Will ICOs Kill Ethereum? A Parallel to Kickstarter

Author: 
Michael R.
Date: 
January 17, 2019
Read time: 
8 minutes
Ethereum
ICO
Kickstarter

As the crypto market gains steam again, investors and traders are interested in various Ethereum  ICOs, often comparing them to Kickstarter. The crypto sphere has sucked in many novice investors who cluelessly throw money at any ICOs (initial coin offering) that come their way while making uninformed Ethereum predictions. Many of these novices do not even understand what ICOs are.

Many people think that when they invest in an Ethereum ICO, they are investing in the company itself and gaining equity. Others think an Ethereum ICO is similar to a Kickstarter campaign. Are these notions correct? In this article, I will clear things up.

As the crypto market gains steam again, investors and traders are interested in various Ethereum  ICOs, often comparing them to Kickstarter. The crypto sphere has sucked in many novice investors who cluelessly throw money at any ICOs (initial coin offering) that come their way while making uninformed Ethereum predictions. Many of these novices do not even understand what ICOs are.

Many people think that when they invest in an Ethereum ICO, they are investing in the company itself and gaining equity. Others think an Ethereum ICO is similar to a Kickstarter campaign. Are these notions correct? In this article, I will clear things up.

What is an Ethereum ICO? Is it an Ethereum Crowdsale?

An Ethereum ICO is a crowdfunding event for an Ethereum-based project. More generally, an ICO - whether is it Ethereum-based or not - is a crowdfunding event for any token-based project. During an Ethereum crowdsale, project tokens are sold in exchange for Ether - or any other requested cryptocurrency. (The fact that so many ICOs only accept Ether for their early tokens explains why Ethereum ICOs are factored heavily in analysts’ Ethereum predictions). ICO stands for initial coin offering, hence the method of selling coins (tokens) in exchange for funds.

Imagine that one day you think of the next big social media app and you decide to launch it on the Ethereum network. After some initial analysis, you realize that $250,000 worth of development is required and $500,000 more will be needed for marketing and advertising. Unfortunately, you did not purchase Bitcoin in 2010, so these costs cannot be paid out of pocket.

Prior to the ICO revolution, most people in situations like this would have attempted to raise funds from family, friends, or traditional investors. Now, many people are choosing to crowdfund their ideas through ICOs. To launch your very own Ethereum ICO, you would set a time period during which your tokens (specific to your platform) could be bought at a set price, say $0.01 each, and you would accept Ethereum as payment. The Ether you might receive in exchange for tokens would fund your efforts. There is one similarity to Kickstarter here. Kickstarter campaigns also have a set time period for when they are accepting funds. The difference here is that instead of issuing tokens, they provide deals on the product they wish to build.

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When deciding whether or not to invest in an Ethereum ICO or Kickstarter, there are a similar criteria to keep in mind:

  • How much money is the project attempting to raise? It is easy for a project to claim they need $1,000,000 - but is it too much? If a project’s crowdfunding goal is too high, it might be a sign of a scam or inexperienced team. If it’s a scam, the team can simply raise lots of Ether or USD and run off with it.
     
  • Regarding ICOs - does the token have utility? The token should serve a purpose. Unfortunately, many projects force the utility aspect by claiming that their token will be the only one accepted for in-app purchases. If this is the case, then the project can probably best be launched as a centralized entity. If, however, the token is used as part of a voting system, for example, then it has more utility. For Kickstarter, do you want this product? Is it worthwhile for you and others? As a result, do you think it will meet its funding goal?
     
  • Is the team reliable? Just like any company, you want to trust that the team can get the job done. Are they qualified? Have they worked together before? If the initial idea fails, will the team pivot?

To summarize once more, an Ethereum ICO is an event in which an Ethereum-based project sells their own tokens in exchange for Ethereum (or any cryptocurrency they choose) to fund their efforts. This is similar to Kickstarter, but instead of issuing tokens, Kickstarter projects give deals on their product. Now, let’s explore some historic Ethereum crowdsales.
 

Popular Ethereum ICOs

 

Ethereum ICO

Throughout 2017 and 2018, Ethereum ICOs have been extremely popular and often successful in hitting their crowdfunding goals. Let’s take a look at a few:

  • OmiseGo (OMG). A payment and remittance system for business and individuals. OmiseGo’s ICO raised $60 million!
     
