The venture capital sector is starting out take a good, hard look at a brand new financial instrument coming out of the bitcoin community – Initial Coin Offerings, or ICOs. Often known as “token sales,” this new fundraising phenomenon has been fueled from a convergence of blockchain technology, new wealth, clever entrepreneurs, and crypto-investors who are backing blockchain-fueled ideas. ICOs present both benefits and downsides, in addition to threats and opportunities, for the traditional venture capital enterprise model.
Here’s how an ICO typically works: A fresh cryptocurrency is created on a protocol such as Counterparty, Ethereum, or Openledger, as well as a value is arbitrarily dependant on the startup team behind the ICO depending on whatever they think the network may be worth at its current stage. Then, via price dynamics dependant upon market supply and demand, the worth is settled on with the network of participants, as opposed to with a central authority or government.
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Venture capitalists, who have been standoffish for the ICO phenomenon, are becoming more interested in it for several reasons. The first is profits – cryptocurrency investors made some massive returns in 2016, with cryptocurrencies from Blockchain startups Monero and NEM both seeing 2,000% increases in value. For instance, the cryptocurrency employed for the Ethereum network, called Ether, saw its value double with a few days in March 2017. Yes, in 72 hours, those who committed to Ether doubled their investment. Those investors can decide to cash out to a fiat-backed currency, or wait for cryptocurrency to bitp1atinum to increase (or fall). Volatility is a two-way street. While the price tag on Ether has become rising, ico has dropped 20% to $1,000 dollars from the record $1,290 on March 3, 2017.
The next reason VCs are becoming more interested in ICOs is caused by the liquidity of cryptocurrencies. As an alternative to tying up huge amounts of funds within a unicorn startup and waiting around for the long play – an IPO or perhaps acquisition – investors can easily see gains more quickly, and may pull profits out quicker, via ICOs. They just need to convert their cryptocurrency profits into Bitcoin or Ether on any of the cryptocurrency exchanges that take it, after which it’s easily converted to fiat currency via online services for example Coinsbank or Coinbase.
For blockchain startups, ICOs certainly are a win-win – they permit startups to boost funds with out equity stakeholders breathing down their necks on spending, prioritizing financial returns on the general good of the services or products itself. And there are lots of inside the blockchain community who think that ICOs can be a long-awaited solution for non-profit foundations that want to develop open-source software to improve capital.