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.
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:
- Speed: Transactions are typically settled in minutes, with no need for third-party mediation.
- Accessibility: Individuals that reside in regions without an established (or trusted) banking system may participate. All that is needed is internet access and computing power.
- Lower Fees: Without traditional banks or credit providers involved, transaction costs are limited.
- Anonymity: Individuals involved in transactions remain anonymous due to blockchain technology.
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:
- A business plan is drawn up and disseminated publicly via whitepaper.
- Digital assets called "tokens" are sold to the public.
- 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:
- Lack Of Restrictions: ICOs are unregulated and able to avoid the routine scrutiny of venture capitalists or lending institutions. As of this writing (September 2017), there is no official regulatory body for the industry to comply with.
- Flexibility Of Compensation: In return for the capital investment, ICO purveyors are not required to give specific compensation or ownership rights to the investor. Percentages of the new cryptocurrency, cloud storage or other services may be used in place of traditional IPO stock models.
- Investor Returns: While the risks associated with ICOs are substantial, so are the potential rewards. For instance, the ICO of ethereum brought initial investors a massive windfall, with tokens appreciating upwards of 300 fold in just over two years.
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. Listed below are a few of 2017's largest ICOs with the amount they 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.
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.
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:
- Investment Fraud
- Cyber Security
- Money Laundering
- Lack Of Transparency
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. This move by China effectively stifled the booming ICO industry, responsible for raising US$383 million for the first half of 2017.
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. As a result, many ICO launches have enacted restrictions excluding investors from the U.S.
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.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…