The venture capital marketplace is commencing to require a good, hard take a look at a new financial instrument emerging from the bitcoin community – Initial Coin Offerings, or ICOs. Also known as “token sales,” this new fundraising phenomenon is now being fueled by a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who definitely are backing blockchain-fueled ideas. ICOs present both benefits and downsides, as well as threats and opportunities, to the traditional venture capital business model.
Here’s how an ICO typically works: A whole new cryptocurrency is created on a protocol such as Counterparty, Ethereum, or Openledger, plus a value is arbitrarily dependant upon the startup team behind the ICO according to whatever they think the network is worth at its current stage. Then, via price dynamics based on market supply and demand, the significance is settled on from the network of participants, instead of with a central authority or government.
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Venture capitalists, who generally have been standoffish towards the ICO phenomenon, are now becoming keen on it for a number of reasons. The initial one is profits – cryptocurrency investors made some massive returns in 2016, with cryptocurrencies from Blockchain startups Monero and NEM both seeing 2,000% increases in value. For instance, the cryptocurrency used for the Ethereum network, called Ether, saw its value double in just a couple of days in March 2017. Yes, in three days, people who purchased Ether doubled their investment. Those investors can prefer to cash to a fiat-backed currency, or wait for cryptocurrency to bitp1atinum to go up (or fall). Volatility can be a two-way street. While the price of Ether has been rising, bitplatinum has dropped 20% to $one thousand dollars from a record $1,290 on March 3, 2017.
Another reason VCs have become interested in ICOs is because of the liquidity of cryptocurrencies. As opposed to tying up huge amounts of funds inside a unicorn startup and waiting for the long play – an IPO or perhaps acquisition – investors can easily see gains faster, and might pull profits out easier, via ICOs. They merely must convert their cryptocurrency profits into Bitcoin or Ether on the cryptocurrency exchanges that take it, after which it’s easily converted to fiat currency via online services including Coinsbank or Coinbase.
For blockchain startups, ICOs are a win-win – they enable startups to boost funds without needing equity stakeholders breathing down their necks on spending, prioritizing financial returns across the general good from the service or product itself. And there are many within the blockchain community who believe that ICOs are a long-awaited solution for non-profit foundations that want to create open-source software to boost capital.