ICO (Initial Coin Offering) is a way of corporate finance. The principle is roughly comparable to the initial issue of securities on exchanges. ICO conceals tokens that are acquired for specific projects through crowdfunding. Investors receive these tokens and speculate that there will be an increase in value at a later date. This principle is comparable to that of shares. Here, too, investors speculate on the stock price gains on the stock market. At times, approximately $ 800 million has been invested in ICOs since 2017. The most well-known projects include Block.one (USD 180 million), Tezos (USD 200 million) and Bancor (USD 150 million).
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ICO - Idea behind the form of financing
The ICOs are used to finance young companies, the startups. These companies generate the ICOs themselves and then sell them online via crowdfunding as a company investment. The revenue generated flows directly into the company and is used for the company's own purposes. One might think that the ICOs are comparable to the stocks. But far from it, because there is a significant difference here. The ICOs are not shares in the company, so the owners have no entitlement to a dividend or voting rights. Of course, that's different with the princely papers. A basic distinction is made between two variants of the Initial Coin Offerings:
- Utility Token
- Revenue Share Token
The Utility Token do not entitle to vote and do not constitute company shares from. When the project is finished, the tokens are used by their users as a means of payment. The success of the ICOs therefore depends on that of the project. If there is high demand for the project tokens, there are price gains from which the owners benefit immediately. Commonly one speaks of an inherent value of the tokens.
Revenue Share Token - but a share?
As the name suggests, the Revenue Share Tokens are comparatively similar to the shares. Anyone who owns these tokens can also benefit directly from the profit distribution. However, they do not always have a functional purpose and serve as a means of payment. Instead, they are intended as an investment to entitle the holder to a dividend. The crucial question is how the tokens are used technically. For some, the profit distribution works automatically through the smart contracts. For example, those who invest in a project that generates Ethereum receive the profit distribution in ether directly as a credit in their wallet.
Differences between ICOs and IPOs
The terminology "ICO "originally goes back to IPO - Initial Public Offering. Shares are issued at the IPO, but not at the ICO - one of the main differences. The ICO tokens are purchased against FIAT currencies or real money. The order book is not managed centrally via a depository or stock exchange, but decentrally via millions of computers - distributed ledger technology (DLT). ICOs are digital crowdfunding based on DLT.
Use of ICOs in practice
With ICOs, virtually every company can create its own cryptocurrency. This enables startups in particular to have their own financing instrument. This means they can easily get fresh capital from a cryptic currency. The use of the ICOs is used exclusively for project financing, so that the companies can provide a new number of ICOs for each project. Blockchain technology forms the technical basis. In the meantime, more and more companies have recognized the potential and are also using the financing option for existing projects in order to obtain fresh capital. Basically, there is always the question of whether the tokens are used to distribute profits or "only" as a pure financing option. The tokens can be traded on different marketplaces due to the peer-to-peer connection. Sometimes the ICOs are still in an unclear state of regulation, as some nations do not yet know how to treat the ICOs. Do they now apply as conventional crowdfunding methods or as a different financing model?
ICO's hype in practice
In 2017 the EOS project was launched, which was intended to provide capital through ICOs. $ 185 million of ether was raised within a week. An EOS token cost around 0.90 euros. When the EOS tokens were released for trading, the value rose to around USD 7. After a relatively short time much more, however, back to approx. USD 3. Meanwhile, the value has consolidated at $ 1.30. There is nothing left of the original euphoria. Nevertheless, the project had a real marketing effect. Many ICOs projects are currently experiencing a similar situation. The rapid price increases, the hype and the early price slumps strongly remind us of the beginnings of Bitcoin. Everyone knows in front of its value.
Another example is the Basic Attention Token (BAT) from Brave Software. Can only be used within the browser. Anyone looking at advertising via the browser receives a token. They can then be used as a digital form of payment on May 31, 2017, an impressive $ 35 million was generated within 30 seconds of the project being presented.
