What Is a Cryptocurrency Crowdsale?
People are becoming more familiar with the idea of crowdfunding, whereby a young company pre-sells its service or product, to be redeemed when they are established and financially viable.
This could be an app developer, for example, requesting investment in return for the privilege of being one of the first to download and trial their app. The company will be in its very early phases so will use the funding for rental of premises, salary payments, software development and so on.
The cryptocurrency version of this is the crowdsale.
Although a crowdsale is similar to crowdfunding, there are marked differences between the two. It’s important to understand how a crowdsale works before choosing to invest your money.
A start-up company trading in blockchain launches an Initial Coin Offering (ICO). One part of this process is known as the crowdsale, an opportunity to sell cryptocurrency digital units or ‘tokens’ to investors to raise money for a project or service that is in development.
An investor wishing to participate sends cryptocurrency to the project address and, in return, receives a token that is stored on their computer or device.
Tokens act as a promise that you can participate in that project or service once it is up and running.
The tokens do not have a set value, their value can rise or fall depending on the success of the project. In this way, crowdsales hold some similarity to trading in traditional shares.
As well as a start-up project using a crowdsale as a method of funding, it also proves useful in helping to gauge interest in their offering.
A promising idea will generate more interest and is a good sign that people will respond well when they launch. If tokens do not sell, the team has some indication that their idea might not be viable.
Opening up the process to anyone wishing to purchase tokens means that startups are not encumbered with finding serious investors who they then become answerable to.
A company usually hosts its crowdsale from a designated blockchain-based platform. When they release tokens for sale, the project team will often keep a portion of the tokens back as investments for themselves to put back into the business as they grow and the tokens increase in value.
The maths behind whether a token increases in value depends on how many tokens are sold and how much revenue is generated.
So, for example:
If 20 million tokens are released by a start-up they may decide to release 18 million for sale. keeping two million back for themselves.
If the project raises $9 million in cryptocoins, each of the 18 million tokens released are worth $0.5 per token. If an investor put $100 into the project and, in the end, each token is worth $0.5, they now have 200 tokens to spend.
The two million tokens that the company kept back for themselves are now worth $1 million cryptocoins which the company can keep and sell at a future date to raise monies if needed.
Because the crowdsale is arranged very early on in the life of the business, the tokens are sold at an incredibly low price, leaving lots of room for growth ready to trade them on the exchange at a later date when their worth has grown.
Companies recognise that some investors may be interested but might hold back from taking the leap, especially when the offering is very new.
To counteract this, look out for early adopter rewards, usually in the form of extra tokens. Sometimes, those that invest earliest will get the most extra tokens, with the incentive reducing as time goes on. This can help drive the process forwards, attracting further investment, with benefits for both the early investors and the project team.
If a project needs additional help in the way of specialist skills or experience, they may also offer ‘bounties’, which are payments in the form of tokens, in exchange for real-life work.
This can be a great way for an investor to get involved in a project they feel passionate about or have a particular interest in and increase their investment at the same time. The company also gets expertise without having to ‘pay’ in monetary terms.
A company may also pay a bounty to an investor who advocates for them and brings fellow investors on board.
Before you invest in a crowdsale opportunity, it is worth having a desired outcome in mind:
- Do you want to choose a project you believe in so you can trade your tokens in for access to its services?
- Are you investing to speculate, either by trading your tokens in the cryptocurrency exchange system or by holding your tokens within the company and receiving dividends on your investment?
Having a clear goal will help you decide how much to invest, and which project is right for you.
As with any investment, there are risks involved in buying into a crowdsale. The main factor being the infancy of the project you are investing in and their capability to create a profitable business. Many businesses fail in their infancy and so can a new venture that has previously gone out to crowdsale.
Experts believe that it is only a matter of time before there is some manner of insurance scheme available to cover blockchain investments carried out as part of this funding process.
Currently, there is very little regulation and legal framework within the cryptocurrency market. This, unfortunately, means that investors are at risk of falling victim to fraudulent behaviour from non-genuine projects.
If an idea receives little interest and poor token sales from a crowdsale, the project can collapse, resulting in the investors losing their money.
The best way to counteract the risks involved in investing is to spend time checking out the viability of the development team who should have an unblemished history.
A crowdsale is a crucial part of the ICO for a start-up project. It not only benefits the team but also the investors, particularly early adopters.
With the right research and knowledge, investing in this way can have a lucrative return. When tokens are sold at incredibly low cost at the very beginning of an ICO, a savvy investor can take advantage of the price and receive the added bonus of additional tokens for providing early support.
Although there is currently little to no regulation for the blockchain market, risk can be managed, and many consider careful investing to be very much worthwhile.
The standout takeaway when considering investing in a crowdsale is to research the project until you are happy that they are a reliable team with the skills to follow through with their ambitions.
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