Are initial coin offerings a good way to raise startup funds or to invest in startups?

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Initial coin offerings have come out of nowhere in 2017 to become the talk of Silicon Valley and Wall Street. Programmers raised over $2 billion in the first nine months of the year by selling their own virtual currencies to investors. That is nearly 1,000 percent more than the amount raised using coin offerings in 2016.

What is an initial coin offering?

Coin offerings are a way for start-ups or online projects to raise money without selling stock or going to venture capitalists — essentially a new form of crowdfunding.

The programmers raise money by creating and selling their own virtual currency, generally with rules similar to well-known virtual currencies like Bitcoin. The new tokens are usually designed so that they can be used only on a computing service the programmers are building.

Filecoin, which raised $257 million in the largest coin offering to date, is being designed to pay for storage on a global cloud storage network that the creators of Filecoin are promising to build. BET, another coin, is being designed to serve as the chips in an online casino its programmers are promising to build.

“Promising to build” is the operative phrase here, because in almost every case the services that will supposedly make these coins valuable have not yet been finished.

What does this have to do with existing virtual currencies?

These coins are generally inspired by older virtual currency systems like Bitcoin or Ethereum, with a cap on the number of coins that will exist — to provide a sense of goldlike scarcity — and a structure that allows them to operate entirely outside the existing financial and regulatory ecosystem.

Investors generally buy the new coins by sending the programmers Bitcoin or Ether (the virtual currency inside the Ethereum network). What’s more, many of the coins are stored, moved around and enabled by other Ethereum technology.

But the coins sold in coin offerings are meant to exist independent of Bitcoin and Ethereum, with their own free-floating value.

(For a more complete explanation of Bitcoinclick here, and for an Ethereum explainer, click here.)

Is there a relation to initial public offerings of shares in a company?

The name for coin offerings was clearly inspired by the initial public offerings that companies do to sell stock to investors. But unlike stock offerings, coin offerings are generally designed so that investors don’t get an ownership stake in the start-ups. If the coin does provide an ownership stake, the Securities and Exchange Commission has said, the companies must comply with all securities law. A few coins have done this, but most have tried to avoid it.

Investors can contribute as much or as little money as they want in these offerings, which are generally more like crowdfunding campaigns that new projects do on Kickstarter or Indiegogo.

Why would anyone pay for these coins?

Learn more: An Explanation of Initial Coin Offerings

 

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Ethereum, think Bitcoin plus smart contracts plus much more

via blog.ethereum.org

via blog.ethereum.org

A new virtual gold rush is underway.

Even as Bitcoin, riven by internal divisions, has struggled, a rival virtual currency — known as Ethereum — has soared in value, climbing 1,000 percent over the last three months.

Beyond the price spike, Ethereum is also attracting attention from giants in finance and technology, like JPMorgan Chase, Microsoft and IBM, which have described it as a sort of Bitcoin 2.0.

The rise of the relatively new virtual currency has been helped by a battle within the Bitcoin community over how the basic Bitcoin software should develop.

The fights have slowed down Bitcoin transactions and led some people to look for alternative virtual currencies to power their businesses. Enter Ethereum.

Like Bitcoin, the Ethereum system is built on a blockchain in which every transaction is recorded publicly. The promise of such a system is that it allows the exchange of money and assets more quickly and more cheaply than relying on a long chain of middlemen.

But Ethereum has also won fans with its promise to do much more than Bitcoin. In addition to the virtual currency, the software provides a way to create online markets and programmable transactions known as smart contracts.

The system is complicated enough that even people who know it well have trouble describing it in plain English. But one application in development would let farmers put their produce up for sale directly to consumers and take payment directly from consumers. There are already dozens of functioning applications built on Ethereum, enabling new ways to manage and pay for electricity, sports bets and even Ponzi schemes.

All of this work is still very early. The first full public version of the Ethereum software was recently released, and the system could face some of the same technical and legal problems that have tarnished Bitcoin.

Many Bitcoin advocates say Ethereum will face more security problems than Bitcoin because of the greater complexity of the software.

Learn more: Ethereum, a Virtual Currency, Enables Transactions That Rival Bitcoin’s

 

 

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Bitcoin Exchanges In India Shut Down After Regulator Warning

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via TechCrunch

Bitcoin exchanges in India are shutting down days after the country’s banking regulator warned users of virtual currency against security and financial risks associated with them.

The Reserve Bank of India (RBI) had remained silent on Bitcoin over the past few weeks, even as China started clamping down on the exchanges, sending the virtual currency into a downward spin earlier this month.

A week after India’s small but growing Bitcoin community organized its first conference, and made an appeal to the country’s banking regulators for recognizing the virtual currency, the RBI said the Bitcoin users have not obtained any regulatory approvals yet, which poses several risks to anybody associated with them. This is what the RBI said:

There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws

However, the wording of the announcement from RBI leaves a question mark over the legality of not just the exchanges but also of the people who trade on them.

Read more . . .

 

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