To bring their ambitious ideas to life, startups often turn to outside investment. And if earlier loans and venture capital were used for this, and a little later crowdfunding (tools with a high barrier to entry), then with the advent of cryptocurrency technologies and token ICOs, everything has changed.
Today we will talk with an expert in the field of international financial law about how cryptocurrency is used by startups to find investments Konstantin Krypopust.
Cryptocurrency as a new source of financing
In 2009, an anonymous developer named Satoshi Nakamoto launched Bitcoin, a decentralized network for conducting transactions without intermediaries. It is based on blockchain technology – a registry that records all data in blocks. Each entry requires consensus – confirmation by many blockchain nodes.
For users, businesses and startups, this tool became a panacea and allowed:
- Get access to the global market, to investing or attracting investments from anywhere in the world, to tools for capital multiplication.
- To zero out the number of intermediaries in operations – to get rid of the participation of banking structures and the state in general, not to depend on their limits and restrictions.
- Minimize the entry point for both investors and startups through fast and cheap transactions regardless of volume and distance.
- Ensure secure and transparent transactions.
Cryptocurrencies have radically changed the financial landscape, offering startups new ways to attract funding – a global and accessible way for everyone to enter the international arena and attract investors, bypassing any intermediaries.
An important step towards this was the launch of Ethereum and the ICO boom that followed it.
What is an ICO: its path to the present day
In the stock market, the most common way to attract investment is an IPO. This is an initial placement of shares, during which investors can buy them, thus investing in the project and expecting to receive profits in the future. It has become an analogue of IPO in the crypto world ICO (Initial Coin Offering) – initial placement of coins.
How the ICO works:
- The startup develops a project and publishes a document about the technical side, its goals, development plans and tokennomics of the future coin/token. Based on this data, investors make decisions, evaluating the potential of the idea and the team itself.
- The project launches a marketing campaign and creates a coin or protocol – with its help, investors receive an asset that can be sold in the future.
- Investors invest in the project, receiving coins/tokens. The project receives the money necessary for further development.
2013-2016 – the first cryptocurrency ICOs
In the early years of cryptocurrencies, ICOs were rarely used.
- In 2013, the launch of the MasterCoin project began with the creation of a fund. For the first month, anyone could buy BTC and send it to a special address for profit after the launch of the platform. The project raised 5,000 BTC or about $500,000, and its coin soared into the TOP-7 currencies. Today, no one remembers him.
- In 2014, Ethereum also decided to use Bitcoin to seek investment. Within two weeks, he managed to attract up to 31,600 BTC or $18 million. Unlike MasterCoin, in 2024 Ethereum (ETH) is the second largest cryptocurrency in the world. In 2014, its price was $0.31, and today it is >$2,500. Growth: 8064 times.
It is interesting that Ethereum became the main reason for the popularity of ICO tokens. In 2015, the concept of smart contracts was implemented on Ethereum – automated protocols that allow you to launch and manage tokens inside the blockchain and work on the basis of an already functioning blockchain network. The entry threshold when creating your own fund to attract investments has dropped to almost zero.
But if in 2015 and 2016 only a few dozen ICOs worth up to $120 million were launched, then the following year 2017 is still known as the “ICO boom”.
2017 is the year of multiple growth of the crypto market
By now, everyone has learned about the possibilities of ICO. Hundreds of projects poured into the market and flooded it with their tokens. Without a finished product, they raised hundreds of millions of dollars in a matter of weeks. During the year, the still young cryptocurrency market grew 47 times – from $17.7 billion to $830 billion in January of next year.
According to different assessmentsduring this time, from 718 to 966 projects were launched, which received investments in the amount of more than $10 billion during the ICO. Among the largest:
- EOS is the largest ICO of the year. Attracted $4.2 billion.
- Tezos is a decentralized smart contract platform based on a unique version of the Proof-of-Stake algorithm. Attracted about $232 million.
- Filecoin – $257 million to create a decentralized data storage database.
2018 is a decline in popularity
The following year saw even more ICOs, but their effectiveness dropped. During this time, from 2,284 to 2,517 projects worth $11.4 billion were launched – only 13% more than in 2017.
The market was also in for a deep correction and new talk of a “bursting bubble.” By the end of 2018, the capitalization of the entire industry fell to $130 billion – by 85%. It is worth noting that even after that, its level was 7.3 times higher than at the beginning of 2017.
Risks and Disadvantages of ICOs
The euphoria from the success of the first projects subsided, revealing the shortcomings and problems of the ICO:
- Failures. Many projects did not implement ideas, and therefore did not bring income. In 2017, the number of successful startups is estimated at 57%, and in 2018 at 40%.
- Fraud. The low threshold and simplicity of the ICO attracted the attention of a large number of fraudsters. A vivid example is Pincoin, which raised up to $660 million.
- Technical risks. Code bugs and hacking attacks have become a major problem for ICOs. So, for example, The DAO project, which successfully raised $150 million, was hacked, it lost more than $60 million. Due to this, Ethereum was forced to conduct the largest hard fork – to roll back the blockchain to the state at the time of the hack, which caused a lot of dissatisfaction and the appearance of the Ethereum Classic fork.
The main problem is the lack of regulation. It is this factor that has led many scammers to ICOs and attracted the attention of regulators. In particular, “clean” projects, such as the first version of Telegram’s blockchain and token, suffered from this.
The market has realized that the lack of regulations creates great risks for investments (from any side). This led to the decline of trust in ICOs and the emergence of new forms.
After the ICO: new forms of investment attraction
Starting around 2020, ICOs have been replaced by other, more regulated forms:
- STO (Security Token Offering) – the most adjustable form of investment attraction through cryptocurrencies. Each STO token is a digital version of a real-world asset – a company’s stock, security or real estate.
Pros: protection of investors’ funds, compliance with legislation.
Cons: high launch requirements, similar to conducting a conventional IPO. - IEO (Initial Exchange Offering) – attraction through centralized exchanges. The platform independently conducts funding rounds on behalf of the startup.
Pluses: reputation, support of a large exchange, access to its audience around the world.
Cons: strict competitive selection, high exchange commissions. - Decentralized forms of fundraising have also developed, such as DeFi – financing through smart contract protocols, which offer investors a percentage of the profit for investing in the project.
Pluses: all the advantages of blockchain, from the absence of intermediaries to automation.
Cons: the already classic volatility of the crypto market and the risks of hacker attacks.
It is also worth noting two more methods of obtaining investments:
- Venture decentralized organizations – collective investment in startups. All DAO participants vote on which project it will be decided to inject capital into.
- NFT collections are unique tokens that act as “works of art” and a way to support a project of interest (digital merch).
The future of cryptocurrency investments
Cryptocurrencies have a huge potential not only as a means of payment around the world, but also as a tool for efficient search for investments. This is facilitated by:
- And the development of regulation of the crypto market, increasing trust in the technology on the part of centralized and traditional financial structures.
- And the development of technology – the field of decentralized finance (DeFi), smart contracts, which already play a huge role in investment processes.
- And the movement towards mass adoption of cryptocurrencies – both among ordinary people (already more than 562 million people worldwide), and among companies and startups.
The ICO emerged as an alternative to traditional tools, and later found new forms of expression of ideas, giving startups more and more flexibility and options to interact with investors around the world. And although there are risks, especially in the context of law, the rapid development and adaptation of regulators indicate that cryptocurrencies will occupy an increasingly important place in the global economy.
Flexibility, decentralization and access to global markets are just some of what will be offered to startups and investors in the “digital asset era”.
