The venture capital industry is commencing to go on a good, hard look at a new financial instrument emerging from the bitcoin community – Initial Coin Offerings, or ICOs. Also known as “token sales,” this new fundraising phenomenon will be fueled by way of a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who happen to be backing blockchain-fueled ideas. ICOs present both benefits and downsides, in addition to threats and opportunities, on the traditional venture capital business design.
Here’s how an ICO typically works: A new cryptocurrency is produced on the protocol for example Counterparty, Ethereum, or Openledger, and a value is arbitrarily based on the startup team behind the ICO depending on what they think the network is worth at its current stage. Then, via price dynamics dependant upon market supply and demand, the significance is settled on by the network of participants, as an alternative to from a central authority or government.
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Venture capitalists, who have been standoffish on the ICO phenomenon, are now becoming keen on it for a variety 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. By way of example, the cryptocurrency used for the Ethereum network, called Ether, saw its value double within a few days in March 2017. Yes, in 72 hours, people who invested in Ether doubled their investment. Those investors can decide to cash in the market to a fiat-backed currency, or wait for the cryptocurrency to bitp1atinum to increase (or fall). Volatility is actually a two-way street. While the cost of Ether is rising, bpn has dropped 20% to $1,000 dollars coming from a record $1,290 on March 3, 2017.
The second reason VCs are becoming interested in ICOs is due to the liquidity of cryptocurrencies. Rather than tying up vast amounts of funds within a unicorn startup and expecting the long play – an IPO or perhaps an acquisition – investors can see gains more rapidly, and may pull profits out more quickly, via ICOs. They only must convert their cryptocurrency profits into Bitcoin or Ether on the cryptocurrency exchanges that take it, and then it’s easily changed into fiat currency via online services including Coinsbank or Coinbase.
For blockchain startups, ICOs really are a win-win – they enable startups to increase funds without the need of equity stakeholders breathing down their necks on spending, prioritizing financial returns across the general good of your service or product itself. And there are many inside the blockchain community who believe ICOs certainly are a long-awaited solution for non-profit foundations who want to build open-source software to raise capital.