Cryptocurrencies seems to become a more important part of the economic domain. However, some economists predict that crowdfunding by means of Initial Coin Offerings (ICOs) will be short lived. This assumption is based upon the fact that most ICOs were worthless. Some observers show that ICOs have very different mechanisms from those of Bitcoin or Etherium.
One of the increasingly popular form of crowdfunding is Initial Coin Offerings (ICOs), which have been around since few years ago. This is considered a model alternative for raising fund. For instance, more than US$ 5.1 billion were raised through ICOs in 2013. The amount increased to US$ 16 billion in 2014 and again increased to more than US$ 34 billion in 2015.
How Initial Coin Offerings Are Different From Blockchain
Actually, there are some differences between cryptocurrency trading and ICOs, even though they are mostly classified into the similar group. It is because both are based upon Blockchain technology. However, they work very differently. Cryptocurrencies like Bitcoin and Etherium are tokens that have intrinsic utility. Therefore, their value increases with time.
Bitcoin allows the owner to make a transfer without controlling the second party. Similarly, Etherium has a smart contract, which enables the owner to have the payment agreement documented properly by means of software. It means that the transactions are controlled by neither the first nor the second party. Both Bitcoin and Etherium have growing ecosystem. They introduce utility, which depends upon them. As a result of increasing demand and price for the tokens, they grow accordingly.
On the other hand, ICOs are tokens aimed at extracting value from a business. Therefore, their value decreases with time. ICOs are not creating new utility. Instead, they graft the cryptocurrency to the existing business model. Therefore, value of the tokens depends entirely upon the success of the businesses, to which they are tied.
Prospects of Initial Coin Offerings in Business Landscape
As mentioned in the beginning of the posts, many people are not so optimistic about the future of Initial Coin Offerings (ICOs) as an alternative way for crowdfunding in business. It is true that many businesses now depend upon them to raise funds. They range from electric retailer, credit card providers, venture capital fund manager, and many more. They believe that the tokens will provide them with substantial returns. Will it?
It seems that businesses are making wrong prediction about ICOs. The future value of these tokens depends not upon enabling new utility but upon siphoning cash from business operations. ICO startups must purchase the tokens to enable them to do business with a startup. It means that the demand for tokens will grow along with the business growth. In other words, around 1% to 5% of the cash flow will be used to buy tokens and distribute them to token holders.
The point is that startups that raise funds with Initial Coin Offerings do not create new utility. This is what makes them different from Etherium and Bitcoin. The ICO startups are entering the existing markets, where competition has been established. Unless they can create significant competitive advantages, competing with established businesses will be a hard work.