What is an ICO? | CNBC Explains - YouTube

If you want to take your business to the next level, you have a few standard options.

You could get a loan.

Find a professional investor.

Or you could go public.

But now, there’s a newer player in town and it’s getting serious attention: the ICO.

An initial coin offering, or ICO, is a new way for companies to raise capital through cryptocurrency.

Companies create a digital token or a coin, and sell it to investors in exchange for cash

or more likely cryptocurrencies, usually ether or bitcoin.

Let’s say I want to set up a business that makes money from my videos.

Instead of issuing shares to investors, I’ll be creating my own digital token.

Let’s call it XECoin.

That's what investors will be buying during my highly-anticipated ICO.

People who buy my digital token can either trade them for other types of crypto

or use them on my platform once it’s up and running.

With XECoins, you gain exclusive access to my videos.

XECoins, like most tokens, do not come with any ownership stakes.

That allows founders to keep control of their companies.

So how do I convince investors to come on board?

The first step is to release a white paper that details my business model.

That way, investors can decide if they want to get involved.

Simply putting together a white paper isn’t enough though.

Hundreds of ICOs are launched each month, but you only hear of a few.

So if I want my ICO to be a success, I have to go on a marketing blitz to convince people

my business is the real deal.

Some ICOs have even had celebrity support, including Jamie Foxx and Paris Hilton.

The number of ICOs has skyrocketed over the past two years.

In the first quarter of this year, $6.6 billion was raised through 217 ICO sales,

an increase of more than 65% from the last quarter of 2017,

and just under the $7 billion raised for all of last year.

The Ethereum project is one of the most successful ICOs of all time,

and is now the world’s second- largest cryptocurrency.

In 2014, it sold 60 million ether coins and raised capital of 31,000 bitcoin, or $18 million in fiat currency.

Cryptocurrencies are underpinned by blockchain technology,

which is why ICOs were primarily used by blockchain startups.

But now other types of companies are flocking to ICOs,

even if they do not have, or require the use, of blockchain.

For instance, the owners of a real banana plantation in Laos issued Bananacoins

and if you bought one, you would be investing in the production of organic bananas.

ICOs aren’t just for startups anymore either.

One of the most highly anticipated ICOs was that of messaging platform Telegram,

which has 200 million users.

It has reportedly raised $1.7 billion for its yet-to-be-built blockchain-based platform.

While Telegram tokens were planned for public sale, tokens sold through the initial private sale

were in such huge demand that a secondary market emerged.

However, as there are no regulations, these sales cannot be controlled.

ICOs have made headlines for being banned in China and South Korea,

but they’re still technically legal in many countries.

One country that has emerged as a top ICO hub is Singapore.

More than $260 million was raised in Singapore last year, behind the United States and Russia.

ICOs are unregulated in most parts of the world, which means that founders don’t have to go

through the expensive processes and middlemen that public companies have to.

Without regulation, it also means that fraud is incredibly common,

with several reports of founders disappearing with millions

and one recent study finding that 80% of ICOs are scams.

The regulatory environment in the United States is mixed.

The Securities and Exchange Commission shut down a $15 million ICO by Munchee

and even launched a fake ICO website to educate investors.

There are a lot of question marks surrounding ICOs.

Why would any investor want to buy in?

ICOs offer really high returns.

The average return on the S&P is about 10%. In contrast, one venture capital firm analyzed that

if an investor had blindly invested in every ICO, including a significant number which failed,

the return would have been 13.2 times your initial investment.

It’s returns like that which have sparked the ICO fever, which we see today.

But don’t forget, big rewards also mean big risks.

Hi I’m Xin En. Thanks for watching.

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