Sunday, July 12, 2020

Will ICOs replace IPOs?

Traditionally, raising money required a lot of time and effort, and a healthy amount of trust on part of the investors. Generally, it went something like this: creating a solid business plan, presenting it to angel investors, a few venture rounds, and then opting for an exit strategy by offering an IPO and making the shares of a company public.

However, with the boom in the digital currency market space, companies are embracing the blockchain technology and its derivative, ICO (Initial Coin Offering), allowing them to get through the funding process easily and quickly. While there is a lot of uncertainty and skepticism surrounding ICOs, they definitely have the potential to beat down and take over the conventional IPOs. Let’s delve deeper and analyze the potential of ICOs, and how they can be a better alternative to IPOs.

The Emergence of ICOs

ICO, also known as a token crowdsale, is somewhat similar to IPOs and how it works, but what distinguishes the two is that the former refers to a company selling cryptocurrency tokens while the latter works by trading stocks. In 2015, about $5.2 million were raised by prediction market Augur in just two months, and this year, it took Gnosis 15 minutes to raise a whopping $12 million – that’s the massive powerful of ICOs.

Every ICO is different from the other in some aspects. There is always a time limit for buying tokens/coins and also a fixed number of tokens that are available for sale from a particular company. Once the time duration has expired, tokens belong to their respective owners, who can use them however they want, just like stocks.

ICOs Present Both a Threat and an Opportunity

Tokens/coins are secure, unfalsifiable, and easy to transfer. With blockchain technology, transaction records can be maintained for as long as the digital world and technology exists. Due to this, companies started to realize that since these coins can be used as assets, they can turn them into liabilities too, and hence issue debts as well as shares for a number of applications. What attracts people the most to these coins is that they are relatively secure and easily transferable – it’s like taking hassle completely out of the equation.

All seems fine and dandy, right? But like with everything, there are a few downsides. Issuing and transferring shares is fairly unregulated. This means that organizations started issuing huge amount of tokens, giving rise to different types of scams that jumped in to seize the walk-in-the-park money making opportunity.

But how do immature and fraudulent companies make so much money from ICOs? What aspects make investors trust such companies? Since the internet has added convenience to issuing and buying shares, it has attracted a new breed of investors, who are less experienced and just looking for an opportunity to invest their money without going through a hassle. Moreover, the low rates of shares make the deal more appealing. All this has created the blockchain bubble, which most people fear would burst, just like the dot-com bubble back in the 2000s.

So, what should you do amidst such uncertainty? A majority of experts believe that token-based system will eventually grow and become more regulated, capturing more value as compared to the previous generation of digital companies and are likely replace IPOs completely. Thorough analysis and due diligence are keys to ensure safe investment in any ICO, and investors should not simply jump into the bandwagon without proper research.

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