Using an Initial Coin Offering as a mechanism to raise capital seems to be in vogue. But how does this financial mechanism actually work? And how it is better than just raising capital with traditional currency?

Creating a Cryptocurrency

Creating a new cryptocurrency it extremely simple. You only need to decide on the following points:

• Total supply (# of coins)
• Name of your new currency
• Set the number of decimal places for the coin
• Coin symbol (like a stock ticker symbol)

With that and a click of the mouse, you can create a new digital currency. But creating a coin and marketing/selling it in exchange for real money are two entirely different things.

Marketing Your Currency

The road show is fully electronic in the ICO world. Instead of holding multiple in-person meetings with money-people, as is done for a traditional IPO, most ICO issuers create a white paper that describes their project. The white paper is then distributed to potential investors.

Dodging the SEC

Isn’t an ICO really just a capital raise (or IPO) in disguise in an attempt to dodge SEC Regulations?

I spoke with an accountant last week who mentioned how the IRS ruled to treat cryptocurrencies for tax purposes, so I did some research.

Turns out, the IRS tax treatment of virtual currencies as a capital asset is a bit convoluted… in that every purchase you make (where you sell virtual currency), you have to record the value of the currency at that moment and compare that to your cost basis (when you bought the virtual currency). If there was a gain on the cryptocurrency while you held it, you have a taxable event.

Let’s look at an example:

Bitcoin and other cryptocurrencies have an opportunity to completely transform the global monetary system, advancing the concept of money to new levels of innovation and transactional efficiency (along with other applications).

Below, I make the case that virtual currencies can have legitimate, inherent value precisely because enough people say they do. I also discuss a few practical limitations of virtual currencies, as they stand today (in early 2018). Specifically: volatility, mining and tax treatment.

Imbuing Value to Virtual Currencies

People frequently describe cryptocurrencies as “not real” and lacking intrinsic value. In other words, people feel the value is “just made up”. This, of course, is true. But it’s also true of all global currencies, including the U.S. dollar.