There are currently over 1500 different
cryptocurrencies in existence and many more will doubtless be launched over the
coming months. Some are more successful than others and not every
cryptocurrency or digital token launched will last the course. An interesting
question, however, is how do cryptocurrencies come into being in the first
place?
Unlike regular currencies, cryptocurrencies are not
backed by a government or a major financial institution. They do not need to exist
as the everyday currency of a particular nation state. Indeed they operate as a
more flexible alternative to such fiat currency. But there still needs to be a
good reason for a new cryptocurrency to be created.
An initial idea
Most cryptocurrencies start with an initial idea. This
generally involves a way to solve an existing problem by using the blockchain
technology that cryptocurrencies utilise for transactions. The currency itself
is issued in order to fund this problem-solving project. By buying the
currency, investors are showing their support for the project. They have faith
in the idea and believe that it will succeed. This, in turn, will give value to
the currency, hopefully guaranteeing them a good return on their investment.
A business plan
The project and the cryptocurrency should be backed by
a thorough business plan that needs to be explained in a whitepaper, the
publication of which is generally the next stage in the launching process. At
this stage, the founder(s) should also exercise all due diligence by ensuring
that every stage of the project conforms to applicable laws and regulations.
Although the cryptocurrency market is minimally regulated, initial coin
offerings (ICO) are quite tightly controlled in an effort to prevent scams. Legal
bodies use the latest technology in order to monitor online providers for compliance.
Different types of token
At this stage it’s worth mentioning that cryptocurrencies
are just one variety of digital token, all of which can be launched with an
ICO. A security or asset token is one that functions much like stocks or bonds,
in that it is directly linked to the issuing company’s fortunes and
performance. A utility token is one that provides access to goods or services,
either now or in the future.
A payment token, or cryptocurrency proper, has an
inherent value of its own and can be traded on an exchange. For some of the
most popular examples, see here.
Finally, there may also be SAFT (Simple Agreement for Future Tokens) tokens,
which are essentially an early version of any of the above, privately
distributed to raise interest and funding prior to an ICO being developed.
Website launch
Following the publication of the whitepaper, the next
step is the creation of a website which aims to attract investors. This will
introduce the team behind the project, outline the project’s aim, and will also
detail the measures that will be undertaken to protect investors’ interests.
Ideally, it should also include a roadmap, showing the project’s journey so far
and its future goals, with a timeline showing when these will be achieved.
It goes without saying that the website should have
excellent security and hosting, to protect it from hackers and to also ensure
that it doesn’t crash if too many people try to access it at once. At the same
time, the currency’s creators will have chosen a blockchain platform to host
their cryptocurrency. Over 80% are hosted on the Ethereum platform, with the
remainder using their own custom platforms. A smart contract for investors will
also be prepared and presented.
ICO listing
Different cryptocurrencies will have different distribution
plans, but almost all will centre around an Initial Coin Offering where the
bulk of funding is raised. This may be preceded by a private sale among initial
team members and backers and also perhaps a pre-sale for early or VIP subscribers.
Following the ICO, the cryptocurrency will go on general public sale.
An ICO will generally run for 1-2 months and can
conceivably raise millions of dollars. The currency’s creators will have a
financial target they aim to reach or exceed. To this end, the offering will be
listed on major ICO calendars.
Promotion and marketing
Assuming the ICO is a success then the currency will
go on general sale and the creators will attempt to get it listed on at least
one cryptocurrency exchange. These exchanges review all applications to be
listed, looking for products that offer something unique, worthwhile and
innovative. At this point, the promotion and marketing swings into action,
utilising direct mailouts, advertising and social media sites, as well as
engaging with the wider cryptocurrency community.
A new cryptocurrency will look to capture the
imagination of potential backers as well as winning their trust. Although the
ICO is often regarded as an end in itself, in fact it is only the beginning. A cryptocurrency
has to stay in demand and perform well over time in order to prove its
long-term worth.