A look at practice shows that it is primarily young companies from the Ethereum that are currently in business - and implement blockchain areas of this type of financing. Experts expect a further increase and income of over USD 1 billion from the sale of the tokens in 2018.
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Invest in ICOs - that's what investors get from it
At times, no platform has been established to offer token trading. However, investors can also participate in the ICOs by owning Bitcoin or ether. Since there is no established trading platform yet, the project owners initiate the sale on their own initiative. A separate website is usually opened for this. The lion's share of ICOs are processed through Ethereum, so a corresponding wallet is required for the transactions. Such wallets are already known from direct trading in Bitcoin and other cryptocurrencies and are made available either online or offline.
Airdrop procedure for distribution
The so-called airdrop procedure was used in some projects, This is a limited number of coins that were distributed to the first project users free of charge. This action is comparable to a sophisticated advertising measure, in order to ultimately awaken the desires within the project among the investors. Nations also use this method. Iceland did the trick and distributed the Auroracoin, its own domestic cryptocurrency to its own countrymen. The Icelanders had the opportunity to apply for a free number of coins with their social security number. 13 percent take part in this campaign.
The challenge at the ICOs
Whoever starts a project with the ICOs must first find enough investors who are willing to invest. The prospects for this are best on a crowdfunding platform, so that many startups in particular use this opportunity to make new investments. Some established companies put their projects on their own websites and try to get investors to invest. Sufficient investors will only invest if there is a certain degree of trust in the project and the company.
The technology behind the ICOs
Technologically speaking, the initial coin offerings are based on a cryptocurrency, for example Bitcoin or Ethereum. Here, too, is based on the open source source code, which however is changed in some parts. This means that the ICOs are customized to the respective project / company. There are various open source solutions for this. For example, if a contract is to be implemented, there are different open source solutions than with the pure trading route of the coins. Smart contracts from Ethereum are used to trigger the automatic payments in a "contractual relationship". Only when certain requirements are met will investors be paid. Of course, production, known as mining, also plays a role in the coins. For this, too, the companies have to provide large computing power. Depending on the coin format, a distinction is made between different proof of work systems.
ICOs prohibited - What are the risks of cryptocurrency?
In China, the ICOs are prohibited because they are completely unregulated. The German banking regulator BaFin has also followed suit and banned four ICOs. The future meeting of the G20 finance ministers and central bank governors is expected to further regulate cryptocurrencies at an international level. Many investors invest in digital coins because they are exempt from sales tax. However, this only applies if they are used for currency exchange or as a means of payment. The Federal Ministry of Finance once again confirmed how the cryptocurrencies are to be taxed. A positive signal for all investors and miners, because their "reward" is now officially free of VAT.
Regulation of the ICOs
In contrast to the IPOs, the ICOs are not yet strictly regulated so that Investors and investors sometimes enjoy little legal protection. The example of the flash crash of the ether course shows how this lack of regulation can have a negative impact. What happened? A sell order over $ 12.5 million ether dropped the price to $ 0.1 within seconds. The original value was $ 317. Thanks to automatic acquisitions, the price returned to $ 300 within 10 seconds, and numerous investors suffered enormous losses within these few seconds.
Not only many investors, but still many authorities consider it problematic that the acquisition of ICOs is highly speculative and investors are betting on something that actually does not exist. For this reason, the risk remains extremely incalculable. In addition, hacker attacks tarnish the joy of investors. In the recent past, two consecutive hacks have stolen $ 30 million of ether. The company's website, which wanted to offer ICOs, was hacked and the weaknesses in its code were exploited.
Switzerland as the origin of the initial coin offerings
Switzerland is of course well known for its financial transactions. In addition to Singapore and Hong Kong, innumerable company financings are also carried out in Switzerland. Especially for startups, the ICO tokens are a comparatively uncomplicated way to get investments. In 2017, companies provided 70 ICOs, raising capital of SFR 1 billion. Experts predict up to 120 ICO projects and revenues of up to SFR 1.5 billion in 2018. Over the past few months, ICO has developed into an institutionalized form of financing in Switzerland, since commercial law firms have also recognized capital raising as an interesting business opportunity.
