Investing in the future of finance
Cryptocurrencies, despite their setbacks, are one of the most disruptive technologies in finance today. But with so many companies vying to set up their own digital currencies, how do they get hold of the investment they need? At the end of May, open source web browser Brave raised a whopping $35 million in just 30 seconds to create its own coin called the Basic Attention Token. The startup was able to generate the impressive funding via an ICO – an Initial Coin Offering. But what are they, and how do they work?
An ICO is essentially a crowdfunding strategy specifically aimed at cryptocurrencies. The first ICO was released for Mastercoin in 2013, and crypto giant Ethereum also used the financing strategy. There are now 20 offerings per month, which shows just how popular they have become. Initial Coin Offerings are similar to IPOs (Initial Public Offerings). However, ICOs and IPOs are fundamentally different. Investing in an ICO doesn’t mean entitlement to a proportion of the company itself, and they are subject to far fewer government regulations. Investors buy into ICOs in the hope that the value of the coin will grow – Ether’s value, for example, soared from $0.40 to $14.
Whilst the lack of rigid regulations is liberating, startups and companies need to preempt the creation of future rules and laws. As the popularity of ICOs increases, they should be careful not to take too much advantage of current uncertainty. There are also underlying technical hiccups with the software platforms behind digital currencies, which Ethereum itself experienced last month. Potential issues aside, ICOs are both profitable and simple. Along with other types of crowdfunding, they provide a snapshot into the future of financing.