ICOs first outline the purpose for development and policies for the virtual currency on the Internet. Investors who have an interest in it purchase the newly issued virtual currency in exchange for an existing virtual currency such as Bitcoin. The issuers of ICO then develop the new virtual currency with the funds collected from investors. The investor can use the services provided by the project and may increase their own assets by raising the price of the invested virtual currency.
By raising funds directly from people around the world through the Internet, ICOs can avoid situations where specific individuals, companies, or nations have an influence on the development and operating policies of virtual currencies. This mechanism is useful because it can raise funds in a decentralized manner which is what virtual currency is all about. Unlike traditional fundraising methods, there is no government organization that can oversee or evaluate the soundness of the project. This means that investors are taking a considerable risk.
History and the current status of ICO
The very first ICO (token sale) was held by Mastercoin in 2013. In 2014, the Ethereum (unit: ETH) ICO successfully raised about 18 million dollars in BTC (approximately 1.8 billion Yen). It has been said that ICOs have been proven well as a fundraising tool.
Later, in 2017, the meteoric rise of ICOs was observed along with an expansion of the virtual currency market. Total amount of funds collected by ICOs in 2017 is estimated to be 6.2 billion USD (approximately 690 billion JPY). The top three projects in 2017 each successfully raised over 20 billion JPY. The subsequent funding recorded in 2018 was 7.8 billion USD (approximately 850 billion JPY), exceeding the amount recorded in the previous year. However, the major decline of the ICO market began in the second half of 2018 and the ICO market as of 2019 is now shrinking.
The future of ICOs
Though 2017 was the year of hype for ICOs, some pitfalls have been pointed out such as difficulty in ensuring the feasibility and transparency of the projects. The speculative nature of ICOs also lead to an influx of fraudulent ICOs.
For this reason, Security Token Offerings (STO) and Initial Exchange Offerings (IEO) are now gaining ground for their emphasis on security and soundness.
(Current as of October 2019)