Crowdfunding has gone through yet another evolution. Initial coin offerings (ICOs) are quickly becoming a popular way to fund cryptocurrency projects. Startups in need of funding are beginning to use digital currency to attract potential early investors, selling digital coins for seed money. Some entrepreneurs are even minting their own digital money, offering their distinct coinage for purchase in exchange for future products, services or funds.
Digital currency explained
Digital currency became a reality in 2008, when the person — or persons — assuming the pseudonym Satoshi Nakamoto unveiled Bitcoin. The digital coin uses the blockchain, a public, distributed ledger to record transactions between users. Bitcoin users trade their coins, which, in essence, are simply encrypted keys. Users can “mine” the coin by solving a complex cryptographic puzzle. Miners race to solve the puzzle, which unlocks the next “block” on the “chain.”
The appeal of Bitcoin, and the reason for its proliferation, is its peer-to-peer nature. There’s no middle man to transact. A Bitcoin user does not need a bank to store his funds. Transactions are managed by the triple entry bookkeeping system of the blockchain. Slowly but steadily, Bitcoin has been increasing in popularity due to this very effective system of tracking transactions. Recently, the coin has experienced incredible highs, hitting over $2,500 per coin.
In addition, Bitcoin is entirely open-source. As a result, hundreds of cryptocurrencies have popped up, looking to improve upon Bitcoin’s model. It’s relatively simple for a group of developers to take Bitcoin’s codebase and build their own digital currency variant, fueling digital currency’s adoption.
ICO vs traditional crowdfunding
Initial coin offerings function similarly to IPOs and other forms of crowdfunding. They differ in that they operate outside of the domain of regulatory bodies. Entrepreneurs leading these projects funded by ICOs claim that once their ventures are running smoothly, their coins can be redeemed by early investors, but there are no regulations or procedures that ensure they fulfill their promises. Financial authorities such as the Securities Exchange Commission (SEC) are unable to reclaim any lost monies due to fraud, for example. In other words, initial coin offerings are, in their current form, essentially unregulated.
“It’s very Wild West,” Sussman, a software developer and cryptocurrency investor, told The New York Times. “It’s very easy to get into a situation where you can send things to a scammer very easily, and there is no recourse for it. That’s kind of the beauty of it, too.”
Why you should care
Despite its lack of oversight, ICOs are gaining traction. According to the research firm Smith & Crown, $522 million has been raised by 65 projects utilizing ICOs. This inventive use of digital currency may change how we fundraise, and, at the very least, could bring to light the issues of leaving cryptocurrency unregulated.
Entrepreneurs are now using the power of cryptocurrencies to fundraise outside the traditional financial system, for better or for worse. Some are making their own coins, offering a chance to invest in a new coin and a new product or service at the same time.
Most are simply offering Bitcoins at a set price in exchange for fiat currency to launch their startups, and these efforts are being met with great success. What’s more, legitimate initiatives have been launched by these offerings. Brendan Eich, of Mozilla fame, raised $35 million in half a minute by selling tokens that will power his new browser, Brave, which aims to eliminate advertisements.
Although there are worries about the very real risk of abusing an unregulated fundraising system, no major scams have yet been reported, and, perhaps more encouraging, ICOs could see regulation in the near future.
It’s possible that how startups fundraise has already changed. ICOs have immense potential to connect enthusiasts with entrepreneurs, but, at the same time, they could easily be degraded by a lack of regulation and, as a result, face abandonment in the future. ICOs have made connecting with investors astonishingly quick and painless — in fact, perhaps it renders the process entirely too quick and too painless to survive.
Cryptocurrency, in all its forms, is an extremely volatile market. Interesting innovations will continue to spring forth from the blockchain, but what falls away and what lasts in the cryptocurrency sphere — only time will tell. Initial coin offerings may very well be crowdfunding of the future, but they may also prove to be a passing fad.
Guest Author: Paul Sciglar – https://twitter.com/PaulSciglar