The venture capital sector is starting to have a good, hard have a look at a new financial instrument emerging from the bitcoin community – Initial Coin Offerings, or ICOs. Also called “token sales,” this new fundraising phenomenon will be fueled by way of a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who are backing blockchain-fueled ideas. ICOs present both benefits and downsides, as well as threats and opportunities, on the traditional venture capital business design.
Here’s how an ICO typically works: A brand new cryptocurrency is created on a protocol including Counterparty, Ethereum, or Openledger, along with a value is arbitrarily dependant on the startup team behind the ICO based on the things they think the network is worth at its current stage. Then, via price dynamics based on market supply and demand, the benefit is settled on through the network of participants, rather than from a central authority or government.
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Venture capitalists, who generally have been standoffish to the ICO phenomenon, are becoming keen on it for many 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. As an example, the cryptocurrency employed for the Ethereum network, called Ether, saw its value double within a few days in March 2017. Yes, in 3 days, people who committed to Ether doubled their investment. Those investors can opt to cash out to a fiat-backed currency, or wait for the cryptocurrency to bitp1atinum to go up (or fall). Volatility is actually a two-way street. While the price of Ether is rising, ico has dropped 20% to $1,000 dollars coming from a record $1,290 on March 3, 2017.
The next reason VCs have become more interested in ICOs is caused by the liquidity of cryptocurrencies. As opposed to tying up huge amounts of funds in a unicorn startup and expecting the long play – an IPO or even an acquisition – investors can easily see gains more quickly, and can pull profits out more easily, via ICOs. They only need to convert their cryptocurrency profits into Bitcoin or Ether on the cryptocurrency exchanges that take it, then it’s easily changed into fiat currency via online services for example Coinsbank or Coinbase.
For blockchain startups, ICOs can be a win-win – they allow startups to raise funds without having equity stakeholders breathing down their necks on spending, prioritizing financial returns on the general good of your services or products itself. And there are lots of from the blockchain community who believe ICOs are a long-awaited solution for non-profit foundations that want to construct open-source software to raise capital.