The MasterCoin Project was started in 2013 by J R Willet. Willet managed to raise $500,000 in the form of 5,000 Bitcoins at that time as part of his fundraising for capital. He managed to do this over a one-month period, where he allowed investors to purchase MasterCoins in exchange for Bitcoin.
This was the first time an Initial Coin Offering (ICO) happened.
From that time until 2018, there have been a total of 228 ICOs, which have managed to raise a total of $3.6 billion. The ICO that has managed to raise the highest amount of money is FileCoin, which raised a total of $ 257 million in the form of Bitcoin and Ethereum.
The current worth of the 5,000 Bitcoins that MasterCoin was able to raise in 2013 is worth about $41 million now.
What is an ICO?
An initial Coin Offering (ICO) can be compared to an Initial Public Offering. It serves the same purpose as an IPO, where investors are asked to purchase shares of a company in a bid to raise capital to run the company. In the case of ICOs, investors are required to purchase the underlying crypto tokens in exchange for Bitcoin and Ethereum.
There have been lots of debates within the blockchain community regarding ICOs. This is because ICOs are a relatively new way of raising funds. Also, this method is highly unregulated, causing people to raise questions regarding the legality of raising funds in this way. The US Securities and Exchange Commission (SEC) has spoken out on this issue. This was after the infamous DAO ICO, which raised questions among investors in regard to its method of fundraising. The essential thing to think about is whether the ICO passes the Howey test. In case it passes this test, then it’s considered to be a security. As such, it should meet the various restrictions that have been put in place by the SEC.
Comparing ICOs with Traditional Venture Funding
In Traditional Venture Funding, you have to pay a certain amount of money to own a certain percentage of the company. The percentage that you own is constant, and so is the dollar amount that you paid for it.
ICOs have certain advantages that venture funding do not have. This includes the fact that when someone gives Bitcoin or Ethereum in exchange for a share in the company, the company does not give up any of its shares in exchange for the investment that has been made. Also, the value of the Bitcoin or Ethereum received stands a chance of going up in value over time.
For example, in the case of unnamed ICO that managed to raise $ 200 million in July 2017, the amount raised is now worth $400 million. However, keep in mind that the cryptocurrency world is quite unpredictable. Therefore there is an equal chance of the value of the currency going down as well.
Moreover, people in business can get a shortcut when it comes to raising funds without the bureaucracy of shareholder agreements and liquidation choices.
This way of doing things raises a problem when it comes to traditional venture funding:
- Fund regulations are not strategized in a way that allows them to participate in ICOs
- We’re still uncovering clear-cut legal policies for companies to comply with
- ICOs are launched and funded too fast for comfort
ICOs have become quite a popular way of raising funds, such that they have exceeded venture funding as from May this year. This all happened within a year.
ICOs Are Not Flawless
ICOs have become quite popular within a short time frame; such that it has taken regulators time to catch up with them.
SEC has already started putting limitations on US citizens. This is both a positive and negative thing. The good thing is that it helps to protect a lot of people from getting scammed. On the negative side, a lot of people are being prevented from getting involved in one of the fascinating things of their time.
With time, it is anticipated that things will be worked out and a consensus will be reached to allow companies to continue to operate, while also allowing investors to invest in the market. The bulk of the responsibility now lies squarely with the companies that have managed to fundraise successfully to prove that they can build a solid business and build the credibility of this kind of businesses.
What is a Protocol and Who Gets Rich from Them?
The internet was invented by Tim Berners-Lee. When he did this, he came up with the best protocol that the world has ever seen, considering that this protocol affects the lives of billions of people all around the world. A protocol can be defined as a particular set of rules that have to be followed. For instance, Bitcoin and your email address use protocol technologies. This is a system of rules and regulations that each computer has to follow.
Big companies like Amazon, Facebook and Google, have been able to accrue so much wealth, much more than the person who invented the internet. They were able to do this since they were able to capture the information that was used in protocols, such as search engine results, behavioral issues, and buying trends to their advantage.
In a case similar thing were to happen today, there is a chance that the creators of these network protocols might end up getting a lot of the value as the protocol grows through a token system, launched through an initial coin offering (ICO).
The procedure involves a token being issued to investors in exchange for bitcoin or ether. These tokens can then be sold in a secondary market. The price it is sold for will depend on the forces of supply and demand.
Based on this mechanism, in case the protocol happens to do well, then the people who invested in it and helped in popularizing it are the ones who will benefit from it through the profits they earn from the tokens.
