The hype around the term ‘ICOs’ (Initial Coin Offering’s) has been more than present over the past couple of years. This has led to many successful projects being implemented, millions of dollars raised via crowdfunding pages, and a massive potential provided for new startups and companies who are participating in this new model.
Additionally, for the investor, upcoming ICO trading can often provide the opportunity to gain large long-term returns on your original investment. When investing in upcoming ICO’s, it is so important that you have completed your own thorough investigative research, rather than simply following the crowds online. Cryptocurrencies are high risk – high reward, and ICOs are no different. Therefore, it is important for you to learn and understand the concept of ICO’s, which we will discuss in further detail in this article.
What Is An Initial Coin Offering (ICO)?
The term ICO stands for Initial Coin Offerings. It can also sometimes be referred to as initial public coin offerings (IPCO).
To put it simply, the term basically describes when a company offers investors a number of units of a new cryptocurrency or a crypto-token in exchange for a stake in their business.
Before the huge interest in cryptocurrency from the wider public in late 2017, one of the key pain points for tech startups was raising money to support their projects. When the cryptocurrency boom took place, many startups noticed the opportunity where they could raise an immense amount of funds to be able to support their visions and project ideas in the crypto and blockchain space. ICO’s are now regularly and successfully used to fund the development of a crypto project simply by releasing tokens to investors.
The success of projects such as Ethereum, whose ICO was successfully used to raise a vast amount of money ($18 million USD in Bitcoins in fact), and quickly, for funding their smart contract platform, has influenced more startups to adopt the ICO model. The value of one Ether token was at $0.40 USD in 2014, the project went live in 2015 and in 2016 had an ether value that went up as high as $14 with a market capitalization of over $1 billion.
One of the key benefits for project founders, is that ICO’s allow for startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. For this reason, ICOs are one of the most popular methods used to raise money nowadays, especially after many startups can clearly see the benefits of adopting an ICO as a model – and a tool that can easily revolutionize currency as well as the entire financial system.
To explain the process for when a cryptocurrency startup firm wants to raise money using an ICO, I have outlined the main steps below:
- Pre-Campaign White-paper:
Before an ICO, a white-paper is released by the startup which informs potential investors with:
A description of the project
The purpose of the project and what need(s) will be fulfilled upon completion
The quantity of money needed to be raised
The amount of virtual tokens that the pioneers of the project will keep for themselves (their stake of the business)
The length of time that the ICO campaign will run for
ICO Campaign
During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed crypto coins with fiat or virtual currency.
These coins are referred to as tokens and are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction.Campaign End
After the campaign, there are two possible scenarios:
Scenario 1: The money raised does not meet the minimum funds required by the firm.
In this scenario, the funds raised are returned to the backers and the ICO is deemed to be unsuccessful.
Scenario 2: The money raised DOES meet the minimum fund requirements of the firm.
On the other hand, in this scenario, the money raised is then used to either initiate an launch the new project or to complete it.
As you can see, cryptocurrency startups have shifted the traditional Initial Public Offering (IPO) model with a completely new one that issues their own tokens for the operation of their business.
However, it is important to understand that the tokens issued do not represent equity. Instead, they are more like paid API keys which allow their holders to increase the value of their API keys as the project launches and acquires more users progressively with its demand. A token launch differs from an equity sale, mostly because the latter is regulated by the 1934 Act, and the former is still under regulation.
How To Take Part In Upcoming ICO Trading
If this novel fundraising mechanism seems amazing to you, the best news is that you can take part in it. In fact, you can participate in any ICO that you deem worthy.
There are three main steps to get involved in an upcoming ICO:
- Obtain Ether – You will need some cryptocurrency in order to participate in an ICO or a crowdsale. This is because these mechanisms don’t usually accept USD or other fiat currencies. Because of that, you should purchase Ether from the Ethereum network – or Bitcoin as one of the most widely accepted cryptocurrencies. The safest way to obtain them is from a secure exchange like Coinbase.
Use the following step-by-step guide: How To Buy Bitcoin
- Move Your Ether To A User-Controlled Wallet – The best way to store your cryptocurrencies (which you will use for crowdfunding an ICO) is to move them to a wallet. If you send your Ether, for example, from your Coinbase account to an ICO address – you will only make Coinbase richer. Instead, make sure to move your crypto in a user-controlled wallet like My Ether Wallet which you can use to make payments at the right time.
Use the following step-by-step guide: How To Store Offline
- Take Part In The ICO – The final step is to send your cryptocurrency from your wallet to an ICO address in order to receive your new tokens. Here, you should make sure that you have the correct wallet address from the company to send your investment to. You must check the company’s official website for this information.
