Venture capital 3.0: the initial coin offering explained

The venture capital community thrives on disruption. So what happens when the tables are turned and the medicine bottle has their name on it? There’s a new kid riding onto the financing block – riding roughshod across an unregulated landscape.

Welcome to the world of the initial coin offering (ICO).

An ICO is a hybrid: part crowdfunding, part software token, part speculation. In simple terms, an ICO is often described, somewhat inaccurately, as an IPO for cryptocurrencies.

How it works

– A tech start-up team creates an ICO using a blockchain-enabled software platform, usually open sourced.

– The platform is powered by cryptography-based software tokens – called cryptocurrencies.

– The team produces a white paper to describe its idea in greater technical depth for the cryptocurrency community to review, often supported by a prototype.

– The team then crowdfunds the building of its platform by offering the early usage of the software token – often at a discount – with these tokens usually paid for in bitcoins.

– Two Australian blockchain-powered platforms, Incent and Chronobank, have raised more than $1 million and $7 million respectively in this way in the past six months – no venture capital firm required.

Crowdfunding vs ICO

While initial coin offerings may sound similar to a Kickstarter campaign, they do have a speculative twist. Once an ICO is completed, the stronger platforms and cryptocurrencies begin to develop material value that can be traded.

Globally, there are more than 40 cryptocurrency exchanges, Poloniex.com being the largest exchange in the US. Their role is to establish a secondary market where major cryptocurrencies can be exchanged for bitcoins in an open marketplace, in a similar way to foreign exchange markets.

As a result, most cryptocurrencies have a market value that can be traded in line with the demand and supply of the cryptocurrency powering the new software platform being developed.

Cryptocurrencies on the exchanges are subject to the same dynamics as equities and forex – where the core fundamentals of the cryptocurrency drive the underlying demand and the day-to-day trading actions determine its price. The total value of the global crytpocurrency markets is currently more than $US38 billion ($50 billion), with bitcoins representing the majority of that.

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Source: Venture capital 3.0: the initial coin offering explained | afr.com