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ICO token as a fee for advice
Many law firms now rely on virtual payment of a completely different kind and their consulting services are rewarded with ICO. But Bitcoin is also welcome as a digital fee. This also includes one of the largest law firms in the country, Bär & Karrer. In some cases, the company accepts the tokens to a certain extent as fee remuneration. The person responsible is responsible for the business model of the respective startup. The law firm Froriep sees it similarly, which can also be paid with Bitcoin in individual cases. The Swiss have already recognized the hype surrounding ICO and have jumped on the bandwagon. ICO consulting in particular is booming in the Alpine state. They have more and more business consultancies in their standard offer and the demand is increasing.
Although there are currently not yet the rapid profits, such as are known from Bitcoin, the law firms rely on futuristic technologies. More and more established companies are dealing with blockchain technology and researching the future possibilities for the capital market. This know-how can of course also be used by the consulting companies.
Startup and consulting company - a must?
If you want to be successful as a startup and need capital, you must above all trust investors create. For this reason, a startup that is backed by a renowned consulting company is many times more trustworthy. Of course, these consulting services cost a lot of money and, especially for young companies, are hard to manage. In both cases, payment with Bitcoin or other cryptocurrencies is a WIN-WIN situation for both parties. The startup can convince its investors with a renowned advisory service and the law firm participates in the exchange rate development of digital currencies.
Useless Ethereum Token - marketing gimmick or serious investment?
In There is news in the crypto scene that is causing a lot of movement: Useless Ethereum Token. Sometimes it is not known who is behind the new cryptocurrency, but the attention is certain. Whoever went to the website said in bold letters: "Honestly, don't buy these tokens". A bad joke or a clever marketing campaign? It's more about creativity to differentiate yourself from the mass of cryptocurrencies. And this campaign was a success. According to their own statements on the website, the Initial Coin Offering (ICO) should run transparently, although no profits are expected. The reason is very simple: The token is simply of no value. Admittedly, with this offensive marketing campaign, many crypto investors are being taken seriously and are being taught a lesson through irony. Nevertheless, the Useless Ethereum Token experienced short-term growth. The market capitalization is over USD 100,000. In the meantime, it even climbed through the media hype by more than USD 800,000.
It is clear that the marketing campaign did not fail to achieve its purpose, although it is not clear what the founder actually needs the capital for. The website says the following:
"Maybe I lost all my money in the GDAX flash crash. Maybe I was inspired by the guy who financed a potato salad through crowdfunding. Maybe it was I am just too bored and need a better hobby. "
However, the example of Useless Ethereum Token once again shows how confused and uncontrolled the crypto scene is at the moment. New digital currencies keep coming, others are disappearing. Hardly anyone has an overview of how the price of the individual cryptocurrencies is. Within a few seconds there can be rapid price increases, but also massive price drops. The new digital currencies are a possible investment for investors, but with an increased risk. Even renowned financial experts are currently divided over where the journey with Bitcoin, ICO and Co. will go in the coming months. Only one thing is certain: The regulatory authorities want to intervene more in the future and pay more attention to the crypto scene. This is primarily intended to protect investors who are exposed to increased risk of loss due to the current situation.
Conclusion: ICOs as a new, simplified financing option for companies
ICOs are a new form of corporate financing, especially for startups. In doing so, they complement the range of different forms of financing, which allows companies even more flexibility in structuring their monetary framework. The ICO tokens do not entitle the holder to participate in the profit distribution or to acquire company shares. Rather, they serve as a means of payment and speculative object. Sometimes the ICOs are not regulated and are therefore banned or restricted by some countries and financial regulators. Technically, they are based on blockchain technology, as is already known from Bitcoin or other cryptocurrencies. So far, there is no established trading platform to trade the ICO tokens. The transactions are processed via the project's own websites or crowdfunding platforms.
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