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ICOs - The Future Investment Vehicle of Choice?

Updated: Jul 9, 2022

The modern global economy is a very efficient machine. Every day, it effortlessly matches investors to firms that require capital. Traditionally, start-ups have relied upon Venture Capitalists or Angel Investors to support growth in their former years. However, this all seems set to change thanks to the advancement of Blockchain technology and its derivatives.

Today, we will explore a newly emerging blockchain-powered investment vehicle named an ‘Initial Coin Offering (ICO)’. In recent years, ICOs have funnelled Billions of dollars into the Blockchain ecosystem, supercharging its growth and providing Blockchain projects with the liquidity they need to thrive.

As of late, this novel investment vehicle has begun to compete with traditional financial vehicles used by small firms and start-ups to raise capital. In future years, ICOs may completely overhaul the relationship between small businesses and their investors, producing a financial arrangement that works better for both business owners and investors alike.

What is an ICO?

At this point, you’re likely trying to figure out exactly what an ICO is and how it works. Well, let me enlighten you…

You can think of an ICO as the Blockchain industry’s unique version of a traditional Initial Public Offering. Essentially, under both offerings, a business is looking to raise the capital required to kickstart its business. Under traditional arrangements, an IPO investor would typically receive a share in the company in exchange for his/her capital investment. However, with an ICO, investors receive the native Cryptocurrency Token of the Blockchain they have invested in.

The digitally tokenised assets exchanged with investors in return for their capital serve different purposes depending upon the project in the discussion. Some projects use the Tokens to represent a direct stake in the project whilst others design the Tokens to provide rights to goods and services on the projects Blockchain in future years to come.

Similar to an IPO, when a Blockchain-based project initiates an ICO, the company will typically produce what is referred to as a ‘white paper’. This document will outline several factors, such as:

  • What the project is

  • How it works

  • What are the goals and aspirations of the project

  • The projects use cases

  • How much capital is required

  • The Tokenomics of the project

  • Business Model

This white paper serves as an important tool for prospective investors, allowing them to get an in-depth understanding of the project's fundamentals before they consider whether it is the right investment for their portfolio.

The emergence of the ICO investment vehicle has brought with it a plethora of advantages that both investors and business owners can capitalise on. In recent years, ICO has been credited with the ability to democratise innovation and completely overhaul business investing dynamics. But how do ICOs actual improve this investment dynamic you may ask? Well, let me now provide some examples of exactly how the concept of an ICO builds upon existing investing practices.

The Benefits of ICOs

Investment Inclusion

ICOs typically do not discriminate based on how much capital you have to invest. As a result, the emergence of the ICO model has liberalised access to start-up investment opportunities for many retail investors around the globe. This non-discriminatory dynamic has unlocked a mountain of previously illiquid capital, massively increasing the availability of capital desperately needed by new businesses to get themselves off the ground.

Additionally, the non-discriminatory nature of ICOs is empowering businesses from less-developed countries that traditionally find it difficult to get access to institutional money. Many developing countries around the globe are completely shut out from the traditional financial system, making it very difficult for them to access the investment capital required to scale their business.

However, ICOs do not discriminate depending upon which country you reside within. Think of all the untapped potential out there that cannot meaningfully contribute to the development of the global economy at present. ICOs overcome this barrier, allowing Blockchain-based businesses to access capital regardless of where they are situated geographically.

Reducing Frictional Barriers

From a technical perspective, launching an ICO is far easier than utilising legacy investment vehicles such as an IPO, for example. A project owner can quite easily issue tokens and collect the associated capital funds with very little skill or technical knowledge.

In addition to this, the process of launching a project through the use of an ICO is far cheaper and faster in comparison to similar investment-raising vehicles. As a result of this, ICOs go a long way in assisting less-experienced businesses with the process of raising capital, breaking down barriers to entry and liberalising the process of raising funds.

Harnessing The Power of Community

Most Blockchain-based projects derive their value from what is referred to as the ‘Network Effect’. Essentially, the law of the Network Effect states that a Blockchain becomes more and more valuable with each new user. This is the same sort of dynamic that governs the value of social media platforms like Facebook, Twitter and Instagram.

Due to the Network Effect dynamic in play on Blockchain-based ICO projects, Token value is directly correlated with the number of users on the Network. If the number of users of the network increase, so will the value of the Token. Due to this correlation between users and the value of tokens, investors are naturally incentivised to promote the project and contribute to its development over time.

When examining the social dynamic of projects that have been launched through the use of an ICO, typically, you will notice that their Token holders are generally more proactive and engaged with the project. Investors share knowledge, promote network growth and employ their personal experiences and skills to improve the project.

This dynamic creates additional resources and capabilities for the project founders, allowing them to operate with far less staff than a comparably sized IPO launched the project. This positive dynamic can be attributed to the fact that holders are strongly incentivised to improve the project so that increased network adoption drives up the price of their tokens.

Bottom-Up Approach

The whole concept of an ICO is enabled by Blockchain technology and its derivatives. Therefore, it should be no surprise that ICO projects tend to be ideologically aligned with the core principles that underpin Blockchain technology.

Typically, ICO projects at their core have an intense focus on decentralisation, meaning, that power over the project is shared more evenly amongst its stakeholders than in traditional businesses. If you speak to Blockchain project owners or listen to them speak online, you’ll quickly recognise that they are passionate about liberalising business ownership and building revolutionary technology in a very collective way.

Whilst it would be naive to assume that Blockchain-based project owners are not motivated by profit, it is safe to say that they have a far more balanced approach, placing value on changing the world and progressing humanity’s advancement forward. As an investor, being part of this type of decentralised project is very enticing, given that they heavily rely on their community to co-develop and input on the development of the project.

What do traditional investors think of ICOs?

Whilst traditional institutional investors were very quick to discredit the ICO model in its early years, its success has forced them to take a long and hard look at the potentially disruptive investment vehicle.

The growing popularity of the ICO model within the investing world has simply become too loud to ignore. I believe personally that there is a growing concern amongst Venture Capitalists and Angel Investors that they will be thrown under the bus if they continue resisting ICO adoption in years to come.

However, there are a few key barriers that currently prevent these types of institutional investors from adopting the ICO model. This barrier is regulation. At present, across most countries in the world, there isn’t a regulatory framework in place to protect investors. Consequently, the ICO platform has been subjected to its fair share of scams, including Ponzi schemes, pump and dumps and outright rug pulls.

In addition to the lack of a regulatory framework, the decentralised nature of ICO projects ensures that large investors have less power over the project they have invested in. Traditionally, venture capitalists and angel investors have been used to exercising immense degrees of power and control over the projects they invest in. However, this degree of control is very difficult to maintain with a Blockchain-powered project. The institutional investor types will need to adjust to this decentralisation if they are to adopt the ICO model in future years to come.

The Bottom Line

The emergence of Initial Coin Offerings has disrupted the traditional financial industry and introduced a Blockchain-based alternative for businesses and firms looking to raise capital. Projects that launch through the use of an ICO naturally adopt some of the foundational principles of Blockchain technology; namely decentralisation, immutability, openness and transparency. ICOs are fast, cheap and reduce barriers to entry, making them a perfect investment raising solution for businesses and firms that may not have the technical skills required to launch their business through other means. Whilst the traditional financial system has been reluctant to use ICOs in the last few years, this will likely change as this type of investment platform increasingly grabs more and more market share.


This Blog was written by on behalf of Blocksultancy. Check out their website for the most Current Cryptocurrency News and Crypto Education.

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