5 Reasons Why ICOs are Giving Stock Markets a Run for Their Money
Initial Coin Offerings (ICOs) are the hottest fundraising mechanism for internet companies today. Investors have reaped over 10X returns overnight just from picking the right winners. In just under a year, tech startups have raised over $1.8 billion through ICOs. Investors and companies are looking at ICOs as an alternative to stock markets. Stock markets are on the losing end.
In just under a year, tech startups have raised over $1.8 billion through Initial Coin offerings (ICOs). Investors have reaped over 10X returns overnight just from picking the right winners. ICOs are the hottest fundraising mechanism for internet companies today.
On stock markets, companies raise money for expansion and development by approaching the public through initial public offerings (IPOs). IPOs give investors part ownership of a company in exchange for investment money.
But today, cryptocurrencies and cryptographic tokens have forever changed how great ideas and projects get funded. Even venture capitalists now feel like dinosaurs, left in the shadow of this radically new crowd funding model.
So what is the difference between investing in stock market IPOs and cryptocurrency ICOs?
Here are 5 differences
- Intermediation: Stocks are handled by brokers, while smart contracts handle ICOs
When you invest in the stock market, you call up your broker to place an order to invest in a security. Your stock broker handles securities on your behalf and companies listed on the stock exchange. Being the experts that they are, they will advise on what to buy and process your order. Later, the broker will handle the change of ownership from the seller to you, the buyer.
Initial coin offerings do not have human intermediaries. They are completely automated using smart contracts on blockchain technology. You are in charge of the process from beginning to end. To participate, all you do is acquire some cryptocurrency funds and send them to a wallet associated with the ICO. That's it! The smart contract takes care of your funds and assigns an allotment of tokens to you.
A distinguishing feature of blockchains is eliminating the role of traditional intermediaries is. ICOs replace stock brokers with smart automated contracts.
- Utility and Ownership: Stocks give you share certificates, ICOs give you utility tokens
As an investor in the stock market, you are part owner of the company equity. Your name appears on a company register as a shareholder. Your share certificate entitles you to vote and participate in the affairs of the enterprise. You also have the right to trade your shares at a market price on a stock exchange.
Initial offerings, however, are not an allocation of equity. A vast majority of ICOs are not securities; this is intended, to avoid the scope of securities regulation. Instead, what you get for your cryptocurrency investment is a digital coin or token.
This token could represent an access token for the project’s services. Or it could be pegged to some function or utility in the project’s app or software. For example, on the Ethereum blockchain, Ether tokens are used to pay transaction fees on the network.
Therefore, in stock markets, you receive a percentage of the company via a certificate. Whereas in ICOs, you receive a percentage of tokens that serve a utility in the project's app or software.
- Trading hours: stock market trading hours limited, ICO tokens trade 24/7
Stock markets are open for specific durations of time during which trades can occur. They remain closed on official holidays and in the event of a disruption. The New York Stock Exchange (NYSE) for example, is open from Monday through Friday, 9:30 a.m. to 4:00 p.m. EST.
Tokens issued through ICOs trade in a 24/7 market around the clock. Trading on online digital currency exchanges is not limited by geography or bound by time. Digital tokens exchanges are automated and always open for business. You can invest and trade at any time of the day or night with no limits.
Investing in ICOs is flexible because it is all digital and automated, unlike stock markets that are bound by physical spaces and geography.
- Returns: Stock market returns are capped, while ICO returns are uncapped
The amount of return you can make per day on stock markets is limited to a maximum of 50% per day depending on the security. Stock exchanges are tightly regulated. They have a rule that halts trading when a stock price increases or decreases by between 10%- 50% in a single day. Market regulations do not limit your potential capital gains per day.
ICOs are not subject to regulations by authorities because they are only 2 years old. Token prices are extremely volatile and can move up to 1000% within the span of a few days. On token exchanges, wild returns are the norm. It is why investors, hedge funds, and wall street bankers are flocking to get a piece of the action.
Stock markets limit how high a stock can trade whereas there are no limits with ICO tokens. Token prices are subject to demand and supply at all times.
- Regulation: Stock markets are highly regulated, ICOs are unregulated
Stock market activities are highly regulated by law and authorities like the SEC in the US, FCA in the UK and ASIC in Australia. Listed stock companies adhere to strict reporting requirements every quarter. The governance structure of exchange listed companies is strictly defined by the statutes governing the stock market.
ICOs are radically new, and regulators are still confused over how to capture them under a regulatory framework. They operate in a legal gray area and fail the definition of currencies, securities, commodities or valueless tokens. Because they are digital and exist purely online, they also do not fall within any national jurisdictional laws.
Regulation tends to lag innovation; nowhere is else is this truer than in cryptocurrency and ICO markets.
There is no turning the clock. Initial coin offerings have proven the demand for investment opportunities. Stock markets will soon become a relic of the past. Already, pioneers like Overstock.com are building blockchain markets where companies can issue tokens rather than go to the stock market. Tokens offer issuers unique advantages that were never possible with stock markets.
Even though ICOs are barely 2 years old, they represent the beginning of a future where token markets will replace stock markets.