The Rise and Fall of ICOs
The term ICO, representing Initial Coin Offering, was inspired by the stock market term IPO (Initial Public Offering) — the listing of a new company on the stock market. The aim of IPOs is to receive funding by publicly selling company shares to investors. ICOs take a similar approach, but they don’t sell company shares, and they are not listed on the stock market. During ICOs, a company sells its native tokens to finance its projects and services. The coin offering can be beneficial for investors and the company alike. How is that possible?
Investors that believe in the potential of a project get the chance to purchase the tokens in the early stages of fundraising. ICO tokens are usually offered with significant discounts, enabling the investors to get more profit after selling the tokens sometimes in the future. The company that offers the ICO receives the needed funding to develop its startup, without major investments on their own. In this article, we will take a look at how ICO works, what lead to the rise and fall of ICOs, and what is the alternative to ICO today.
What Are the Stages of an ICO?
A project interested in holding an ICO starts with an announcement and introduction of the company and its offer. The developers usually create a new website and post a Whitepaper. This is an official company document that describes the project in detail — it is supposed to highlight the purpose of the project, describe the team working on it, and how much money is needed to complete each development stage, as set out in the roadmap. When the ICO begins, investors can start investing in it by sending their coins and tokens to the publicly available addresses.
An ICO is successful if the company manages to raise enough capital. If it goes unsuccessful, the funds will be returned to their investors, and the ICO will be considered to have failed. To invest in an ICO, investors can use Ethereum, Bitcoin, or any other token that is accepted (Ethereum is the most used platform for startups who often use new ERC-20 Ethereum tokens). Ethereum can be safely purchased with just a few clicks on the ChangeNOW cryptocurrency exchange.
The First ICO in Crypto History
J.R. Willet is believed to be the creator of the 1st ICO. In July 2013, he started a new thread on the Bitcointalk forum where he introduced his idea of building a new protocol layer on top of Bitcoin. This protocol entailed a new decentralized exchange, a distributed betting platform, and more. The project was called MasterCoin.
To finance the development, donations were needed. To incentivize users to donate money, certain features and bonuses would only be accessible to holders of MasterCoins who donated and bought the coins. The world’s first ICO was a success. The project managed to raise around 4740 BTC, valued approximately $600.000 at that time. That amount is today worth over $45 Million. The MasterCoin protocol was later rebranded to Omni Layer, the protocol used by the Tether stablecoin.
Talking about the early days of ICOs without mentioning the success of Ethereum is not possible. In 2014, the Bitcoin developer Vitalik Buterin introduced us to Ethereum, “the world’s computer” and a smart contracts platform. In the first 12 hours of the Ethereum ICO, the project managed to raise 3700 Bitcoins. The ICO price was $0.31. In the great bull run of 2017, the price of Ether increased to $1400/token. Today, Ethereum is the 2nd most popular cryptocurrency in the world.
The ICO Boom in 2017
During 2017, the ICO market grew to nearly 100 times its size. The 1st quarter was a bit slow, and the amount of raised money was just below $30 Million. In the 2nd quarter, the investments in 25 known ICOs brought in an estimate of over $400 Million. This trend continued during the 3rd quarter when it is believed that new startups earned over $1 Billion. The last 4 months of 2017 were the most profitable, during which over $2.5 Billion were pocketed. Altogether, 2017 was a year when ICOs earned around $4.9 Million.
The absolute winner was Block.one, a blockchain solutions provider that raised $700 Million. 2nd on the list is Filecoin. This distributed and decentralized storage market collected $258 Million. Tezos and its innovative self-upgradable platform were #3 on the list, with $232 Million raised in its ICO. The open-source blockchain platform EOS has managed to raise $180 Million. We end this list by mentioning the liquidity provider Bancor that comes in at #5 after its successful ICO that raised $153 Million.
EOS, Bancor, and Tezos coins can all be purchased on the limitless and lightning-fast crypto exchange ChangeNOW.
The Negative Sides of ICOs
ICO was considered as a very promising method of financing startup projects. However, ICOs have their downsides as well. The risks associated with investing in them are big because ICOs, just like the crypto market, are unregulated. Many of the created projects throughout the years have no demand, they have not taken proper security measures to protect their platforms, they lack the quality to be executed properly, or they are just plain scams from the very beginning.
The biggest scam in ICO history was organized by the Vietnam-based company Modern Tech in 2018. They conducted two ICOs for Pincoin and iFan. Both ICOs turned out to be Ponzi schemes. One day the company suddenly stopped processing client withdrawals, their offices were emptied, and the scammers got away with $660 Million.
The case of the Plexcoin ICO was the first time that the US Securities and Exchange Commission (SEC) got involved in and stopped the operations of an ICO project. Plexcoin raised over $15 Million, but they were a fake investment company, promising investors unattainable results of over 1300% per month. The money was seized by the SEC, and the founder of the company was sentenced to jail.
An example of a poorly secured ICO happened in 2016 with the Decentralized Autonomous Organization, The DAO. The project raised $150 Million in its ICO token sale event, but a hacker managed to find a vulnerability in the code and stole $50 Million worth of Ether coins. This led to the Ethereum hard fork that split the community after the users of Ethereum and Ethereum Classic decided to go their separate ways.
Introducing Initial Exchange Offerings (IEOs)
ICOs are no longer the most popular way of fundraising in crypto. Their biggest issue was the lack of trust between clients and the company as well as no regulatory frameworks. IEOs are the new method of investing conducted through well-known cryptocurrency exchanges such as Binance, Huobi, Kucoin, and many others.
This business model offers many benefits to startups. A company sends its tokens to a chosen exchange, pays a listing fee, and in return the exchange:
- Secures the tokens
- Handles the fundraising
- Advertises the IEO
- Onboards and verifies investors
- Lists the new token on the exchange upon successful completion of the IEO
The trust factor is one of the biggest advantages of participating in an IEO instead of an ICO. They take place on popular trading platforms that have a reputation to protect. The chances that reputable exchanges list and market scam projects are significantly lower because such a venture would cost them dearly. IEOs are offered and advertised to existing customers of crypto exchanges. The startups don’t need to worry about finding clients themselves. Security incidents caused due to the inexperience of the developers, like the DAO hack mentioned above, can be mitigated. Regulated exchanges are already set up to handle big amounts of money daily.
Many ICOs in the past have had issues listing on exchanges after the completion of their token sale. IEOs solve this problem by offering the needed liquidity to the users of their exchange immediately after the end of the sale campaign. IEOs are, as we can see, equally beneficial to all involved parties.
In the early days, ICO campaigns were an excellent way of raising funds. Professionally presented projects, with valid use cases, pocketed millions of dollars in investments. These funds helped them with the development of their projects, and the investors made huge profits after they sold their tokens. But the ICO scene was quickly overshadowed by scams and dishonest individuals who were looking to take advantage of the unregulated ICO market. This created fear and uncertainty in the eyes of the investors as the ICO industry made headlines with the scams, instead of success stories.
But things had to change, and that led to the invention of the IEO. Hosted on reputable cryptocurrency exchanges, IEOs might be just what the crypto world needed. Provided, supported, and advertised by the brands we trust, IEOs can potentially flourish in the same way as ICOs did in 2017.