The Future of Initial Coin Offerings:
Will the ICO Market Correct Itself Before it’s too late? (1 of 2)
What is an ICO?
The term ICO is short for Initial Coin Offering, and is a fundraising strategy employed by blockchain companies to raise capital. It is conducted in a crowdsale type nature in which the company receives funds from investors, and in exchange, the investors receive the company’s native cryptocurrency token at a discounted price. Initial Coin Offerings have become the favored fundraising strategy for many blockchain companies due to its overall simplicity and flexibility. The title ‘Initial Coin Offering’ was named as a play on the traditional fundraising vehicle Initial Public Offering (IPO). However, there is a significant difference. During an ICO, the company is not giving away any equity in its company. A company can raise millions of dollars during an ICO without giving up a percentage of the company; only its tokens. In contrast, during an initial public offering equity ownership in the company is granted to investors in the form of stock issuances.
How Do ICOs Work?
Initial Coin Offerings seem complex but they are fairly straightforward. The company first designs a solution that employs the use of blockchain technology a/k/a- a blockchain based solution. That solution requires the creation of a token to be deployed for use within that ecosystem. It is important to understand that a blockchain does not in all cases require a cryptocurrency to function. However, you cannot have an initial ‘coin offering’ without a coin to offer. So if the company wants to raise funds via an ICO, it would need to create a token which should have practical utility within the blockchain application. The company generally commences the Initial Coin Offering prior to building out the application and token. This is because the usual goal of the funds raise is to bring in enough capital to complete the build out of the platform, the token and the application’s minimum viable product.
There are many different ways that a company can structure an Initial Coin Offering. The decision will be primarily based on the funding goal, number of tokens to be issued, and initial token price. The most common structure is to have a set fundraising goal from the start, with a fixed initial token price and a fixed number of tokens to be issued.
When structuring an ICO, the company will need to make the following decisions:
- The amount of funds targeted to be raised.
- The time period of the ICO.
- The number of tokens to be issued during the ICO.
- The number of tokens to be issued in total.
- The price of the tokens.
- When and how the tokens will be issued.
- The total token supply that will be created.
- The currencies that can be used to purchase the tokens.
- The rights and benefits the tokens will grant its owners.
- Which blockchain to build their application on.
- How investment funds will be used.
Below is a mock example of a Token Launch Summary for fictional Blockchain Built Tokens (BBT):
The BBT token sale will commence on a specified date and will run for a period of 90 days or when the token cap is reached, whichever occurs first.
– Lifetime Authorized Tokens Available: 1,000,000,000 tokens = Total amount of tokens to be created by this blockchain application.
– ICO Token Cap: 500,000,000 tokens = The Total amount of tokens to be sold during the ICO. Also known as the funding goal.
– Network Operations Fund Reserves: 500,000,000 tokens= The amount of the remaining authorized tokens that will not be sold during the ICO but reserved for functional needs such as platform operations, maintenance, mining rewards and more.
– Built on the Ethereum Blockchain = The Blockchain that the company’s application will be built on.
-Ether (ETH) the accepted cryptocurrency for exchange = The Cryptocurrency that investors will purchase using a fiat currency and then exchange with the company for its BBT. The company will then use the ETH to pay for the costs of building out its platform and tokens.
– During the Crowdsale Tokens will be offered based on the exchange rate of 1 ETH to 150 USD or 1 ETH to 1,000 BBT or $0.15 per BBT= The fixed price of the coin based on the current value of Ether.
– During this crowdsale individuals can purchase tokens through the Blank Name exchange at https://blanknameexchange.io. = The ICO listing site that has agreed to list the company’s ICO.
Initial Coin Offerings are rolled out to investors in three phrases, the Private Sale, the Pre-Sale and the Crowdsale. Using the example above it would look as follows:
Private Sale: With a preference to institutional investors, the Private Sale is “private” to the majority of the public and gives a very select group the first opportunity to invest. The token is priced at its lowest during the Private Sale.
Using the pricing example above, the pricing may start at 1 ETH to 1,500 BBT or $0.10 USD per BBT
The Pre-Sale: During this phase the price has increased from the Private Sale price but still below the fixed Crowdsale price. The Pre-Sale occurs directly before the Crowdsale. Unlike the Private Sale, the Pre-Sale is publicly marketed to a larger group of potential investors.
The Crowdsale: The Crowdsale is the main token sale of the ICO. The price is now at the original set price as shown in the Token Launch Summary and the offering has been opened up to the general public and usually (if accepted) marketed on ICO listing websites.
It is quite an easy process for the investor. The investor takes fiat currency such as the US Dollar, purchases Ether (ETH) through an exchange (as used in this example), and then uses the Ether to purchase the company’s tokens. Since the tokens are not yet created, the investor receives some type of futures contract guaranteeing issuance of the commensurate amount of the company’s token once the platform is built out and the tokens can be issued.
After the tokens are delivered to the investors, the company has in its investors, a built in ecosystem of application participants whom are utilizing the company’s blockchain application. The company can then place their focus on continuing to develop the application, to onboard more participants and increase the value of the tokens and business.
Now that you have an understanding of how ICOs work, look out for part two of this blog which will take a look into the evolution of the ICO market and why the current ICO market is in serious trouble if it does not correct itself.