After the boom and bust and boom of bitcoin, where some lost millions on discarded drives and others found forgotten wallets with enough to buy a flats in Oslo, the next big thing in the cryptocurrency is here to generate millions of pounds for the lucky few brave enough to invest: the initial coin offering (ICO).

If you hang out in cryptocurrency circles, you’re used to hearing conventional wisdom being questioned. After all, the sector was born out of the idea that orthodox economics is bunk. From there, there’s nowhere to go but up.

It’s no wonder Initial Public Offerings are being rethought. They’re too bound up in regulation, too late in a company’s life-cycle and too expensive to pull off to be really useful for a startup. They’re a great way of returning capital to investors, but not for funding your blockchain-based business idea.

Enter the ICO. They’re essentially crowdfunding campaigns for cryptocurrency startups, these days almost always based on the Ethereum platform – a bitcoin spinoff which lets users build distributed businesses all plugged into the same blockchain. The startup’s developer sets the currency up so that a significant batch of initial coins are allocated to them, which they then auction off to investors who want to get in on the ground floor.

Often the only chance of a return is if the value of the coins goes up, but with the examples of bitcoin (increase in value over the past 12 months: 410%) and Ethereum (increase in value: 4,000%) behind them, a lot of investors are prepared to speculate. If the platform takes off, those coins are going to rise in value, and they can cash in.

Some startups take a more complex route, and offer tokens that guarantee the holder a share of the return on the platform – in effect, cryptographically guaranteed equity. A dark web market, for instance, can fairly easily charge transaction fees which are automatically split amongst the holders of its equity tokens.



However they’re run, ICOs are big business. Ethereum itself was launched with a sale that netted 31,591 bitcoin (then around $18.5m) in exchange for its first 60m ether tokens. It’s since been outdone by at least 10 other ICOs run on Ethereum alone, including the Basic Attention Token used for tracking-free advertising on the Brave adblocking browser ($35m raised), the MobileGo token used in a cryptocurrency-based video game marketplace ($26m raised), and the Bancor Network Token, which backs a platform designed to make it easier for users to make and launch their own blockchain tokens ($152.3m raised).

Of course, the risks for investors are sizeable. Despite the name, an ICO doesn’t share a lot of similarities with an IPO. Increasingly, these offerings are made before the company even really exists – perhaps a legitimate choice if the team can’t work until the coins have been issued, but one that leaves millions of dollars flowing into startups which would still be courting angel investors for five figure sums in a conventional market.

Perhaps the most noteworthy failure to date, of a startup called the Decentralised Autonomous Organisation – DAO – which sold itself as a sort of crowdsourced hedge fund, took around $150m of investor funds with it, after a vulnerability in the code was discovered which allowed funds to be siphoned off by an anonymous attacker.

For the companies themselves, there’s an added risk: it’s not clear such ICOs are strictly legal. That’s fine if you’re trying to build a company that takes advantage of the pseudonymity inherent to cryptocurrencies to stay on the wrong side of the law; but if you’re planning to break out into legitimate businesses, it’s worth remembering that financial markets are fairly heavily regulated, and the Financial Conduct Authority and the US Securities and Exchange Commission take a dim view of selling unlicensed securities.

But the cryptocurrency boom has always been for the risky. Where else can you make – or lose – a fortune overnight, on a company run by someone you’ve never seen, or even know the name of?

And anyway, don’t listen to me too carefully. If I’d invested £100 in bitcoin every time I told someone else it was silly to buy them, I’d be out in the sun today instead of writing this column.