Ether Explained - Chapter 7: ICOs on the Ethereum Platform
Vontobel now offers investors access to the crypto currency «Ether». But what is Ether? And why has the second best-known crypto currency gained so much popularity in such a short time? In eight chapters, we want to give you high-quality knowledge about the exciting topic of «Ether».
What are Initial Coin Offerings?
An Initial Coin Offering («ICO» or «token sale») is a method of corporate financing. Usually, ICOs are used to finance new businesses and start-ups. The start-up "generates" a predefined number of digital tokens and then sells them, typically in exchange for known crypto currencies such as Ether and Bitcoin but also for traditional currencies. Investors buy the tokens of the project and speculate that it will increase in value in the future, similar to a share on the stock exchange with the prospect of price gains. An ICO can therefore be compared partially with an initial public offering (IPO) of securities on a stock exchange. An important difference to IPOs is that ICOs normally do not represent ownership of the company via the token. It therefore does not entitle the holder to a dividend, nor does it automatically carry voting rights.
ICO's are gaining more and more popularity. In the wake of the crypto boom in 2017/2018, they collected more capital in the first five months of 2018 than in all the years before. In addition, they are increasingly becoming competitors to the traditional venture capital financing provided by venture capitalists, private equity firms and banks. Most ICOs take place on the Ethereum Platform.
Types of tokens
After the 2017/2018 crypto boom, the number of ICOs declined due to the weakening market and regulatory intervention. ICOs are regulated differently worldwide: Depending on the legal situation, they are issued as security tokens, utility tokens or currency tokens. Currency tokens are tokens that are used to pay for goods or services inside or outside the platform. Utility tokens offer token holders access to a functional network in order to use its product or service. However, they do not offer ownership interests in any platform. Security tokens are similar to traditional assets such as bonds or shares. They entitle the token holder to receive profit distributions and are therefore subject to stricter legal regulations. However, in many countries it is still relatively unclear whether ICO's are treated like traditional crowdfunding methods, in some countries ICO's have already been banned or severely restricted.
Depending on how the token is technically implemented, profit distributions can be made automatically via Smart Contracts. For example, a project can generate profits in the form of Ether. Investors who own the Ethereum-based token from the ICO will be credited a corresponding profit share on their Ethereum wallet.
What are ICO's used for?
In the early days, ICO's were used to launch new crypto currencies on the market and to obtain initial financing from the ICO. The projects are usually blockchain-based. Financing via ICO's is becoming increasingly interesting for existing companies with a project-based purpose. In addition, the complicated process of an IPO is greatly simplified, since ICOs can be implemented with only moderate effort, for example on an Ethereum basis. Furthermore, the investment opportunities will be accessible for a broader target group, as tokens can be traded more flexibly than shares on the stock exchange. At the technical level, the ownership of the tokens is mapped on a blockchain, which means that the tokens can be traded peer-to-peer on any desired marketplace. When trading equities, by contrast, a central authority is required to manage ownership.
How can I invest in ICOs?
To participate in an ICO, you need to purchase crypto currencies such as Bitcoin or Ether. The organizer of the ICO offers the sale of its tokens, where investors can exchange their crypto currencies for the new tokens. So far, no central platform has been established to carry out ICOs, so that the organizer usually sells the tokens via its own website. An overview of all current ICOs can still be found on CoinCheckup. Since the majority of the ICOs take place via the Ethereum platform, an Ethereum Wallet is required to acquire the Ethereum-based tokens, to which tokens can be transferred after purchase. From a technical point of view, participation in an ICO is very easy. Therefore it is more important to analyse the ICO's from an economic perspective in order to invest in meaningful projects. In the past, fraud cases often occurred, where the scammers published fake whitepapers, collected the money and then simply disappeared. For example, the founders of the crypto currency start-ups «Pincoin» and «Ifan» stole approximately USD 660 million from 32,000 investors - the biggest fraudulent ICO up to now.
How ICOs are structured?
The largest ICOs
Telegram and EOS were the biggest and most successful ICO's to date. These 'ICO Unicorns' have collected record-breaking sums of around USD 1.7 billion and USD 4.2 billion respectively. In general, the most important ICO hubs are in the USA, Singapore and Switzerland. Due to clear and strict regulatory requirements (e.g. "KYC", "know your customer"), the USA is the ICO location number one with the most ICOs worldwide. In Europe, Switzerland is the most important location for ICOs. In Asia, Singapore is the largest ICO hub, followed by Hong Kong. Based on the total financing volume, the Cayman Islands and the British Virgin Islands are the leading ICO countries due to the aforementioned ICO Unicorns EOS and Telegram.
Risks
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