An introduction to Initial Coin Offerings

An introduction to Initial Coin Offerings

Until recently, if you were an entrepreneur and sought some seed level funding, you probably would have tried pitching your idea to an early stage VC or an angel investor and then manage to somehow navigate yourself around the complex investment regulations. But as in many other markets, the blockchain technology proves once again why it is globally considered as a disruptive technology.

 

 

Some call it “Kickstarter on steroids” other considers it a crowd funding-venture capitalism hybrid.

 

The blockchain based alternative, lets start-ups raise public capital for the development of their business by offering its investors a part of their digital tokens in return for fiat money or crypto currencies, usually Bitcoins or Ether. These crypto tokens are digitally secured representation of a set of rights, which can vary depending on their intended functionally. The most widely known type of token is the crypto currency, which its holder can use as a medium of exchange, due to its store of value. Investors will then hope that their newly acquired tokens will become worth more than the money they’ve invested.

 

How ICOs managed to successfully challenge the VC institution

 

Having raised over 2.3 billion dollars through ICOs since January 2017, this new investment vehicle managed to surpass traditional venture capital investments in just under three years since its first ever recorded application. Benefits for both investors and entrepreneurs help explain the sudden growth of these ICOs.

 

There are a couple of key differences between traditional VC funding and ICOs that explain how they managed to attract a critical mass of adopters.

 

First of all, it lets entrepreneurs avoid all the suffocating regulation that encompasses debt and equity investment, thus saving money and time. Plus, they do not demand as much documentation; as entrepreneurs do not even need to present a single whitepaper detailing their business idea. Furthermore, those raising funds through ICOs can potentially access a global pool of investors.

 

Investors on the other hand are buying into it because it allows them early access to a token, which, due to its inherent volatility, has a huge potential for capital growth. Most investors are now hoping to become early adopters of the next Bitcoin or Etherum. Besides, the current regulatory void means that there are no investor protection rules other than what is built into the platform itself, which means that anyone, anywhere can participate. Finally, it lets investors be part of a community, by owning part of the initial token pool.

 

 

With great opportunity, comes great risks.

 

As much as these key differences might explain the success of ICO funding, it is well worth noting that they also contribute to several risks. No regulatory oversight means that scammers can easily take advantage of investors or that different tokens will be deemed illegal in the future. Unexperienced entrepreneurs might start ICOs, launching products that are doomed to failure. And the lack of documentation means that investors often lack key information about the business they want to support.

 

All in all, it is a very vibrant market, which leads to both, a lot of excitement and hope, but also to fear and insecurity.

 

 

 

 

A propos de CŽedric RENEL

Étudiant en Master 2 Droit de l’Économie Numérique à l’Université de Strasbourg. La confrontation régulière avec le monde de la technologie a éveillé en moi une passion grandissante pour les nouvelles technologies et je suis particulièrement attiré par la variété et la complexité des situations générées par le développement de l’économie numérique.

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