It wasn’t too long ago when two pizzas from Papa John’s cost 10,000 BTC — a transaction worth approximately $25 in 2010 that would now be worth over $95,900,000 by today’s current exchange rate. After the world watched bitcoin’s price soar thousands of dollars in just a few years, the staggering increase in value led to the rise of countless other cryptocurrencies.
There are currently 1,324 different cryptocurrencies listed on CoinMarketCap.com. From other all-purpose currencies like Litecoin to more niche options like MTLMC3 (Metal Music Coin), it’s easy to see startups are using cryptocurrencies to tackle a wide variety of new use cases.
Nowadays, the crypto community’s obsession with Initial Coin Offerings (ICOs) has birthed over 300 coins with 8+ figure market caps. An ICO is a new fundraising mechanism that allows startups to raise capital for a fraction of the cost it takes to go through traditional routes like crowdfunding or an Initial Public Offering (IPO).
Understanding the Two Different Token Types
In a sense, ICOs behave like a combination of public offerings and crowdfunding campaigns. In an ICO, users can support the projects they’re interested in by sending Bitcoin and Ethereum directly to the developers in exchange for a set amount of the project’s tokens.
Ethereum helps developers leverage blockchain technology to make a wide variety of decentralized applications (DAPPS). To navigate the blockchain, each project requires a token native to its ecosystem. For now, there are two categories:
Usage Tokens: Usage tokens act as currencies in their respective ecosystems. These are the initial tokens that can be exchanged back and forth between other tokens or FIAT currencies.
Work Tokens: As opposed to behaving like a currency, work tokens are used to give token holders various rights within their individual ecosystem.
A token is fundamentally just another term for a privately issued currency. However, instead of being released by a sovereign government, token sales are unregulated, and their value is determined purely by the public’s perception. New tokens follow their own sets of rules and encourage users to interact directly with the developers of a project.
The ERC20 Token Standard
The ERC20 Token Standard was created to make it easier for developers’ tokens to interact with existing wallets, exchanges, and smart contracts without encountering problems. The ERC20 standards are a set of six functions that enable the following four actives:
- Display the total token supply
- Display the account balance
- Transfer tokens from one account to another
- Approve tokens for use as a monetary asset
How an ICO Works
Regardless of your opinion on the value of cryptocurrency, ICOs are turning hundreds of people into millionaires overnight. ICOs make it possible for anyone with an idea to get massive financial backing without being bogged down by government regulations and business politics.
Developers start by marketing the overall intention of their project to get people interested and generate hype surrounding the launch. Next, the developers will create a white paper—a document issued by the development team to highlight the specific features of their product for potential investors. While it’s important to remember that white papers are used to sell your idea to investors, the copy should be less showy than a sales email. White papers should be informational—most developers will run the final draft through various members in the blockchain community to gain credibility and generate momentum behind their project.
The next step is to create the token itself and offer it in exchange for Bitcoin or Ethereum. It’s crucial to limit the number of tokens that will be released in order to increase their demand and drive value over time.
The Craze Behind Currency ICOs
Currency ICOs are particularly exciting to the general public due to the potential for a massive return on investment. Ethereum is a great example of an extremely successful currency ICO.
It all started in 2013 when Vitalik Buterin became frustrated with current Bitcoin development and wanted to take matters into his own hands. He knew early on that blockchain technology’s reach would soon extend far beyond the world of financial transactions—Vitalik wants to use the blockchain to decentralize the internet and allow developers to build DAPPS on the platform itself
The Ethereum ICO started in July and raised over $18 million USD in just 42 days. The earliest investors received 2000 Ether for just a single Bitcoin—a mere $2500 dollar investment that would now be worth over $900,000.
Vitalik’s launch of Ethereum should be considered the gold standard for ICOs. He started with a fresh vision, assembled a world-class development team, and ended up creating the world’s second most used cryptocurrency.
The Pros and Cons of Using an ICO to Raise Capital
- Makes it easier for emerging technology to get funding: Ethereum is now the world’s second largest and most powerful cryptocurrency. While BTC still has a larger market cap, Ethereum aims to build the development platform of the future by decentralizing the internet.
- Helps startups avoid piles of unnecessary paperwork: A lot of startups never get off the ground due to the sheer amount of paperwork required to raise and collect funds using traditional methods. ICOs make it easier to get straight to the meat of a funding round and raise money directly through your users. With an ICO, the only documentation truly needed is a white paper.
- Provides massive investment opportunities for the public: ICO investors get to pick up massive amounts of tokens on the cheap, all of which have the potential to skyrocket depending on how popular the technology goes on to become.
- Gives projects a ton of exposure: ICO hype generates a ton of exposure for new projects and makes it much easier to grow your audience prior to launch.
- The value of a token is based purely on public speculation: Nobody knows whether or not a given project will be successful until the developers finish it. 90% of startups fail, and blockchain projects are no exception. Your decision to invest is based entirely off of what you and the general public think about a given project.
- Lack of regulation attracts scammers: It’s easy for a scammer to create a fake white paper and make off with tons of money from early-stage investors. It’s also quite common for development teams to leave out pertinent project details in hopes of appearing more appealing to the public. Unfortunately, the entire community suffers from these scams and appears significantly less credible to people considering jumping into crypto.