Funding a brilliant idea and turning it into a viable start-up isn’t an easy task. Some people ask friends and family for a contribution, while others might initiate a crowdfunding campaign or look for angel investors or VC’s to inject some much-needed capital into their business. Over the past three years however a new method of funding has emerged and various entities have successfully raised funds, sometimes even only based on a whitepaper. What did they do? The answer is: they launched an ICO.

To this day, the money raised through ICO’s in just over three years has totaled over 13,000,000,000 USD, with over half of the total amount being raised in 2018 alone. Compared to the traditional stock markets, cryptocurrencies only account for a small piece of the pie, but the industry has been growing really fast over the last few years.

Just look at this animated overview of the ICO bubble that was created.

https://youtu.be/ac1P3GXkFxc

What is an ICO?

Launching an Initial Coin Offering (ICO) or Token Generation Event (TGE) is a way to raise funds for a blockchain based start-up in exchange for supplying tokens to investors. ICOs are mainly launched on a blockchain platform like Ethereum, NEO or EOS. One of the main benefits of launching on a blockchain platform is the possibility of adding a smart contract that will execute terms and conditions associated with the ICO.

Participating in an ICO that issues utility tokens as an investor does not mean you generate equity or any other kind of asset from the company. Tokens issued are intended as an IOU or coupons which allows owners to exchange for future products or services.

ICO’s are mostly unregulated and specific countries (e.g. Malta, Switzerland and the Republic of Singapore) are favored to launch an ICO because of its favorable conditions. To avoid issues with authorities afterwards, ICO projects usually prohibit citizens of certain countries to participate and they will require token sale participants to be verified through providing Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) information.

Tokens issued after an ICO are mainly utility or dApp tokens. These tokens function as a future IOU to attain access to a project’s service or product in the future. Besides utility tokens there are also security tokens. A token is called a security token when it offers governance voting rights or when token holders will gain profit sharing rights. A security token gives the owner special rights in regards to the company that issued the token.

Current issues with ICOs

After the ICO gold rush late last year and during the beginning of this year, a lot of people, especially individual investors, got burned and saw massive losses on their investment. ICO projects performed really bad under the recent bearish market conditions, with some even reporting a 99% loss from their all-time-high prices.

ICO project launch platforms TokenLot and Cofound.it recently threw in the towel. Cofound.it announced it is shutting down its operation and provided the following reason to do so:

“After a lot of consideration, weighing the different options against each other and looking at it from different perspectives, we have decided that the second option is the most responsible way to go — we wind Cofound.it down and distribute the assets to token holders. The purpose of Cofound.it was to build a platform and protocol to enable an alternative VC ecosystem; to continue with this purpose for a market that does not exist is not responsible.”

Over the course of the last few months a decrease is detected in ICOs raising their desired funds, with a few minor exceptions, like entertainment platform TaTaTu (TTU) that raised 575,000,000 USD. It is currently listed on coinmarketcap at number 111 at a valuation of 43,000,000 USD. Hedera Hashgraph raising 100,000,000 USD to build and launch a platform that supports the Hashgraph protocol. They have yet to issue their tokens and launch on an exchange.

Participating in an ICO is in essence not the best position for individual investors. Individual investors are usually the last people to invest with the least amount of insider project knowledge and the highest amount of token price. Because of the lack of transparency, they are often unaware of the token purchase price of seed investors, friends, and family plans or VC rates. Getting dumped upon by earlier investors is a regular occurrence.

ICO Terms state that the project is a high-risk investment and it might fail and there is nothing you can do about it. Yes, it actually says that in the ICO terms.