Education Series: ICOs Part 1
An Initial Coin Offering (hereon referred to as an ICO) is a fundraising mechanism for companies. Similar to its equity based cousin, the Initial Public Offering (IPO), the ICO allows the public to participate in providing capital to the company. In exchange the ICO differs from the IPO in that it offers a digital tokenized asset in return. Classifying these tokens in the eye of regulators and tax authorities around the world are still very much in discussion. Amongst the investment community the utility of these tokens is still up for debate as well. What is clear is the ICO could be the most efficient form of capital fundraising the world has ever seen. Take for example the SingularityNet ICO. In 60 seconds this ICO raised an incredible $36M.
The History of ICOs
In 2013, the first ICO took place with Mastercoin running a monthlong fundraiser. After it was all said and done Mastercoin had raised 5,000 Bitcoins (BTC) for an estimated sum of half a million dollars. Since then, the numbers of ICOs have escalated and the sums have grown enormously.
Ethereum launched its ICO on July 23rd, 2014. The project was founded by Vitalik Buterin, a Bitcoin developer and founder of Bitcoin Magazine. Enamored by the idea of using the blockchain to create a decentralized global computer, he set off to put his idea into practice. To get the network up and running Vitalik and his co-founders set a presale event to bootstrap the network. In exchange for Bitcoin, presale participants would receive Ethereum's native token Ether (referred to as ETH hereon out). To deal with the legal, financial, and operational complexities of conducting the presale the Ethereum Foundation was established in Zug, Switzerland. The final result of the presale netted 31,591 BTC (worth $18,439,086 USD) in exchange for roughly 60,102,216 ETH.
First Came Currency Then Came Fundraising
Bitcoin is said to be the first useful application of blockchain technology. It enabled a cryptocurrency that was first thought to be a replacement for fiat currency but is now widely recognized as a useful store of value. Please see the History of Bitcoin post to learn more about it overall. Ethereum launched a blockchain with smart contract capability, essentially creating the opportunity to run applications natively on its blockchain. For better or worse, Ethereum smart contracts enabled one particularly attractive application: a smart contract for fundraising. It's quite easy to create an Ethereum smart contract, in fact here's a 20 minute guide on how to create one. In exchange for ETH the project raising an ICO will return to the contributor a set amount of their native token.
2016 Marks the Big Bang
Forty three ICOs were raised in 2016 totaling a combined $95M (excluding the hacked and refunded DAO ICO). Since then, the sums have grown exponentially. Critics will point to an ICO bubble and proponents will argue ICOs have enabled a decentralized form of fundraising for emerging technologies and startups in capital starved locales. In 2017 there were 210 ICOs raising a total of $3.9B according to Coinschedule.com. Other estimates I've come across estimate as much as $6B was raised. Through April of 2018, $6.8B was raised with 266 ICOs, averaging an amazing $25.5M each. These sums would normally be reserved for tech startups raising a Series B round. To get even sillier, Series B companies are often battle tested in their markets. They have figured out their product-market fit and have paying customers. Their major challenge is typically to figure out how to widen their product adoption past their low hanging fruit customers. With cryptocurrencies a forked GitHub repo, a cleverly written whitepaper, a bot driven Telegram group, and a sparkly website would be more than enough to raise Series B sums of money.
Source: Coinschedule.com
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With the EOS mainnet going live and 1000 dAPPS launching you could talk a bit about the ICOs that will happen on EOS pretty soon!
PS. great article.
I'm bullish on EOS (well obviously if I'm using Steem). I haven't really seen what dApps are planned for it.
There isnt much detail on the dapps that are going live, but apparently enough to support the whole ecosystem of needs in the crypto space.
Do we also know how many of these ICOs are successful? And how many grabbed the $25mln and took off to the Caribbean?
In 2017 the upper bound estimate for failed ICOs (including scams) is around 80%.
Word on the street was it was actually quite a bit lower than what most people though.
Great ICO history lesson! I didn't know a lot of this.
This is why I agree that there is a bubble. Some coins raise millions for no reason. Same thing happened with internet companies during the Dot Com bubble.
I write ICO reviews and am bullish cryptocurrencies are here to stay but the hype levels we're seeing is out of control.
Ya, totally unsustainable, thats why a lot of companies moved to the airdrop model and let the community decide the token value.
Great background article. When I started I got scammed on a few ICOs and hit it big a few times. Thanks.
Thanks for reading. Sorry to hear about the scam but hopefully your successes pushed you over the top. Feel free to follow me to keep up with the projects I'm reviewing.