  • 0x (ZRX). A protocol allowing Ethereum tokens to be traded freely on the blockchain. 0x’s ICO raised $25 million.
     
  • Basic Attention Token (BAT). A token used to tip content creators through the Brave web browser. Basic Attention Token’s ICO raised $35 million in under 30 seconds!
     
  • Augur (REP). A decentralized prediction market. Augur’s ICO raised $5.5 million in 2015.
     

Ethrereum ICOs vs Kickstarter as a fundraising mechanism

By now you should have a brief understanding of why projects use ICOs as a method for fundraising. Throughout this article, we have touched on some similarities and differences between ICOs and Kickstarter, but let’s get a bit more in depth now to make the distinctions more clear.
 

Kickstarter Explained

As you probably know, Kickstarter is a website on which entrepreneurs can raise money to fund the development of their products. The most successful Kickstarter projects are generally those that fund the goal of creating physical products. Software-related projects, on the other hand - such as mobile or desktop applications - are not as successful.

When you donate to a Kickstarter campaign, you generally receive a discount on the product or you receive some sort of cheaper item in return - like a t-shirt, coffee mug, computer sticker, etc. Generally, the more you donate, the more valuable of a perk you will receive. By donating to a Kickstarter campaign, you are not gaining any equity or ownership in the company.

Kickstarter campaigns

Source: statista.com

Out of an estimated $15 billion dollars worth of ETH raised by Ethereum ICOs, $11 billion worth has already been sold.

How Ethereum ICOs Are Different From Kickstarter Campaigns

ICOs are used to crowdfund software rather than physical products. When you invest in these Ethereum ICOs, you receive tokens. Hopefully, the tokens have utility, which may provide you discounts to the services offered by the project. Even more importantly for investors, though, is the hope that the value of the token will increase in price over time.

Tokens sold in Ethereum crowdsales can get listed on different trading exchanges and fluctuate in value, similar to how stocks fluctuate in value on the stock market. Investing in these tokens can be seen as something in between participating in a Kickstarter campaign and directly purchasing company equity. People that give money to Kickstarters do not receive any fungible tokens; instead, they often receive a physical product in return as a thank you.

Software-based Kickstarter campaigns often fail because donators won’t receive a physical product in return. In my opinion, ICOs are a nice solution. Unlike Kickstarter campaigns for software-based products, ICOs can be wildly successful. With the advent of ICOs, software has found a new means for raising funds.

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Ethereum Price Predictions: Will ICOs Kill Ethereum?

It is important to understand the fundamental relationship between tokens sold during Ethereum crowdsales and Ether, especially for any Ethereum predictions you may be making. All tokens can be traded back and forth to Ether. This means that any project that raises $1,000,000 worth of Ether during their ICO technically has $1 million worth of Ether which they can sell on the open market. If a project - or any individual or organization - sells a large amount of Ether, it may lower Ether’s price. Billions of dollars have been raised through ICOs.

Ethereum ICO

Source: trustnodes.com
 

Out of an estimated $15 billion dollars worth of ETH raised by Ethereum ICOs, $11 billion worth has already been sold. This means that if you believe the current Ether bear market is due to ICO owners selling their Ether, then the end is here. The remaining $4 billion will not kill the price, primarily because it is unlikely they will be sold at the same time - if sold at all.

Additionally, as the industry’s investors mature, so should the projects receiving funds. In other words, Ether should go into the hands of experienced businessmen more often than scammers, which may have been the case in 2017. So, as you form your own Ethereum price prediction, do not let the amount of Ether raised through ICOs frighten you; we are optimistic about its future. Just like Kickstart continues to thrive, so will Ethereum ICOs.
 

How Can I Invest in an Ethereum ICO?

Great question! Generally, you need Ethereum or Bitcoin. Both of these cryptocurrencies can be purchased on numerous exchanges and platforms, but there is a lot to know. The value of these cryptocurrencies may skyrocket in value, and as a result, you will want to be comfortable storing, exchanging, and interacting with your cryptocurrencies. If you are seriously looking to invest in Ethereum and other cryptocurrencies, then learn more by checking out start investing guides! The more information you absorb, the better your decisions will be.

Posted by Michael R.

Michael is an entrepreneur who has been deeply involved in the cryptocurrency industry since early 2014. He joined Cryptomaniaks as a cryptoanalyst, helping to create accurate and digestible content.

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