On Monday, the People’s Bank of China announced a ban on all ICOs (initial coin offerings) — a new, mostly unregulated way for companies to raise money by selling their own “digital currency” in exchange for services.
As a result, in the past 48 hours, almost every cryptocurrency has experienced double-digit losses.
Soo cryptocurrency… that’s like Bitcoin, right?
Bitcoin is the most well-known cryptocurrency, but there are actually 900+ different cryptocurrencies, all started as a way to make really fast, secure payments worldwide, without going through a bank or central regulator.
Each cryptocurrency is built on the premise that anything can be valuable, so long as there is a controlled, finite amount of it.
(Heck, we could pay for groceries with frogs if they were rare enough, but governments decided printing a limited amount of special paper would be more convenient at checkout.)
For example, the amount of gold in the world — hence the use of the term “mining” to describe the process for verifying a new “block” of cryptocurrency transactions, which are recorded in a public ledger aptly named the “blockchain.”
WHEW, OK. WHAT’S NEXT?
Ok. ICOs. AKA, when a company raises money like they would in a traditional seed round, except by selling its own version of cryptocurrency, called “tokens,” that are specific to the company itself. It’s kinda similar to public stock.
Companies have raised a total $1.8B through ICO this year alone — surpassing all angel and seed venture capital for internet companies in recent months. (Cloud storage company “Filecoin” raised $200m in 60 minutes through ICO.)
But, unlike a typical funding round, ICOs are largely unregulated, which means some ICOs fund legit companies, while others are total scams.
Which brings us back to China
According to China’s central banks, token sales violate Chinese fundraising laws and put investors at high risk of losses and fraud. As of August, regulators in the US also said that token sales have to comply with SEC rules.
This decision will likely have a huge impact on the ICO market as a whole (20% of which have been in China), and as of last night, the entire cryptocurrency market had lost $38B in 48 hours.
That said… it still sits at a $142B market cap — double what it was 4 months ago.