FXCM Insights

Initial Coin Offering (ICO)

As commerce evolves with advancing technology, new forms of capital are being developed for use in the online environment. Some of the most innovative and popular ideas regarding the future of money and wealth transfer are known as cryptocurrencies.

A cryptocurrency is an exclusively digital form of money that employs a process called cryptography to convert pieces of tangible information into lines of elaborate computer code.

The introduction of bitcoin (BTC) in 2009 brought the conceptual framework of cryptocurrencies into reality. Since then, bitcoin and many others have grown into fashionable modes of payment and investment. As a testament to its popularity, BTC now boasts a market capitalisation of more than US$70 billion, a value more than many stocks included by the S&P 500.1)Retrieved 5 September 2017 https://www.cnbc.com/2017/08/15/bitcoin-price-market-cap.html

Today, cryptocurrencies such as BTC, ethereum (ETH) and litecoin (LTC) are thriving parts of the contemporary economic system. Individuals and corporations alike utilise them in order to take advantage of their many benefits:

In order to become a player in the cryptocurrency landscape, all one needs is capital and computing power. And in order to raise adequate funds to start a viable enterprise, many firms have turned to initial coin offerings (ICO) to overcome the challenges of securing adequate financing.

What Is An Initial Coin Offering (ICO)?

Most people with a vague understanding of finance are familiar with the term initial public offering (IPO). Conversely, unless you are a veteran of the blockchain, the exact definition of the ICO is more than likely a mystery.

Essentially, an ICO is the process used by new cryptocurrency enterprises to raise capital from investors. It performs much the same function for cryptocurrency startups as an IPO does for private firms that go public by raising the money necessary to launch business operations.

An ICO is conducted via the following progression:

  1. A business plan is drawn up and disseminated publicly via whitepaper.
  2. Digital assets called “tokens” are sold to the public.
  3. Proportional rights of ownership or other compensation are then transferred to token holders.

Because they operate under the basic model of crowdfunding, ICOs have garnered tremendous interest from cryptocurrency startups and investors alike. Most of the buzz is due to several distinct advantages ICOs present over the traditional IPO model:

The skyrocketing interest in ICOs as both an investment vehicle and funding mechanism is evident. For 2017, roughly US$1.5 billion has been raised through ICO offerings.4)Retrieved 6 September 2017 http://www.businessinsider.com/bitcoin-ethereum-bitcoin-cash-price-crypto-correction-pboc-ico-crackdown-2017-9 Listed below are a few of 2017’s largest ICOs:5)Retrieved 6 September 2017 https://bitcoinira.com/articles/biggest-icos-2017-far

Initial Coin Offerings of Note

ICO Amount Raised
TEZOS US$222 Million
EOS US$183 Million
BANCO US$153 Million
STATUS US$95 Million

Perhaps the most astounding part of these ICOs is the speed at which the money was raised. Typically, an ICO’s duration lasts from days to a few weeks. In the case of TEZOS, the US$222 million was raised in a mere 13 days.6)Retrieved 6 September 2017 https://futurism.com/tezos-just-finished-the-worlds-largest-ico-hitting-more-than-200-million-worth-of-cryptocoins/

In response to these success stories, many firms in the cryptocurrency sector are adopting the crowdfunding model to meet their own financial needs. While the exact number of pending ICO launches varies depending upon the source, seemingly every calendar day a fresh ICO is hitting the open market.7)Retrieved 7 September 2017 https://www.icoalert.com/

ICO Controversy

ICOs are still very much in their infancy. Even though they are a hot item among both firms and investors, the entire notion remains controversial. Financial regulatory bodies frequently give the following reasons why governance of the industry is overdue:

The burgeoning ICO market in China came under fire directly from the Chinese government. Citing concerns over fraud and a “serious disruption to the economic and financial order,” ICOs were banned outright by domestic authorities.9)Retrieved 7 September 2017 https://techcrunch.com/2017/09/04/chinas-central-bank-has-banned-icos/ This move by China effectively stifled the booming ICO industry, responsible for raising US$383 million for the first half of 2017.10)Retrieved 7 September 2017 https://techcrunch.com/2017/09/04/chinas-central-bank-has-banned-icos/

Additionally, the U.S. Securities and Exchange Commission (SEC) has stated that ICOs will be regulated as securities in the United States. Any unregistered offerings will be subject to criminal punishment.11)Retrieved 7 September 2017 https://www.sec.gov/news/press-release/2017-131 As a result, many ICO launches have enacted restrictions excluding investors from the U.S.

Summary

Cryptocurrencies have a relatively short history as a financial instrument. While they are becoming increasingly popular, the traditional financial model is still the preferred form of commerce. Ultimately, only time will tell if cryptocurrencies will replace fiat money as the world’s go-to means of conducting business.

There is no denying that the ICO concept has proven to be effective, encouraging both exponential growth and increased scrutiny from regulators. However, much like cryptocurrencies themselves, the future of ICOs is difficult to quantify.

Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

FXCM does not endorse cryptocurrencies. The information provided herein is for educational purposes only.

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