Bitcoin is the market leader when it comes to cryptocurrencies, as I explained in my recent video interview. It is important since it gave value to the different cryptos that came up after it and it is possible for anyone who has access to the internet to acquire it and make use of it anywhere in the world. The role of bitcoin can be compared to the role that gold plays in comparison to a currency such as the US dollars.
All the other cryptos that came after bitcoins were referred to as altcoins. There are so many of them now; they could be running into hundreds, if not thousands. Out of all these coins, only one of them can act as the main store of value, and in my opinion, Bitcoin plays this role. This is given that different altcoins serve certain niches. But for all of these coins to be traded in or out, bitcoin is used in exchange for them. Ethereum is also quite significant as it is mainly used by people who want to create their tokens. Ethereum technology provides the base on which all tokens are built. These tokens are then traded on the crypto market based on the forces of supply and demand. Currently, Ethereum is the market leader when it comes to token. However, it cannot be assumed that this will always be the case.
Due to advancing technology, it will be possible for new users to build tokens on bitcoins. Ethereum has its challenges, especially when it comes to growth and expansion issues. Also, its technology has not been tried and tested to the extent that it can be said to be as established in the market as well as bitcoin has become the cornerstone of the crypto world. But all this is not very important. In case Ethereum collapses, all tokens can then be moved onto the protocol that will come after all the period of confusion and turbulence.
Whether you like it or not, one thing that has become certain for me in 2017 is that tokens are not going anywhere any time soon. They will make a significant change in the market, in the same way, that Bitcoin did and still does.
The Effect of Blockchain on Crowdfunding and Venture Capital
Equity crowdfunding is not exactly an original idea, given the fact that it was not so widely embraced. One of its major disadvantages is the fact that there is no proper secondary market in case you decide that you want to dispose of your investment. This makes it difficult to have transparent pricing, thereby making it challenging to liquidate your investment.
The ICO market has grown so fast, to such an extent that it was able to exceed the billion-dollar mark by the first 6 months of 2017. In 2016 alone, $ 738.9 million was raised through traditional crowdfunding.
Crowdfunding through ICOs has its disadvantages. Things are not so clear. Also, investors are not protected in case things go wrong. This is what has caused some countries, such as South Korea and China, to ban this fundraising method, given that scammers and con artists can make use of this to take advantage of innocent investors. On the other hand, ICOs have their advantages. For instance, token is transparent, immutable and are secure, given that they are backed up by the blockchain, and they can be traded on various exchanges. This leads to many other advantages as well.
There would be such a big advantage if there was a crowdfunding platform that managed both the creation and exchange of tokens. This includes the fact that it will be possible to research any upcoming ICOs and it will be easy to liquidate the tokens. Transparency issues will also be improved, and costs decreased since the blockchain company will by default be the keeper of the assets.
A blockchain crowdfunding will provide so many advantages over traditional venture capital funding, especially when it comes to the level of experience and support that the company will give to startup businesses.
Things like coaching, networking and business incubations can take place directly in the market. Also, the entrepreneur will enjoy this since the balance of power will shift back to them.
When it comes to technology, innovation gives birth to more innovation. This ensures that more efficiency is achieved when it comes to the allocation of funds when it comes to other ways of traditional investments.
Warnings from Regulators
A lot of startups have been using ICOs as a way of raising funds without any regulations being adhered to. In some cases; companies don’t even have a basic investment project in the works or any financial statement or evidence that the company even exists.
As a result of this, a few shady characters have used this to their benefit to take advantage of investors, given that not many people have a good understanding of what they are investing into. That is why a lot of central banks from all over the world have issued warnings to their investors to be wary of cryptocurrencies and stay away from them.
The UAE central bank was also in the same mix, warning its investors and even stating that they will step in at some point to regulate cryptocurrencies in a bid to protect its people.
ICOs have been able to avoid regulators due to some things. First of all, they don’t offer equity in their company in return for any investment made. They are also global; therefore, they are not controlled by any country’s laws. Also, they are funded using cryptocurrencies. Cryptocurrencies such as Bitcoin and Ethereum are not managed by any regulatory body. Since crypto investments can be made semi-anonymously, customers will not have to follow any anti-money laundering regulations or know customer’s requirements.
Regulators from all over the globe are taking steps to protect their investors since there are too much money and too little control, transparency and rules on how ICOs should be handled.