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Four Reasons Why ICO Funding Is Slowing

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Initial coin offerings (ICOs) have quickly emerged as a multi-billion-dollar industry, but concerns over regulation are compelling many startups to think twice before issuing their crowdsale. These regulatory hurdles, combined with greater investor scrutiny over prospective raises, suggest that the ICO market is about to shift into lower gear.

ICOs by the Numbers

Depending on who you ask, ICO funding was on track for a record-setting month in November. According to data collected by Argon Group, nearly $500 million was raised in the first half of the month. That’s equivalent to roughly 75% of the September total, when startups raised $663 million. This translates into 25 times the funding seen just one year ago.

However, the latest CoinSchedule data suggest that only a fraction of that total was actually raised last month.

Crowdsales have generated more than $3.5 billion in funding this year alone, easily outstripping early-stage venture capital. ICO projects touch virtually every industry, with infrastructure and trading tend to be the most common.

Five Reasons ICO Funding Is About to Cool

Launching an ICO has become the gold standard for startups wanting to raise capital as quickly as possible, but there’s evidence to suggest that the early-stage euphoria is beginning to wind down. This doesn’t mean coin offerings are dying. Quite the contrary, as a matter of fact. As the industry evolves, the quality of the crowdraises is expected to improve. Vitalik Buterin, founder of Ethereum, says ‘Tokens 2.0‘ will provide much more noteworthy ICOs that are of significantly higher quality.

Regulation

The immediate cause of the sudden slowdown in ICO funding is tied to China’s ban on token sales. The all-out ban occurred in early September, and eventually led to a sharp slowdown in the amounts raised during the month of October. The ICO ban quickly spread to South Korea, a nation with otherwise very lax cryptocurrency laws.

ICOs continue to operate in regulatory purgatory, which means startups are thinking long and hard about what type of token to issue and where to implement their crowdraise. In the meantime, the European Union (EU) appears to offer the best opportunity for a headache-free crowd sale. The region accounts for nearly half of total ICO funding, according to a recent report.

New Protocols

Murky regulations have compelled the blockchain community to take matters into its own hands. This has led to the development of the Simple Agreement for Future Tokens (SAFT) project, which is intended to create a self-regulated industry capable of navigating U.S. securities laws.

SAFTs are gaining traction among ICO issuers, but may not be as safe as previously envisioned. A compelling report from the Cardozo Blockchain Project recently argued that SAFTs “could heighten the exuberance manifesting in markets for blockchain-based tokens and make it even more difficult to provide consumers access to potentially impactful new technology.”

If SAFT is the way to go, it may be a while before the industry adopts it as the standard protocol.

Investor Scrutiny

Gone are the days where an ICO can raise $20 million on the back of a whitepaper. Investors are much more cautious today than they were just a few months ago. In addition to concept, the public wants to see solid use cases and a viable business model underlying the crowdraise. They want more information about the team, and expect to have all their questions answered promptly.

Investors are still pouring money into crowdfunding campaigns, but with hundreds of projects launched weekly, the standard for token raises is higher than it was before.

Rise of Scams

One of the reasons why investors are scrutinizing ICOs so closely is the growing prevalence of fraudulent projects. It’s not uncommon for a scammer to copy an ICO, re-write the whitepaper and launch a website with pictures of advisers they found online.

Then there’s the U.S. Securities and Exchange Commission (SEC) charging two ICOs with fraud. The regulator has warned investors to be weary of false promises of sizable returns from token sales.

The Future

As we mentioned earlier, a slowdown in the ICO space could be a very good thing for an industry experiencing exponential growth. A more conscientious token sale market may also help shake off the blockchain community’s speculative image. But regardless of where ICOs end up, blockchain technology is here to stay. It utility has proven far too valuable to ignore, even though many do not care for the cryptocurrencies it helped create.

The cryptocurrency market is worth more than $320 billion. Sixteen digital currencies are valued at $1 billion or more, with nine others worth at least $500 million.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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4.6 stars on average, based on 497 rated postsSam Bourgi is Chief Editor to Hacked.com, where he specializes in cryptocurrency, economics and the broader financial markets. Sam has nearly eight years of progressive experience as an analyst, writer and financial market commentator where he has contributed to the world's foremost newscasts.




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Understanding the Risks of Mining Bitcoin

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At this point of your journey into the cryptocurrency world, you probably have a strong grasp of the fundamental mechanics of the coin, and maybe understand the basics of “proof-of-work” systems.

Assuming you already have this understanding, you know that the robustness of the network is what secures the entire bitcoin protocol. As such, there is an opportunity for money to be made if you are able to add value to the network, you will be compensated for your time. This is essentially what mining bitcoin is, and it is very possible for you to make a good return on your capital if you go about it intelligently.

Cloud Mining for Lower Risk

Mining has advanced quite a bit since bitcoin’s creation in 2009. It used to be that you could use any PC to mine cryptocurrency. The algorithm is designed to adapt the level of difficulty and work required to be done so that the average block time stays at approximately 10 minutes.

