There are two main cryptocurrency mining methods, Proof of Work (PoW) and Proof of Stake (PoS), which are relevant for defining the operation of an ICO. Proof of Work mining model is used in the Bitcoin, Litecoin or Ethereum protocol to mention just a few examples. Although in the case of Ethereum, its developers are considering changing to Proof of Stake in the future.
The Proof of Stake is a model in which the owners of cryptocurrency are progressively rewarded – in a lottery among the holders of cryptocurrency – with new tokens of the same type. In this model, holders of more units of account or currencies are more likely to increase their holdings with new coins.
The Proof of Stake model, unlike the Proof of Work model, allows for a distribution of cryptones or tokens based exclusively on the protocol developers’ priorities, which has allowed the creation of ICOs with a fraudulent or unworthy tone. The advantage of the PoS system is that it does not consume energy to secure the system unlike the Labor Test model, but unlike the PoW, the distribution of the coins can be imbalanced.
The prelude of cryptones in the ICO
In the Proof of Stake model there have been many cases in which the pre-order has been used, which simply means that the protocol developers distribute a fixed amount of cryptones to an initial small group of investors. Later – already open distribution to the general public – they try to inflate the prices of this new cryptocurrency in order, to sell them with great benefits to the new investors. Of course, the promotion or marketing campaign must be successful and attract new capital.
To put it in SEC terms, many of these PoS models can operate like a pump and dump stock deal. The currency creator pumps up the coin with value and transactional volume, sells, and gets out. When the pumpers dump their coins, the volume disappears and the value crashes.
Obviously, this does not mean that all models of Proof of Stake are all fraudulent, but it is true that they tend to attract scammers. Unlike the Proof of Work system in which the developer of a protocol can’t control the distribution of the coins, a PoS system can be manipulated.
- Trivia: It’s said that Satoshi Nakamoto owns at least one million bitcoins out of the 21 million that will be broadcast on the Bitcoin protocol.
To understand the economic significance of an ICO in the world of protocols let’s mention, then, some of the best-known ICOs.
The ICO of Ethereum
Ethereum raised 31,531 bitcoins ($15 million at the time) during its launch campaign, with a pre-order system, in the summer of 2014. Investors had to wait a year to be able to trade their ethers in the market because that was stipulated in the investment agreement of the ICO. A measure taken to curb initial speculation. To date, 31,531 bitcoins have a market value of 26 million dollars.
The launch of the ether was, at the time, one of the most successful crowdfunding campaigns registered in any protocol and positioned Ethereum and its cryptocurrency – ether – as a serious competitor that could receive attention from developers and investors in the market, in comparison with Bitcoin. Some of the more sound and important ICOs of new decentralized protocols have used Ethereum as reference protocol.
The ICO of The DAO
Ethereum ecosystem made history again in the world of cryptocurrency and in the crowdfunding campaigns in 2016. On April 30, the startup of the ecosystem Ethereum Slock.it announced the launch of the DAO, articulating a campaign of collective financing that put on sale for the first time the tokens of DAO (Decentralized Autonomous Organization), raising 12.07 million ETH (ETH is the ethers code as BTC is that of Bitcoin).
This crowdfunding campaign raised more than $150 million, boosted by the spectacular revaluation of the ether since its launch and the high expectations of the Ethereum community to be present in one of the first invertible projects presented to them. The DAO was an open venture capital fund where anyone in the world could participate, to invest in projects based on the automated Ethereum protocol with intelligent contracts, without the need to have a management structure.
The DAO failed because a hacker managed to block 3.6 million ether and although this problem was solved weeks later, it caused a break in the Ethereum community and the project failed. This situation, led to a division in the Ethereum community, that lead to the creation of Ethereum Classic (ETC) and Ethereum (ETH) which changed its initial system, branching into two separate protocols.
The DAO crisis and a series of other technical problems throughout 2016 caused the ether price to fall from its highs of $ 21.50 per ether at the height of The DAO to the current price of $7. Despite this significant fall, the revaluation of the ether only in 2016 has been of 700%.
In the first six months of 2016 the price of ether was revalued by 2,000%, trading from a price of $ 0.93 per token to the high of 21.50 recorded in mid-June.
Even the SEC couldn’t stay away from DAO. The government issued a ruling that DAO was a regulated security and should be treated just like an Initial Public Offering (fully controlled by the US government). For more, see: Press Release – SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities
The ICO of Z-Cash
The Z-Cash project received the support of more than 30 investors who contributed $ 3 million. The monetary base is the same as for bitcoin, 21 million units.
The protocol specifies that miners can only be made with 90% of the coins because the remaining 10% is intended for investors (1.65%), founders and employees of the company (5.72%) and corporate investments (2 , 65%). That 10% of the coins will be refunded in the first 4 years of life of Z-Cash. In this way, the partners’ commitment to the project is sought and to ensure the stability of the company in the early years.
The weeks prior to the launch of Z-Cash (the unit of account is ZEC), the price was warming up in the futures market to settle, at the end of October, at 3,300 bitcoins per ZEC (about 2 million dollars). as part of the promotional work of some of the initial investors. In the same week, the price fell to 1 BTC. The reason for reaching such high prices is none other than the law of supply and demand itself. In the initial market there were very few ZECs, by design, reaching prices as high as unreal but as they were mining and generating more coins the price dropped to 60 dollars.
Z-Cash’s main value proposition is that it assumes that it can be really anonymous in transactions, using a new, untested cryptographic technology known as zero-knowledge proof.
Historically ICO speculators have investigated and followed the launch of new cryptones in specialized forums, trying to get ahead of market movements. The first investors are thus looking to benefit from the subsequent revaluation that can occur with a successful commercialization of the new token.
One of the characteristics of any ICO so that it can quickly increase its price is the lack of liquidity and supply in the market of the token in question. Liquidity is the key to a relatively stable price. That is, a currency needs a lot of buyers and sellers to maintain a stable price.
Because the SEC is now regulating all ICOs, you’ll need to go offshore if you want to find any deals. Only the very largest and most vanilla ICOs will be done in the US. Those with the potential for massive growth will be sold offshore.
A US citizen can form an offshore LLC or corporation and invest in foreign ICOs. You can also set up an offshore trust for a more robust asset protection and estate planning vehicle.
And, because the IRS is taxing cryptocurrency as an asset and not a currency, you can buy them offshore in your US retirement account.
That’s right, you can take your US retirement account offshore and buy bitcoin, ICOs, and all manner of cryptocurrency. For a detailed article on how to take your retirement account offshore, see: Here’s how to take your IRA offshore in 6 steps.
I hope you’ve found this article on Mining and ICO cryptocurrency to be helpful. For more information on taking your cryptocurrency offshore, you and contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free and confidential.