ICOs have exploded in popularity over the past year.
An ICO typically involves selling a new digital currency at a discount — or a “token” when a cryptocurrency start-up firm wants to raise money through an Initial Coin Offering (ICO), it usually creates a plan on a whitepaper which states what the project is about, what need the project will fulfill upon completion, how much money is needed to undertake the venture, how much of the virtual tokens the pioneers of the project will keep for themselves, what type of money is accepted, and how long the ICO campaign will run for. If that cryptocurrency succeeds and appreciates in value — often based on market Demand-Supply, just as stocks do in the public market — the investor makes a profit. During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed crypto coins with fiat or virtual currency. These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering(IPO) transaction.
Unlike in the stock market, though, the token does not confer any ownership rights in the tech company, or entitle the owner to any sort of cash flows like dividends. Buyers can range from established venture capitalists and family offices to less wealthy cryptocurrency zealots.
Investing in a digital currency is extremely high-risk — more so than traditional start-up investing — but is motivated largely by the explosive growth in the value of bitcoins, each of which is now worth around $4,000. That spike helped introduce both fanatics and professional investors to ICOs. ICOs have been used to raise more than US$2 billion so far, this year, according to CoinDesk. Some start-ups see this mode as a cheaper and faster alternative to venture capital for raising money.
The volatility and unregulated markets are working adversely whereas, Regulators worldwide are paying attention to ICOs.
Early last month, the People’s Bank of China declared ICOs illegal, banned the practice of creating and selling new digital currencies, and ordered its major cryptocurrency exchanges to be shut down.
South Korea banned ICOs last week, prompting a legislator in Taiwan to push for regulations to be put in place to control cryptocurrency flows.
An outright ban is an easy way for regulators to take control, but such actions “are not necessarily conducive to creating a new healthy cryptocurrency ecosystem.
Blockchain – the technology that publicly records transaction details including the unique alpha-numeric strings that identify buyers and sellers – is here to stay, many industry observers say.
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