors look for when thinking of investing in an ICO?
Firstly, before considering investing in an ICO, it’s important to look for those that offer due diligence. There is currently no formal process to audit an ICO organization which means a company is able to start selling cryptocurrency tokens before a functioning product even exists. Understandably this has led some critics to comment on the legitimacy of some projects.
Before investing, it’s important to carry out a detailed analysis of the project, its objectives, and resource to gauge the likelihood of the project coming to fruition. In addition, the project should be able to provide regular operational updates on its status to ensure the investor feels confident with its progress.
As well as ensuring the legitimacy of an ICO through their due diligence, investors should look for an ICO with a certain level of transparency so they feel confident in their venture. Due to the nature of Blockchain technology, it can be difficult to identify who is purchasing tokens. This means that the true extent of the transaction is not quite clear. However, some blockchain platforms enable organizations to require and share personal information when making a transaction. Therefore before investing, it’s wise to consider the project’s Know Your Customer (KYC) measurements in place.
ICOs have seen rapid growth within the last year with more projects planned in the near future. However, for those looking to invest or launch their own ICO, it’s essential to understand how to navigate the ecosystem, including risks associated with the mechanism. Despite being a relatively new fundraising model, the rate at which they have grown in popularity means that we will continue to see more and more blockchain startups turn to the cryptocurrency community.