The most important decision you’ll make in terms of bitcoin mining is whether to mine using cloud services, or if you are going to buy your own rig instead. Each method comes with different levels of risk due to the varying risk structures.

Cloud mining has you rent mining hardware from a company or just get a portion of their hashing power. There are many different operators in the field, and it is important you perform some heavy research to figure out what the best investment of your capital is. Cryptocompare has a list of all the different companies you can use and how they have been rated and reviewed recently.

Personal Mining for Higher Potential

When you make the decision to go the personal mining route, you are taking a much bigger risk in terms of upfront investment. There is a significant cost involved, and you are buying some very specialized hardware. The top consideration should be whether you have access to cheap electricity, because without that, you are putting yourself in a terrible position.

Once you choose your hardware, it is all a matter of selecting the type of hardware you are going to use (there are many review sites, and this is outside the scope of this article) and then choosing a mining pool and software provider. Research is your friend, so you would do well to not neglect it.

Determining the Logistics

No matter what route you decide to go, you are going to have to make some decisions that will affect your overall workflow significantly. First, you must select a mining pool, which means you need to adjust for the amount of risk you are willing to take. Mining can be very profitable on your own, or you could go months without making any money at all. Going with a larger group will increase your likelihood of making money, but cap your earnings at a certain point.

There are pools that are set up to allow switching from mining one currency to another, depending on which is the most profitable, but we are going to stick to Bitcoin for the purposes of this article. One common point to watch out for with pools is whether they are paying out before the block properly verified, since that can cost the pools significant amounts of money.

Payout methods are the most relevant factor to consider when assessing mining pools, since they will determine the risk and return of your payments. There are ten or so variations, but it is only necessary to understand the three most common: Prop, PPS, and PPLNS.

Prop (or proportional) mining pools you are paid for the amount of valid shares you contribute to the pool when a block is found. Basically, you would be getting paid an exact amount based on the “work” you submitted. This is the best deal for the miner, but carries risk to the pool operator, since bad shares still get paid here.

PPS (or Pay Per Share) rewards miners for each submitted share. The miner knows the estimated number of shares to get the reward, and takes the risk of paying out per share before the reward is earned. As such, these generally have the highest fees.

Finally, PPLNS (or Pay Per Last N Shares) works like Prop pool, but instead of just rewarding miners for the last block, it rewards based on long-term contribution.

Afterwards, you also need to make sure you trust the wallet the cryptocurrency is being deposited into. The last thing you want is to leave a vulnerability for any of your earnings. This is an often-emphasized point, but you shouldn’t overlook it just because your past solution has worked for the small investments you put in.

Control the Risk

Never forget the fact that nothing is certain in investments, especially with bitcoin. This should steel you against the fact your investment may be lost. The fluctuations in the price of hardware, as well as the continuing increases in computing power, have turned bitcoin mining into somewhat of an arms race.

If you do find yourself feeling too risk averse to put significant funds into mining bitcoin, it might be better for you to just purchase bitcoins directly. This way, you are at least guaranteed to receive cryptocurrency.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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The Economics Behind Stablecoins

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A common argument for the value of bitcoin is the hyperinflation of fiat currencies in countries like Venezuela or Zimbabwe, but bitcoin’s high volatility isn’t necessary the answer.

In fact, the high volatility that comes with all the speculation in the area is what scares off a lot of users. These people see the value in the technological innovation, but have no interest in dealing with the massive ups and downs most cryptocurrencies have gone through. This is where the need for a more stable cryptocurrency has spawned from.

Low Volatility Solutions Are Required

Some countries, such as Canada, have been working on their own brand of digital currency, but are missing the fact that although “digital”, the currency doesn’t solve any of the same problems that bitcoin does. Instead, a solution is necessary that is decentralized and trustless, which is where stablecoins come in.

Stablecoins have a massive use case because there are many users who are looking for currencies that present all the benefits and utility of blockchain technology, but without the same market volatility.

Clearly, there is market demand for low volatility cryptocurrencies, and stablecoins are the class of cryptocurrencies attempting to address the problem.

The goal of these companies is to package all the benefits of bitcoin into a cryptocurrency, but avoid all the speculation nonsense that scares off potential users of the technology.

How a Stablecoin Works

A stablecoin essentially works by tying the value of the token to the value of a security. The simplest manifestation of this is having users buy a “digital” version of the USD that is decentralized.

Stablecoins can generally be sorted based on how they are collateralized. This means that the company backing the coins has to have some sort of assets on hand in order to support the value of the cryptocurrency.

There are three types of stablecoins, but the most popular type is fiat-collateralized. These companies hold deposits in fiat currency, and issue tokens at a 1 to 1 ratio. Other pegs are possible, but the simplicity of the USD as a peg is what makes these easy to facilitate.

