What is an Altcoin?
Using our handy guide, you may have already familiarized yourself with the ins and outs of Bitcoin. But aside from bitcoin, there are hundreds of other digital currencies out there. These are known as “altcoins,” or alternatives to
bitcoin; for example, ether, ripple, zcash, monero and dash, to name just a few.
Altcoins can differ from Bitcoin in a range of ways. Some have a different economic model or a different coin-distribution method, like altcoins
that were given away to all citizens of a country. Others employ different proof-of-work mining algorithms, perhaps to resist specialized mining hardware — or maybe they don’t even rely on proof of work at all. Several altcoins
offer a more versatile programming language to build applications on top of, while yet others offer more privacy compared to Bitcoin. And there are also altcoins that serve very specific, non-monetary use cases, like domain name
registry or data storage pointers.
However, there are also many altcoins that don’t do much interesting at all. The vast majority of altcoins simply tweak some parameters that don’t matter much, or offer something that may
sound useful but isn’t. If, for example, an altcoin has a greater total amount of coins, it just means each individual coin is worth less. If an altcoin finds blocks faster, it only means that a transaction requires more confirmations
for a similar level of security.
As such, most altcoins offer no benefit over Bitcoin at all. Plus, they have less hash power securing them, involve fewer developers improving them and are usually less useful due to smaller
network effects. And while many altcoins promise useful features, upon closer inspection many of these promises are just that: promises.
This also means that altcoins are typically riskier than Bitcoin. Their exchange rates
are often more volatile, and over the years virtually no altcoins have maintained their value against bitcoin; most have come and gone. On top of that, many altcoins can be considered outright scams, mainly created to enrich its
inventors and early adopters.
While some altcoins out there can and do perform useful tasks (for example acting in a testnet capacity or offering greater anonymity than bitcoin) and may have a future, many others are exclusively driven by speculation or
worse. So make sure to do your research, and buyer beware!
What is an ICO?
An Initial Coin Offering, also commonly referred to as an ICO, is a fundraising mechanism in which new projects sell their underlying crypto tokens in exchange for bitcoin and ether. It’s somewhat similar to an Initial Public Offering
(IPO) in which investors purchase shares of a company.
ICOs are a relatively new phenomenon but have quickly become a dominant topic of discussion within the blockchain community. Many view ICO projects as unregulated securities
that allow founders to raise an unjustified amount of capital, while others argue it is an innovation in the traditional venture-funding model. The U.S. Securities and Exchange Commission (SEC) has recently reached a decision regarding
the status of tokens issued in the infamous DAO ICO which has forced many projects and investors to re-examine the funding models of many ICOs. The most important criteria to consider is whether or not the token passes the Howey
test. If it does, it must be treated as a security and is subject to certain restrictions imposed by the SEC.
ICOs are easy to structure because of technologies like the ERC20 Token Standard, which abstracts a lot of the
development process necessary to create a new cryptographic asset. Most ICOs work by having investors send funds (usually bitcoin or ether) to a smart contract that stores the funds and distributes an equivalent value in the new
token at a later point in time.
There are few, if any, restrictions on who can participate in an ICO, assuming that the token is not, in fact, a security.
And since you’re taking money from a global pool of investors, the
sums raised in ICOs can be astronomical. A fundamental issue with ICOs is the fact that most of them raise money pre-product. This makes the investment extremely speculative and risky. The counter argument is that this fundraising
style is particularly useful (even necessary) in order to incentivize protocol development. Before we get into a discussion over the merits of ICOs, it is important to have some historical context for how the trend started.
History of ICOs
Several projects used a crowdsale model to try and fund their development work in 2013. Ripple pre-mined 1 billion XRP tokens and sold them to willing investors in exchange for fiat currencies or bitcoin.
Ethereum raised a little over $18 million in early 2014 — the largest ICO ever completed at that time.
The DAO was the first attempt at fundraising for a new token on Ethereum. It promised to create a decentralized organization
that would fund other blockchain projects, but it was unique in that governance decisions would be made by the token holders themselves. While the DAO was successful in terms of raising money — over $150 million — an unknown
attacker was able to drain millions from the organization because of technical vulnerabilities. The Ethereum Foundation decided the best course of action was to move forward with a hard fork, allowing them to claw back the
stolen funds. Although the first attempt to fund a token safely on the Ethereum platform failed, blockchain developers realized that using Ethereum to launch a token was still much easier than pursuing seed rounds through the
usual venture capital model. Specifically, the ERC20 standard makes it easy for developers to create their own cryptographic tokens on the Ethereum blockchain.
Some argue that crowdfunding projects might be Ethereum’s
“killer application” given the sheer size and frequency of ICOs. Never before have pre-product startups been able to raise this much money and in this little time. Aragon raised around $25 million in just 15 minutes, Basic
Attention Token raised $35 million in only 30 seconds, and Status.im raised $270 million in a few hours. With few regulations and such ease of use, this ICO climate has come under scrutiny from many in the community as well
as various regulatory bodies around the world. Are ICOs Legal?
The short answer is maybe. Legally, ICOs have existed in an extremely gray area because arguments can be made both for and against the fact that they’re
just new, unregulated financial assets. The SEC’s recent decision, however, has since managed to clear up some of that gray area. In some cases, the token is simply a utility token, meaning it gives the owner access to a specific
protocol or network; thus it may not be classified as a financial security. On the other hand, if the token is an equity token, meaning that it’s only purpose is to appreciate in value, then it looks a lot more like a security.
While many individuals purchase tokens to access the underlying platform at some future point in time, it’s difficult to refute the idea that most token purchases are for speculative investment purposes. This is easy to ascertain
given the valuation figures for many projects that have yet to release a commercial product.
The SEC decision may have provided some clarity to the status of utility vs security tokens; however, there are still plenty of
room for testing the boundaries of legalities. For now, and until further regulatory limits are imposed, entrepreneurs will continue to take advantage of this new phenomenon.