There is a new twist on cryptocurrencies like Bitcoin: It’s called an Initial Coin Offering or ICO, and it’s a process that the business and investment world needs to be aware of.
ICO cryptocurrency occurs when a company creates a new digital currency and sells that currency to the general public in order to raise money to fund a new venture. These digital currencies are essentially miniature unknown versions of Bitcoin. They have no intrinsic value on their own, but they do have value to investors who believe in the future of the asset.
The new currencies being created are usually intended to be built around a specific business platform. For example, a firm might roll out an ICO where the digital currency is supposed to eventually be used for B2B transactions on a website selling, for instance, used the industrial equipment. The idea is that the digital currency or tokens have no value now, but if the new industrial equipment business takes off, then those digital tokens can be used to buy a product from the business in the future.
As a result, for digital currencies from an ICO to have any value, one must believe that the business they are raising money for will be successful. This is where things get speculative. The attraction of businesses to ICOs is understandable — an ICO is the equivalent of pre-selling a product or service, albeit in a fancy wrapper. Raising capital that way avoids the risks and burden of debt as well as eliminates the cost of giving up equity in what could be a great business idea.
For investors, though, ICOs can be much riskier. The business backed by the ICO is almost always a completely unproven idea, and investors themselves have little ability to get any of their money back if the venture fails. Recovery rates on failed currencies are generally very close to zero, because there are no hard assets in the business. All this information leads one to suspect that the digital currency mania may be a giant bubble just waiting to burst. With so many new digital currencies being introduced, many are likely to fail, and when they do, they could turn the entire digital currency boom into a bust overnight.
Despite these risks, ICOs have been wildly popular. Investors have passionately bought into the mania around cryptocurrencies, and as a result, there have been more than 230 ICOs in 2017, which have raised more than $3.6B.
If you consider running or investing in an ICO, be sure to have a reliable technology partner by your side. Contact us! Get ELEKS’ expert support in adopting cryptocurrency and Blockchain for your business.