ICO: risks of digital financing
Since the hype of cryptocurrencies, some ICOs have been very successful, with newly issued virtual currencies sometimes increasing by hundreds of percent in days or even hours. Others flopped. That makes her per se risky. Even the conventional financial market and lawmakers eyed them with suspicion, which raises the question: Who needs ICOs for ever new crypot currency, why are they still there? For the explanation, practical examples will help further.
An extremely practical cryptocurrency: the Flex (ICO in 2019)
Frankfurt-based founder Simon Toprak founded TrustedCars in 2016 in his hometown. In his online shop, customers can buy new and used cars, they are provided with TÜV valuations on their doorstep. This is a really groundbreaking business idea that will continue to work well until today (2018), which Toprak intends to expand in 2019 with the "TrustedCars Flex" app, which offers a flexible hybrid model of rental and leasing cars. This offer is handled through a block chain, the secure web technology of stringing together transaction blocks, on which many crypto currencies are based. As a blockchain Toprak uses the Ethereum Blockchain, which was created especially for such applications - namely, the management of smart contracts - but as an internal clearing agent he creates the crypto-currency Flex. In Flex customers calculate the use of the car, the insurance, the mileage and other services. The blockchain also stores the vehicle ID and the state of the car. In order to launch the Flex, which can then be traded through the Ethereum Blockchain, Toprak will launch an ICO in 2019, issuing the new form of payment and raising money from investors buying the first Flex. These are then also on crypto exchanges and of course against fiat money (euros, dollars, pounds, etc.) traded. This ICO has a very practical background, because the business idea of the TrustedCars Flex app makes sense. With such a background, many of the current nearly 5,000 cryptocurrencies have been emitted.
Opportunities and risks of ICOs
In an ICO, the issuer, who may be a young company like TrustedCars, issues so-called tokens. These digital means of payment are based on a modern network technology (often a blockchain, but also a DAG or other variants). The issuer mines them and sells them against a Fiat currency such as the Euro or other cryptocurrencies like the Ether or the Bitcoin. In many cases, the initial issue size is set exactly, with Flex, for example, it should be 500 million tokens at an initial issue price of seven euro cents. Many other companies have done so before, from January to June 2018 about 200 German start-ups financed 13 via ICO. Worldwide, ICO issuers were able to raise around $ 6 billion in 2017, and in the first half of 2018, they had already reached more than $ 12 billion. But these ICOs are not only an opportunity for start-ups or first-time buyers hoping for high token value enhancements, they also carry risks. These are the following:
- Some newly issued tokens were stolen by cyberattacks
- ICOs are a popular money laundering instrument for criminals
- This makes the authorities, but also the investors suspicious
- Not every business model for which a new cryptocurrency is invented really makes sense. Therefore, some start-ups and thus also the issued crypto currencies go down again. Investors lose their stake
- Meanwhile, some regulators are alarmed by fraudulent ICOs. The line between fraud or simply highly speculative ideas and investments is often fluid. The German BaFin warns consumers in any case before the ICOs. The European Financial Supervisory Authority ESMA also warns
Investors should therefore invest at best cautiously. A total loss is virtually never ruled out in ICOs.