What are initial coin offerings?

By L.S.

WOULD you like to invest in Filecoin, a marketplace for digital storage services? Or Indorse, a professional social network where members own their data? How about Lust, a service “to enable all human beings on Earth to find their perfect sexual partner anonymously?” These are just three of a wave of what are called initial coin offerings (ICOs). More than $2bn has already been invested in such offerings since the first one, in 2013. And there is more to come: Smith + Crown, a consultancy, lists more than 200 ICOs on its website. What are they and why are they so successful?

The term ICO is somewhat misleading: these flotations are quite different from the similar-sounding “initial public offerings”, or IPOs, when startups list on a stock exchange. Whereas investors in shares receive ownership rights, those who put their money in ICOs get crypto-currency, or tokens issued on a blockchain, an indelible distributed ledger of the kind that underpins bitcoin. They are meant to serve as the currency for the project they finance: to pay for storage space on Filecoin, for example. They can also be traded by speculators; investors hope that successful projects will cause tokens’ value to rise. In early August Filecoin raised $252m in just over 30 minutes. The ICO does not end until September 7th and yet its price has already more than quadrupled, to more than $6 (the price is determined by the level of demand, though the tokens cannot be traded during the ICO).