ICOs: What you need to know

Financial Mirror (Cyprus) - - FRONT PAGE -

Floyd “Money” May­weather made head­lines for mak­ing light work of Mixed Mar­tial Arts su­per­star Conor McGre­gor. But he also made tech head­lines re­cently by en­dors­ing the Hu­bii Net­work, an ini­tial coin of­fer­ing (ICO), on his In­sta­gram and Twit­ter ac­counts.

This isn’t the first time May­weather (who’s dubbed him­self Floyd “Crypto” May­weather) has en­dorsed an ICO. In late July, he pro­moted the ICO for the Stox project, which went on to raise more than $30 mil­lion in its to­ken sale. (Btw: there are sub­tle dif­fer­ences be­tween an ICO, a to­ken sale, and a crowd­sale, al­though the terms are of­ten used in­ter­change­ably. Search the terms to learn more.)

An ICO is sim­i­lar to an IPO (ini­tial pub­lic of­fer­ing) in that it of­fers a cer­tain amount of own­er­ship in a com­pany to the pub­lic. In an IPO, a share of stock rep­re­sents frac­tional own­er­ship of a cor­po­ra­tion. In an ICO, a crypto coin rep­re­sents a per­cent­age of own­er­ship in pretty much any busi­ness en­deav­our (as de­scribed in the ICO’s doc­u­men­ta­tion).

In an IPO, new share­hold­ers hope that the value of their shares will in­crease over time. In an ICO, in­vestors are hop­ing that the value of the newly minted crypto coin will in­crease. The ma­jor dif­fer­ence is that, as of this writ­ing, there are prac­ti­cally no gov­ern­ment rules or reg­u­la­tions that ap­ply to an ICO. So if you want to stage an ICO for _____­coin, where your name goes in the blank, go for it!

An ICO is about as easy to do as a Kick­starter project. In that sense, it can make un­ver­i­fied claims about how great the prod­uct is or how smart you would be if you in­vested in it. But there’s noth­ing stop­ping the per­son or team be­hind the ICO from tak­ing your money and run­ning for the hills. The Coin­tele­graph re­ports that phish­ing, Ponzi schemes, and other scams ac­count for about 10% of ICOs.

When you buy “coins” in an ICO, you’re es­sen­tially buy­ing dig­i­tal coupons is­sued on a blockchain, which you can then trade or hold onto. Crit­i­cal to un­der­stand­ing how an ICO works is un­der­stand­ing how blockchain works. As I wrote last month:

“Of­ten re­ferred to as a “dis­trib­uted ledger,” blockchain is a con­tin­u­ously grow­ing list (dig­i­tal file) of en­crypted trans­ac­tions (called “blocks”) that are dis­trib­uted (copied) to a peer-to-peer (P2P) net­work of com­put­ers.

“En­crypted trans­ac­tions are the key to blockchain’s value. The user’s “pub­lic key” is stored in the block and be­comes an “ad­dress” on the blockchain. Files, such as cryp­tocur­ren­cies or other dig­i­tal as­sets, are recorded as be­long­ing to a spe­cific block. A cor­re­spond­ing “pri­vate key” is re­quired to ac­cess the as­so­ci­ated dig­i­tal as­sets. (Keep­ing your pri­vate key pri­vate is so im­por­tant that to pro­tect their dig­i­tal as­sets from hack­ers, many peo­ple do not keep dig­i­tal copies of their pri­vate keys. They write the num­ber on a piece of pa­per and keep the pa­per in a se­cure lo­ca­tion, like a wall safe.)

“P2P or mesh net­works are de­cen­tral­ized com­puter net­works where each com­puter (node) acts as both a client (a com­puter that ac­cesses in­for­ma­tion on a server) and a server (a com­puter that serves in­for­ma­tion to clients). At scale, P2P net­works are self-heal­ing and very sta­ble be­cause the in­for­ma­tion is repli­cated in thou­sands, and in some cases mil­lions, of places.

“There are two gen­eral types of blockchain net­works: anony­mous net­works, where each user has a copy of the en­tire blockchain and helps process and con­firm trans­ac­tions; and per­mis­sion-based (non-anony­mous) net­works, where per­mis­sion is re­quired to pos­sess a copy of the blockchain and to help process and con­firm trans­ac­tions.”

While blockchain is a key com­po­nent to any ICO, the Smith + Crown re­search group notes that some ICOs are launch­ing “meta-to­kens” built on es­tab­lished cryp­tocur­ren­cies, like Bit­coin.

The com­plex­ity and risk as­so­ci­ated with ICOs may have slowed down some in­vestors, but as of April 2017, more than $250 mil­lion had been in­vested in ICOs, with more than $107 mil­lion in the first few months of this year alone. Ethereum raised $12 mil­lion in 10 min­utes in April, and Ba­sic At­ten­tion To­kens raised $35 mil­lion in less than 30 sec­onds in June.

Any­one who re­mem­bers the prob­lems of Mt. Gox knows cryp­tocur­rency is far from a brand-safe, risk-free in­dus­try. If you need more re­cent ex­am­ples, they’re not hard to find.

As you can imag­ine, the tech­nol­ogy is a bit ahead of the reg­u­la­tors. Smith + Crown write that many ICOs are mar­keted as “soft­ware pre­sale to­kens” (much like an early ac­cess video game on a gam­ing plat­form like Steam), us­ing words like “crowd­sale” or “do­na­tion” (rather than ICO) to avoid le­gal re­quire­ments. This lack of reg­u­la­tion and over­sight al­lows for quick growth, piv­ots, and in­no­va­tion but also leaves less ed­u­cated in­vestors in the hands of po­ten­tial bad guys. Caveat emp­tor.

That said, cryp­tocur­ren­cies and ICOs are trend­ing up­ward, and they are le­git­i­mate, ver­sa­tile fi­nan­cial tools that will ul­ti­mately be­come main­stream. Early adopter Es­to­nia (the coun­try) is con­sid­er­ing hold­ing an ICO and is­su­ing its own cryp­tocur­rency. Should you be con­sid­er­ing your own ICO? “Palmer­coin” has a nice ring to it.

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