Similar to an Initial Public Offering (IPO) or even VC funding, an Initial Coin Offer (ICO) or “token sales” is essentially a new way for blockchain companies raise funds for the technical development of a new cryptocurrency. ICOs have become increasingly popular over the last few years, thanks of a number of factors including the convergence of technology, clever investors, new wealth and a growing number of crypto-investors investing in cryptocurrencies and other blockchain-related projects. Since 2013, blockchain companies have raised more than $270 million in ICOs, excluding the $150 million raised by the DAO scandal. This is according to data from Smith + Crown, a blockchain research, data and consulting group. Moreover, the venture capitalists have invested nearly $2 billion in blockchain projects during the same period.
How Investment Bankers are Getting Involved in Cryptocurrency
A blockchain company creates a new digital token on a protocol such as Openledger, Ethereum or Counterparty and assigns the crypto an arbitrary value. The creators then assign the token an arbitrary value at the early-stage and then the early supporters of the project determine the value of the token based on market forces of supply and demand. To invest in an ICO, an investor has to purchase the digital tokens using an existing cyptocurrency such as Ether or Bitcoin. Investors normally trade digital tokens on cryptocurrency exchanges in order to create liquidity.
Benefits of Investing in ICOs
Some of the reasons why ICOs have become increasingly attractive to investment bankers include:
Huge profit potential — ICOs have a huge profit potential. For instance, in 2016, the early supporters of NEM and Monero cryptocurrencies saw their investments grow by as much as 2000 within a relatively short period. Similarly, the supporters of Ether, the digital currency used for the Ethereum protocol, doubled their investments in just three days. Investment bankers have noted the huge profit potential presented by ICOs and are increasingly investing in ICOs in order to get a piece of the pie.
Liquidity of cryptocurrencies — Since cryptocurrency investments offer liquidity, they allow investors to realize profits faster and more importantly, pull out profits easily. All an investor has to do is to convert a digital token into an existing cryptocurrency and then convert the cryptocurrency into fiat currency via an online service such as Coinbase.
Ability to Monetize the underlying protocol directly – Digital tokens allow the creators of a blockchain protocol to monetize the protocol directly by reserving a portion of new digital tokens for early adopters and early investors, as well as themselves. This group of early investors can use their tokens to support the applications of the crypto after it launches and attains some level of success. This means that the value of a digital token does not lie in its application but on the shared protocol layer in a blockchain project. Still, the applications built on the underlying blockchain protocol are useful in attracting attention to the protocol. However, as the price of a cryptocurrency increases, the market capitalization of its protocol grows faster than any application. This aspect of ICOs appeals to investment bankers.
Investment bankers are increasingly investing in initial coin offerings (ICOs) due to various reasons including the ability to monetize the underlying protocol directly, Blockchain Capital’s Brock Pierce explains to Bitcoinsit readers the benefits and drabacks of both. Liquidity of cryptocurrencies and the huge profit potential of ICOs. To invest in ICOs, investment bankers typically have to buy a new digital token from a blockchain company. The future of Coin Offerings are going to be huge and this is just the tip of the iceberg.