Remember we mentioned cryptocurrencies having coins? Well when a new cryptocurrency is about to launch, they do so with what is called an Initial Coin Offering (ICO). This ICO typically happens as an IPO would, with potential investors lining up in a digital queue ready to part with another cryptocurrency in exchange for the new one. An example of this would be as follows:
Investor Z has read all about KeithCoin, a cryptocurrency that deals with the transfer of intellectual property rights on content. Investor Z has read the White Paper, which is a standard document that details the real-world use, the technology to be utilised, the wallet to be used and all other details required to make an informative investment decision, and has decided to register his interest in purchasing a share of the coin base.
The people at KeithCoin Technology who are developing the technology have based the coin on the Ethereum block chain and therefore created a nominal value of KeithCoin to Ethereum which they will offer their investors. In this case they have decided on a price of 1,000 KeithCoin for each Ether invested. They have also decided to create 100,000,000 Keith Coin in their ICO, out of a maximum of 200,000,000 KCs. They’ve also reserved 90,000,000KCs to be distributed as Mining Prizes, and finally 10,000,000KC for development and maintenance.
All these numbers look large, but in reality when considered that the price of Ether at the time of writing hovers around the 200 USD per ETH, then in their ICO KeithCoin Tech are looking to raise $20,000,000 in ETH. When you consider that a good Coin backed by strong technology and a real-world use that could generate thousands or millions of users, this investment amount suddenly does not sound as large or ridiculous. In 2017 it was estimated that $1.3Billion was raised in ICOs and 2018 looks to have doubled that amount!
So the developers are getting rich?
Many a times, the investment pumped into the company is due to a large interest in the service offering and the solution created, but other times the investments in the coins or tokens are purely speculative from investors. The whole point of an ICO is to get the technology launched, to get your early adopters and build off of their feedback and finally to begin moving the service into the public sector and solving the problem that exists today. On the way, there will be people who just got in to make money on reselling the coin when the value increases, but this also helps in getting the much needed funding whilst still retaining ownership in the product you are building.
It is important to note here that there are times unfortunately when the ICO is actually a scam built by the developers to generate enough interest in the service but not have an actual plan to launch and see through the service. This is why before investing we always suggest to do your due diligence, look into who is behind the coin, if they are active and if they come recommended. There are many forums online that discuss this at length and just like any other investment, never invest more than you can afford to lose.
Continue Reading about blockchain:
- What is Blockchain?
- Why is Blockchain Important?
- What is a Crypto Currency?
- What is an ICO?
- Are Cryptocurrencies and Tokens the same?
- Can Blockchain be used without a Coin or Token?
- Blockchain in Use (Real Estate)
- Will Blockchain replace banks? (Part 1 – Banking and Finance)
- Will Blockchain replace banks? (Part 2 – Blockchain Adoption)
- What is Distributed Ledger Technology? (Coming Soon)
- What is the future of Blockchain? (Coming Soon)
If you want to learn more about Blockchain Technology, Cryptocurrencies, ICOs, Distributed Ledgers, Smart Contracts or other fields related to the technologies, contact me using the contact page, or leave a comment below.
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