Aside from those, you have crypto-collateralized coins that hold cryptocurrency in deposits. Because of the heightened risk in holding cryptocurrency, the value of the deposits must be larger than the value of the tokens to mitigate potential losses. Finally, you have non-collateralized stablecoins which work much like a decentralized version of a fiat currency in that they have limited volatility, but depend on the expectation of retaining value.

The Basics of the Stablecoin Market

Tether may be the most well-known example of a stablecoin, but this is mostly because of the controversy surrounding regulators subpoenaing them in regards to their USD reserves. Tether is meant to be “tethered” to the value of a single USD, and is an example of a fiat-collateralized token.

MakerDAO is another project that seems more viable due to its decentralized management and heightened transparency. It is collateralized with Ether and seen as a frontrunner in the industry.

Another popular project is TrueUSD, which is fully collateralized with fiat currency, and is much more transparent than Tether. The Tether controversy raises questions about whether you will need to speculate on the capitalization of a company, which is why transparency is such a key component.

Extrapolating into the Future

Right now, the stablecoin market is mostly focused on backing a few of the major fiat currencies (USD, EUR, etc.) or gold (the original store of value). As the model proves it has viability, it is likely that stablecoins will be devised for the backing of alternative assets.

In a world that is looking for tokenized assets that are provably solvent, stablecoins are the answer, and have the potential to lead us to the “next generation” of the Internet. With low volatility solutions as a viable unit of account, it will become possible to move stable assets like houses or loans to the blockchain. From there, the whole financial world may experience disruption.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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The Sharding Solution

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In recent months, the news has been rife with cryptocurrency detractors quick to point out flaws in bitcoin or Ethereum, and this has created the need for the development community to come up with novel solutions to the problem at hand.

First – What’s the Problem?

Bitcoin and Ethereum both currently operate on a proof-of-work protocol. This protocol offers a very high level of security; however, this comes at the catch of being very resource intensive. As these cryptocurrencies continue to scale, this is becoming an issue.

The three big issues that are presenting themselves are latency, throughput and scalability (inability to perform at an even higher volume). With some transactions taking between a few minutes and a few days (depending on the transaction fee you pay), it is hard to imagine how this model could handle higher traffic. Bitcoin is currently limited, to 3-7 transactions per second, and Ethereum is limited to 7-15. Neither of these figures are encouraging.

As a result, novel solutions like “proof-of-stake” protocols are being invented in order to improve the speed at which transactions can be processed. Sharding is an offshoot that shows promise, and the founder of Ethereum has indicated it will likely be implemented in the future for the network.

Explaining Sharding

A common engineering solution is to split a bigger problem into smaller problems and solve them one at a time. Sharding is a solution that follows a similar train of thought. The way it works is by taking the entire network and splitting it into a bunch of smaller subsets. Each subset of nodes is called a shard, and this takes away the need for each node to go through the entire transaction history in order to verify a transaction.

The term “shard” comes from the idea of a fragment of glass or pottery. The whole is split into smaller component pieces that govern themselves much like states do within a larger country.

One possible means to split up the network is based on the first digits of the public addresses, but there are many other methods that are being floated around.

By requiring its own set of validators, proof-of-stake becomes a prerequisite for the functioning of a shard. By requiring a proof-of-stake protocol to properly function, sharding becomes more practical for Ethereum in the short-term when you examine Vitalik Buterin’s recent comments on the scaling of Ethereum.

Benefits of Sharding

Sharding is necessary for the key reason that these networks need to find a way to grow, otherwise their value will be significantly limited. Implementing a solution like sharding serves to both increase the flexibility of the network while limiting the amount of storage required for it to function.

The difficulty in changing the networks from their current proof-of-work protocols is that they need to keep maintain their security, otherwise they lose all value. Sharding seems to be one of the few solutions that solves the scalability problems while still being secure.

Potential Risks

Every solution comes with downsides, and it is important we address those of sharding. As with proof-of-work, the problem comes from the same thing that makes sharding powerful. Shards are designed to make it easy to transact with other users on the same shard. However, transactions between shards becomes complicated and add an extra layer of complexity to the solution.

If facilitating communication between the shards proves to be too difficult, then the solution has no merit. There are several workarounds that have been theorized (such as transaction receipts), although a lot of work must be done before this is brought to fruition.

Another potential issue is what happens when you create all these small shards. Will they be vulnerable to 51% attacks because of their size, or will the proof-of-stake method still make this too costly to be feasible? The value of the bitcoin and Ethereum network is in their security, so they need to be able to guarantee sharding’s efficacy before implementation.

The final thing to make clear is that this is only a potential solution, and it has not been tested yet, so we have no idea how well it would work or what the results of its implementation will be. For that, only time may tell.

Featured image courtesy of Shutterstock.

Important: Never invest (trade with) money you can't afford to comfortably lose. Always do your own research and due diligence before placing a trade. Read our Terms & Conditions here. Trade recommendations and analysis are written by our analysts which might have different opinions. Read my 6 Golden Steps to Financial Freedom here. Best regards, Jonas Borchgrevink.

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