The digital currency ecosystem has had a crazy year. The Bitcoin market capitalization has grown from $11 billion on June 5, 2016 to almost $47 billion USD on June 5, 2017.
Negative news during that time included a 120,000 BTC heist from Bitfinex, worth $65m then and $350m now. The Winklevoss twins sought to create an exchange traded fund dealing in Bitcoin, but they were denied. Positive events were much broader, including Japan recognizing the coin as a legal payment method, Russia reversing their prior stand against Bitcoin, and Australia adjusting its policies to remove a double taxation problem for those accepting digital currencies.
Now a new phenomenon is sweeping the market, the Initial Coin Offering.
As of May of this year, over $380M has been invested into ICOs. Many of these companies are raising millions of dollars with nothing more than a white paper and a cryptocoin dependent on a small network of nodes running their blockchain. A year ago Bitcoin was 80% of the entire market capitalization of cryptocurrencies, and now it’s less than 50%, despite its meteoric rise in price.
Something is clearly happening here, so I spoke with Michael Terpin, a pioneering investor in the space, James Prestwich of Storj, a company that has offered ICOs on two different blockchain platforms, the co-founder of Ethereum, Anthony Di Iorio, and Ted Livingston, the CEO of KIK, the first $1 billion company to announce an ICO.
But first, what is an Initial Coin Offering? This phrase, like cloud and blockchain before it, is becoming overloaded as the market seeks to explain new concepts.
The idea around an ICO is that you create a digital coin or token and then you offer this coin or token for sale in an initial offering. An ICO is in some ways similar to an initial public offering. Both are done to raise funds, but, instead of stock, your ICO purchase gets you a new type of coin or token, an asset rather than a security.
The token can represent some sort of value or be of value itself. An ICO might involve attributing equity to a token so that ownership gives you voting privileges and access to dividends, which is what the now infamous fund raising effort of The DAO did. Their use case for a token is the most similar to that of an IPO, however, the majority of use cases are for something different. The typical use case of a token issued in an ICO is the creation of an asset that gives you access to the features of a particular project. Instead of having cash or Bitcoin as the way to pay for goods and services from the ICO offerer, you use their token. You can think of these tokens as being similar to a store specific loyalty point, something you purchase with a general purpose digital currency and use at a specific location.