January 30th, 2019

Reflex CapitalBlogICO or IKO

Sometimes we come across a start-up, which in the past did, is doing, or is planning to do an ICO, or Initial Coin Offering. Simply put, an ICO means the company prints it’s own (digital) money and offers it to potential investors.

Most ICOs are in the form of utility tokens, which is a means of payment for services or products sold by the issuing company. I’ve seen special tokens for payment for ads or tutoring, for example.

Picture it as if you are going into an amusement park, which uses tokens for payment. You can buy these tokens at the entrance cash desk, in exchange for dollars. One token for one dollar. Some rides cost one token, some three and the roller-coaster costs ten tokens. It’s a little inconvenient for the visitors, but simpler for the management, as they don’t need to handle cash at all rides. Unspent tokens can be exchanged back for money, when you leave the park. We’ve all experienced something like that.

And now, picture the management doing something completely different. At the start of the season the park announces that it will offer 1 million tokens for sale, $1 a piece. The one mil it hopes to raise will be spent on improving the park and to cover operational cost. Thanks to the improvements, more people are supposed to visit the park. The demand for tokens will rise and based on economic theory, the price should increase. Close to the park, just three tram stops from the entrance, is an exchange, where you can exchange money for the tokens. Our park tokens can also be exchanged for other park tokens, everything for market rates, based on supply and demand. Decentralization galore! And if that’s not enough, one convenience store in town announced, it will accept the tokens for purchase of groceries.

Doesn’t make much sense, does it? Not just for potential token investors, park visitors, but even for the park itself. So when we see the ICO in the pitch deck, it mostly also means an IKO. Immediate K.O.

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