ICO – A new model of capital investment

An Initial Coin Offering (ICO) is really creating a fever in the Blockchain community. The idea behind each ICO process is a promise to build a product or service based on Blockchain technology because the company needs to attract capital.

In order to be able to earn the necessary money for the execution of its plan, the company will issue digital tokens and sell them to contributor, which is usually made a coin. series.

Contributors can then use these tokens to run the app after it has been launched by the company and launched, or can simply hold them and resell for a profit.

More and more Blockchain startups are holding token sales as a way to raise funds through an ICO, similar to the IPO process that we often encounter in securities. While companies were able to make only $ 260 million from ICOs last year, in the first six months of 2017 that figure has grown to a staggering $ 560 million, according to statistics from Smith + Crown. good.

ICOs are being seen as an alternative to “crowdfunding” and gradually change the way startups seek capital for themselves. It is basically a solution to help blockchain startups get capital without having to resort to financial and banking systems.

While tokens behave in the same way as other stock-style assets, they should not be considered the same. Indeed, in order to be able to trade stocks, stocks need to be registered with the government, for example in the US one must obtain a license from the Securities and Exchange Commission of the United States (SEC). On the contrary, this is not applicable in the case of tokens, which only serve as a means to help users access a certain application of Blockchain.

Break the records

In 2013, Mastercoin held a token issue and became the first project to use this new form of crowdfunding. Despite many warnings that Mastercoin is essentially a scam, there are brave investors who take risks and contribute $ 500,000 worth of money at that time.

Ethereum followed suit in 2014 and successfully raised $ 18 million, even though it was hit hard by the massive drop in Bitcoin price afterward. But since then, the ICO began to gradually break records, until a venture capital company went down in history with an accumulation of up to 160 million USD in 2016. That company was not. the other is KNIFE infamous, a name that was soon attacked by hackers and robbed of nearly $ 50 million.

Because ICOs are not due SEC management so the government is almost powerless against such incidents. Startups that issue tokens become self-monitoring entities with no need for a third party, but in return the contributor is not guaranteed whether the company, after making a lot of money, will continue to comply. according to the plan it came up with in the first place or not. Ambiguity is one of the factors that turn ICOs into very risky investment channels.

No management rules

Currently, the US Securities and Exchange Commission is scrutinizing this method of capital contribution; But until the moment the SEC makes a specific decision, contributors will not be able to receive any protection against their investment deal.

Aaron Ting, Vice President of Malaysian Investment Association, believes that:

ICO is an investment option for those who like ‘take a lot’.

“Even if the white paper claims that through the purchase of tokens from ICOs, investors can own a portion of the startup’s assets and benefit from it, but you will not be able to do anything if you attend. the sentence did not come true and the people behind it hugged all the money and ran away. Currently, there aren’t any laws or regulations to help manage this space. ” Explains Matthew Tan, Founder and CEO of Etherscan.

Passion is full of risks

Through reviewing the development of startups built up from ICOs in the past, one can comment that not all have been truly successful. Of course it takes a long time to form a global company, but the huge successes in this area can help increase investor confidence.

Besides the obstacles mentioned above, it is also very difficult for us to distinguish between a potential project and a sophisticated, organized scam. For this reason, many industry experts claim that contributors must learn as much as possible about the project they are about to pour money into, even become close to its proponents, get the hang of it. success rate and the potential for later widespread application of the idea of ​​conducting an ICO.

Robin Lee, founder and CEO of Hello Gold, recalls:

It was like when the Internet just exploded. Then no one can predict that Google, Apple or Amazon can re-become ‘giant’ like today. The potential of this technology (Blockchain and ICO) Very large, but it is still difficult to predict who will ultimately lose. It is still in its early stages of development.

What’s more, projects established through an ICO recently face a multitude of risks. ‘Pump-and-dump’ is a securities fraud that involves pumping the value of a stock to skyrocketing levels by releasing false and misleading information so that you can then sell the stock you bought cheaply. duck at a higher price and make a profit. Such tactics are not uncommon in the cryptocurrency market, where there is still little attention and management.

Then there is still the possibility of cyber-hacked projects with the goal of plummeting the price of tokens – a tactic commonly used by hackers in combination with margin trading. (margin trading) to get rich on the sweat of others.

A novel model

Although it contains a lot of risks, ICOs are very suitable for helping to accumulate a large amount of capital without having to contact an intermediary third party. Instead of distributing profits like traditional companies, Blockchain startups can now reward the first group of backers who have put their faith in their project.

Matt Levine, a paper writer Bloomberg, explain:

The company and its customers are two essential parts of the system; And investors, in this new model of Blockchain investment, are just outsiders and can be put aside.

According to the above point of view, the purpose of tokens is to be used only to help customers access a service, an application; rather than being sold to institutional investors who want to profit only from the growth of the company. The ICO phenomenon is the clearest testament to the need to freely invest outside of aging credit systems. The Blockchain network can even regulate bad behaviors in its own segment.

“Although the history of the ICO has seen many blatant scams, pump-and-dump tricks, and Ponzi schemes, nowadays, most of the illegal activities are being closely monitored by the due diligence organizations. is freely set up by the user community, in coordination with external parties such as Smith + Crown or ICO Rating. ” – quotes Richard Kastelein, founder of Blockchain Partners.

Like traditional businesses, this should be the time when we begin to take a more serious look at this nascent financial segment. It includes not only the money that can be earned, but also the emergence of a new Blockchain-style capital investment model, which has the potential to not only help build this kind of cutting-edge technology, but also create a foundation. for both startups and networks in other sectors in the near future.

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