By Heather Hamilton, contributing writer
Since 2009, bitcoin has been at least partially on our radar, though 2017 brought it into the public eye. During that time, it has ranged in value from $710 to $7,356 and is one of many digital currencies. Also called a cryptocurrency, bitcoin seems to be the most well known.
To most people, the language of digital currencies seems more complicated than the language of more traditional money, in part because it still operates somewhat quietly online. Recently, Initial Coin Offerings have been in the news, leaving many wondering what exactly they are.
A bit of background
Make Use Of explains that Initial Coin Offering, or ICO, is the act of crowdfunding by way of cryptocurrency, which operate on the blockchain, a distributed network of records secured with cryptography.
Tech Crunch says, “An ICO is a fundraising tool that trades future cryptocoins in exchange for cryptocurrencies of immediate, liquid value. You give the ICO bitcoin or ethereum, and you get some of Billy’s New Super Great Coin or the infamous CrunchCoin.”
The Financial Times offers a more sinister definition that, in its first word, points out one of the big problems with ICOs — “unregulated issuances of cryptocoins where investors can raise money in bitcoin or other cryptocurrencies.”
Ethereum was the first cryptocurrency to require an ICO, and it was traded for bitcoin, which raised nearly $18 million. ICOs have grown, raising the price of bitcoin. When the Ethereum Virtual Machine (EVM) was developed, small contracts could be created, which utilized the Ethereum blockchain, allowing anyone to form applications and contracts on the platform. Ethereum is a popular platform choice for ICOs because anyone can crowdfund a new project without involving third parties. ICO and token sale are often used reciprocally.
Initial Public Offerings, or IPOs, refers to the act of a company going public by giving shares to investors to raise funds. Occasionally, people mistake ICOs and IPOs, but an ICO is not regulated and an IPO is. While an IPO has a product behind it, an ICO does not — it is an idea.
ICOs are tricky because they are not documented, causing a number of sites to make their own lists, which can vary in quality. Often, these sites generate buzz around a new ICO, much like a crowdfunding campaign might do. Make Use Of reports that, as of October, there are 203 ICOs, raising a total of $3.25 billion, the most successful of which is Filecoin, raising $257 million.
A financial bubble?
Some argue that ICOs are problematic because the price eclipses the actual value of the item. In 2017, ICOs raised over 10 times the amount that they did in 2016, causing China to ban ICOs in fear of the market bubble bursting. They also required ICOs to provide refunds to investors, which may change if regulations are ever implemented.
South Korea has also banned fundraising via virtual currencies.
Potential for fraud
The total lack of ICO regulations means that there’s a high potential for fraud — multiple companies have been charged by the Securities and Exchange Commission for selling coins that don’t exist and deceiving investors.
While ICOs like Ethereum have operated ethically and raised considerable funds, there’s a pretty high risk in the current state. More traditional crowdfunding sites (Kickstarter, Indiegogo) have begun to offer some protection against fraud, and ICOs might be next.
Sources: Make Use Of, Tech Crunch, Coin Telegraph
Image Source: Pixabay
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