The venture capital industry is starting out require a good, hard look at a fresh financial instrument coming from the bitcoin community – Initial Coin Offerings, or ICOs. Also called “token sales,” this new fundraising phenomenon has been fueled by a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors that are backing blockchain-fueled ideas. ICOs present both benefits and downsides, as well as threats and opportunities, towards the traditional venture capital business design.
Here’s how an ICO typically works: A whole new cryptocurrency is produced over a protocol like Counterparty, Ethereum, or Openledger, as well as a value is arbitrarily dependant on the startup team behind the ICO based on whatever they think the network may be worth at its current stage. Then, via price dynamics dependant on market supply and demand, the benefit is settled on through the network of participants, instead of from a central authority or government.
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Venture capitalists, who normally have been standoffish for the ICO phenomenon, are becoming more interested in it for a number of reasons. 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. For example, the cryptocurrency used for the Ethereum network, called Ether, saw its value double with a day or two in March 2017. Yes, in 3 days, people that invested in Ether doubled their investment. Those investors can choose to cash out to a fiat-backed currency, or wait for a cryptocurrency to bitp1atinum to go up (or fall). Volatility is actually a two-way street. While the price tag on Ether has become rising, bit platinum has dropped 20% to $1,000 dollars from the record $1,290 on March 3, 2017.
The second reason VCs have become keen on ICOs is due to the liquidity of cryptocurrencies. As an alternative to tying up vast amounts of funds in a unicorn startup and waiting around for the long play – an IPO or perhaps an acquisition – investors can see gains more rapidly, and might pull profits out more easily, via ICOs. They simply have to convert their cryptocurrency profits into Bitcoin or Ether on some of the cryptocurrency exchanges that carry it, and then it’s easily converted to fiat currency via online services for example Coinsbank or Coinbase.
For blockchain startups, ICOs are a win-win – they allow startups to raise funds without needing equity stakeholders breathing down their necks on spending, prioritizing financial returns within the general good of the goods and services itself. And there are lots of inside the blockchain community who feel that ICOs can be a long-awaited solution for non-profit foundations who want to construct open-source software to boost capital.