Upcoming ICO trading is becoming very popular because there are huge gains to be made if the startup project delivers on its white-paper promises. Early investors in the operation are usually motivated to buy the latest low-cost cryptocurrency tokens in the hope that the project becomes successful after it launches. If all goes to plan, the value of the coins or tokens that investors originally bought will then grow in value as more investors take their stake in the project, and the popularity of the project increases.
The Dangers Behind ICOs (And The Potential Scams)
Still, there are many risks of investing in ICOs, mostly because of the potential scams and projects whose aim is to only take money. The growth in popularity of ICO’s for both startups and investors, has created an influx of scams and inexperienced tech startups wanting their piece of the pie too. Some of the biggest concerns around the dangers of ICOs include crowdfunding for purposes such as money laundering, fraud, terrorist financing and more. Because ICOs are barely regulated, you need to be way more careful than you’d be when investing in an IPO. To ensure you do your own thorough research, make sure you cover at least the following:
Definitely read and understand the white paper
Research and understand who the key players are behind the project, as well as what their incentives are, and make sure they have a history in cryptocurrency,
When it comes to the legality of ICO’s, it is still very much a grey area. The SEC classified tokens from ICOs as securities in December of 2017. The SEC’s recent decision helps to clear up some of the grey area: in certain cases, the token is simply a utility token, meaning it gives the owner access to a specific protocol or network; thus it may not be classified as a financial security. On the other hand, the token can be classed an equity token, meaning that it’s only purpose is to appreciate in value. In this case, it seems more like a security.
In many countries, there is a proper regulatory crackdown that is looming. One of these is Bermuda – with the well-known Digital Asset Business Act 2018.
Digital Asset Business Act 2018 (DABA): The Next Step In Bermuda’s Fintech Sector
The Government of Bermuda has recently tabled all of the companies and LLCs (in the form of ICOs) to introduce a statutory framework for the offering of digital assets by Bermuda companies. The ICO Act provides that all of the Initial Coin Offering (ICO) assets will be treated as a Restricted Business Activity – which is certainly one of the most significant regulations of businesses like this to date.
More importantly, digital asset offerings will be conducted in accordance with all the requirements of published regulation. They will fall under all the relevant supervision and compliance requirements – all part of the initiative to provide regulatory certainty and a reliable legal framework for creating an environment moved by blockchain, cryptocurrencies and other digital assets.
Bermuda’s fintech development and implementation of a globally recognized standard is best seen through the Digital Asset Business Act 2018 under which there are many steps for regulating the fintech sector in the country. Currently, DABA has been approved by both the House of Assembly and the Senate – and it only needs a Royal Assent and a notice by the Minister of Finance.
This way, DABA as a document will regulate digital asset business carried on in or from within the country. In other words, this “Digital Asset Business” will refer to:
Issuing, selling or redeeming virtual coins, tokens or any other form of digital asset;
Operating as a payment service provider business utilising digital assets which includes the provision of services for the transfer of funds;
Operating an electronic exchange;
Providing custodial wallet services;
Operating as a digital asset services vendor.
From all this, an exchange is defined as an entity that means to assume control of digital assets from and on behalf of a client. As such, it can sell, trade or convert (a) digital assets for fiat currency, bank credit or other digital assets or (b) fiat currency or bank credit for one or more forms of digital assets.
A Word From The Blockchain Influencers In Bermuda
In order to clearly preview what the DABA 2018 means to Bermuda as a country, one media outlet named Royal Gazette spoke to Stan Stalnaker who is the founder of the Bermudian-based Hub Culture startup which created the world’s first digital currency, Ven.
According to Mr. Stalnaker, new regulations and legislation in Bermuda is upping the standards for everyone working in the digital asset and FinTech sector. Stan told the journalists:
“The industry for blockchain is going to be a trillion-dollar industry, and Bermuda is positioning itself to be a leader in that front. My hope would be that Bermuda has a role similar to the way it controls the reinsurance industry, but in blockchain,”
What’s more, Mr. Stanlaker believes that the blockchain sector will become much larger than the reinsurance industry – and Bermuda will not be able to get “all of it.” However, as Stalnaker says, it will “hopefully end up with a healthy stake”.
Further Legislation To Be Introduced
The ambitious agenda carried out by the Government of Bermuda is not stopping here. It was announced that further legislation would be also introduced over the course of the coming months. On that agenda, we can now easily see the new Virtual Currency Business Act 2018 which is tabled in the country – as well as a digital identification platform (e-ID) which will come in July 2018, followed by an official Virtual Currency Exchange that is targeted for September 2018.
The entire Virtual Currency Business Act along with all of the published regulations and the code of conduct has now been published in a draft form and is available for download on this link.
A Final Word
In the end, more and more countries are moving forward to regulating ICOs and cryptocurrencies and therefore developing a new business infrastructure through crowd-sale. Even though there are still some risks at present, the authorities are doing their best to regulate them and bring us the safer, hyper-connected environment we deserve.
Remember to do your own research when investigating ICO’s to take part in.
