Bitcoin, Ethereum, ICO, STO…WTF is going on with this crypto craze???
With over 4 years of crypto experience under my belt, I can honestly say this is still new to me as things are changing daily. Compared to these millennial blockchain whiz kids that are running the new economy of digital currency, I’m pretty much a crypto dummy myself. Leaning on my 25 years of Wall Street Capital markets experience, I think I pieced together a quickie on what’s happening as of today.
What Exactly Are ICOs?
Consider crypto like going to Vegas. Expect to lose every cent. Beginning with that mentality is a good place to start.
Now that we got that outta the way…
So imagine that there is a new silver dollar coin that is actually worth more than a dollar. In fact, imagine that the value of this coin keeps going up, and you can invest your own money in it in order to own some of that value. But also imagine that the value of this new coin can go down at any point, even to less than a dollar, and you could lose money and not just some money. All your money.
ICO stands for Initial Coin Offering and it exists in the world of cryptocurrency. Cryptocurrency is “money” created by a computer algorithm and regulated by more algorithms instead of the bank and the government. With ICOs, you can invest your hard-earned money in new forms of cryptocurrency in the hopes that, though you got in when the price was still low, the values will continue to rise; you’d expect that liquidity exists for exit as cryptocurrencies can also be traded and sold, just like stock.
Risks of ICOs
The problem is, no one is regulating these ICOs and, as a result, frauds can abound. In fact, US Regulators have been very clear that in their view every single ICO to date is in violation of Federal Securities Laws. Investors have to be wary. Sophisticated hackers have created campaigns for fake cryptocurrency. In addition, someone can start a campaign to get investors for one of the well-known cryptocurrencies, like Bitcoin or Ethereum, and then steal the invested money without giving any cryptocurrency in return. There are little to no security measures in place for cryptocurrency exchanges, so crooks and hackers can steal cryptocurrency and there is little anyone can do to recover the loss.
Unlike stocks, anyone can invest in ICOs, which means there are investors out there taking uneducated, unmeasured risks. A good rule of thumb for me is if you don’t understand what your buying…don’t buy it. ICO issuers also don’t have any legal obligation to provide proof of their legitimacy, though some do anyway.
Now that you understood you can lose it all and you have educated yourself on crypto, if you have decided to actually buy a cryptocurrency, know that it will be stored in your “wallet”…on your phone. If you lose your phone, say goodbye to that cryptocurrency. The other option is to store your cryptocurrency at an exchange, but this centralized custodianship brings the sophisticated hackers like sharks to blood. In my view, it makes you more vulnerable to thieves.
How Security Token Offerings Are Safer
Security Token Offerings, or STOs, may be the answer. They work slightly differently than ICOs in that the value of an STO is supported by a tangible aspect of the company offering it, such as company assets, revenue, or profits. The added security of STOs is that they are issued under prospectus and regulated by Federal Regulators. SEC and Finra have done great work outlining the four corners of issuing a digital security token. These regulations also protect investors from fraudulent exchanges that Regulators have said every single US Crypto “exchange.” including Coinbase and Gemini, are not in compliance with Federal Securities Law. Trading on registered, regulated exchanges makes them serious players in a world where cryptocurrency is becoming more mainstream. Experts have even begun advising that STOs actually replace ICOs.
At The Token Team, our advisors and cutting-edge technology developers help corporate issuers navigate the STO process de novo and provide technology and resources to access capital. Speak to us today about managing your token generation event.