ICOs: Raising Money with Cryptocurrencies

Before diving into ICOs, it's helpful to understand the basics. For a primer, read our first article in this series, "Bitcoin, Explained." Bitcoin and blockchain are transforming many sectors. These technologies are changing everything from banking to security. But the fundraising method known as the "initial coin offering" (ICO) is gaining the most attention. It is changing how startups and companies raise money.

ICOs streamline the process of going public. Similar to an initial public offering (IPO) of stock, an ICO allows cryptocurrency startups and even some established companies to raise funds. However, unlike traditional IPOs, ICOs often accept payment in cryptocurrencies like Bitcoin or Ethereum. There's minimal regulatory oversight, no investment banks, and rarely any equity or voting rights.

ICOs democratize and accelerate venture capital. Some see ICOs as a way to make venture capital more accessible and faster. Others are skeptical, seeing it as risky or even fraudulent. Regardless, ICOs have raised significant funds, with over $4 billion raised in 2017 alone. Mastercoin, now Omni Layer, was the first ICO. In 2012, J.R. Willet published a whitepaper suggesting that the blockchain could support other applications. To fund his project, he offered Mastercoins in exchange for Bitcoins, raising around $500,000 at the time.

ICOs start with a whitepaper. This document details the project's technical aspects, goals, and budget. Tokens represent an ownership stake or currency. Early investors might get lower prices, but prices can change based on demand. ICOs can be managed independently or through exchanges. More credible ICOs use exchanges or escrow services to provide some security to investors.

ICOs have produced some unlikely successes. Dogecoin, created as a joke in 2013, now has a market cap of over half a billion dollars. Despite skepticism, many startups and companies continue to launch their own cryptocurrencies. Big names are entering the ICO space. In 2017, social network Kik raised nearly $100 million through an ICO. Kodak announced its own cryptocurrency and blockchain service in 2018, which doubled its stock price.

Ethereum is the platform of choice for ICOs. Ethereum makes it easy to create tokens and conduct ICOs. Its own ICO in 2014 raised over 31,000 Bitcoins, now worth more than $250 million. Despite some high-profile failures like the DAO hack, Ethereum remains popular for launching new cryptocurrencies.

Due diligence is crucial. As with any investment, especially in a new and unregulated market, thorough research and caution are essential when considering an ICO.

In summary, ICOs offer a new way to raise funds using blockchain technology. They allow projects to gain global financing without traditional intermediaries. However, the lack of regulation and the potential for scams mean that investors must be very careful. As the ICO market evolves, it may become more regulated, providing more protection for investors while maintaining its innovative edge.