As well as being a hot topic in economic news, the blockchain has also revolutionized the way we can store, share and protect information through public and private networks. The ability to process information on the blockchain has also created new opportunities for businesses to take more control of their finances.
Based on the way Bitcoin works, companies can create their own digital or "token" currency that represent a unit of value that is exclusively tied to that particular company. Companies have created an Initial Coin Offering, or ICOs, as a way to attract investors to the ground floor in the hope that the value of the token increases as the value of the company does. Ultimately, tokens would be exchanged for another form of bids such as local currency, Bitcoin or another cryptocurrency, or a product or service usually produced or offered by that company.
While tokens are written in the individual blockchain of the company, some go a step further by creating physical currencies that can be held by investors and that can offer some commemorative or symbolic importance as "first currency".
Two types of tokens with two different results
The tokens that the companies put on the market is (or should be) supported by a kind of value and can be implemented in two different ways.
- Tokens with asset allocation are directly related to the value of the company. Just like a stock, the value of company coins could increase and decrease based on company operations.
- Utility tokens are supported by a promised product or service in a given time frame. The price of a utility token may vary depending on the increase or decrease in the value of the product or service offered.
Asset-backed tokens are ideal for companies that need direct funding to continue developing any product or service they are working on. ICOs are like stocks where values can go to zero, so there is still risk, but companies can exert more control over token allocation and distribution. Token and transaction trading can also be controlled and monitored as activities are supported by the company's blockchain platform.
Companies offer utility tokens as a way to raise money for commercial operations in exchange for the product or service that the company is developing. These tokens also represent risks because the company may not be able to provide the promised product or service for any reason. Companies that produce in-demand products such as watches or luxury handbags may see the value of their utility toes increase when allocated production lowers and demand increases.
Investors jump head first blindfolded
There is always a dark side about the new technology and the blockchain are not without flaws when it comes to nefarious activities. The ease with which ICOs can be configured offers opportunities for online scammers and thieves who leverage the cryptocurrency associated hype. Thousands of investors have lost millions of dollars in illegal and false investment schemes, online phishing scams and definitive hacking. A crazy emotional rush to get money in the market sometimes puts deep research and due diligence at risk. Crossing your T and betting your I is a must for any type ICO investment.
ICOs still represent a risky investment. The latest statistics indicate that 50% of the coins fail within four months of their launch, which means that investors must double and triple their research efforts before allocating any capital to these investment vehicles. Although not discouraged, ICO managed to raise about $ 7 billion in capital only in the first half of 2018, suggesting that there is a viable and prosperous market for investment grade digital cryptocurrency.
Will the regulation establish integrity for ICOs?
ICO have their place in the investment market. They offer an efficient way for companies to publicize their value and raise capital for ongoing business operations. This type of access and the "decentralized" platform create vulnerabilities that are constantly exposed by people with nefarious reasons.
Many governments have recognized the importance and efficiency of blockchain and have begun to explore ways to regulate and control companies that are being spun off from the blockchain. ICOs have become a more urgent concern for corporate control agencies because of market instability and the potential for fraud and hacking. The intervention of the government can create a bit of integrity in the ICO business, but it is actually up to the individual to make sure that they fully research the business from the other side of the investment. .
PLEASE NOTE: This article expresses my ideas and opinions. Any information I have shared comes from sources that I believe to be reliable and accurate. I have not received any financial compensation for writing this post, nor do I have any participation in any of the companies I mentioned. I invite any reader to do their diligent research before making any investment decision.