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Why use regulatory bodies, such as banks, to raise funds when they can be replaced with an intangible currency? Why to waste time and efforts for raising funds when it can be raised easily by digitalized crowdfunding? Still not able to get over those technical words as cryptocurrency, Bitcoin, Ethereum, ICOs. Well, let’s get into this.
In today’s digitalized world, everything happens to be quick and easy. The capital markets are also not left untouched by this change. Every now and then, there is some evolution in this field. One such illuminating change is the evolution of digital currency, cryptocurrency.
Cryptocurrency is a virtual mode of raising capital by companies. It is basically a decentralized mode in which a company, mainly start-up, offer coins in the form of tokens to the public. Decentralized mode means a system which works without a centralized administrator such as the central bank in case of physical currency. The interested investors buy these coins and the funds raised by the company are used as an initial capital by the company. It is basically a form of crowdfunding i.e. raising funds through a wide source.
The first cryptocurrency was Bitcoin started in 2009. Bitcoin was invented by an unknown person or group of people under the name Satoshi Nakamoto. Every cryptocurrency is based on an algorithm (i.e. IT coding). Whenever an individual buys a coin there is a transfer of payment which is recorded in a block and then is verified by minors who are people working on servers. This system is called Blockchain.
Initial Coin Offerings is one of the ways of crowdfunding in Cryptocurrency that was initiated in 2013. However, it came in a refined form in the year 2014 when Ethereum (another cryptocurrency) raised money with a token sale in 2014, raising 3,700 Bitcoin (BTC) in its first 12 hours, equal to approximately USD ($) 2.3 million at that time.
- MEANING OF INITIAL COIN OFFERINGS (ICOs)
ICOs are basically for cryptocurrency start-ups who wish to avoid the hassles of raising money from the regulated sources such as banks or the share market. An ICO for cryptocurrency is like an Initial Price Offering (IPO) on the stock market, but instead of buying stock in a company you buy digital coins. However, contrary to stocks, coins do not give you any voting or legal rights. This system, since is decentralized, is a much easy option for fund raising. In ICO, mainly a certain percentage of cryptocurrency is offered in exchange of Bitcoin or sometimes in exchange of a legal tender i.e. physical currency. These start-ups get their initial funding from these ICOs. Later, when these currencies enter the market their price changes. Investors are motivated to buy the Crypto coins in the hope that the plan becomes successful which could convert to a higher crypto coin value than what they purchased initially. An investor profits by selling the coins at a rate higher than the purchasing price or may also hold it for future. Therefore, one can say ICOs are the first step of cryptocurrency investment.
Author – Fayza Khan, BSc (H) Mathematics student, Hansraj College, Delhi University