In 2017, the rising popularity of cryptocurrencies created an upheaval in the investment landscape. One of the causes of the upsurge was the fact that bitcoin, the cryptocurrency that started it all back in 2008, experienced an unprecedented price inflation. The going price of $998 at the start of 2017, rose to $13,412 by January 2018. While the price of bitcoin has subsided significantly since then (it is sitting at about $7000 at the moment of writing), the blockchain technology that made it possible in the first place has been used to create numerous offshoot cryptocurrencies.
These new currencies were often developed and used by firms as an alternative means of securing investment funds. A company would create the initial batch of its own cryptocurrency, and then sell it to interested parties at a discounted rate. While many of these initial coin offerings have failed as a result of fraud and rampant speculation, their potential as an alternative form of investment still remains largely untapped.
One of the areas in which ICOs have been gaining more traction recently is crowdfunding. Instead of seeking funding from venture capitalists and angel investors, companies are increasingly turning to online supporters in order to obtain a source of capital. And by purchasing these preliminary coins or tokens, early adopters are banking on the idea that their price will keep growing as was the case for bitcoin. Startups in particular have been keen on experimenting with cryptocurrencies and crowdfunding to find a sustainable investment model in our increasingly internet-centric economy. Crowdfunding software offers a lot of features and latest integrations for business success.
Utilizing cryptocurrencies for crowdfunding requires a working knowledge of blockchain technology, as well as an understanding of principles behind crowdsourced investment. In the rest of this article, we will go over these topics in more detail, to bring you up to speed with all you need to know.
A blockchain is a kind of digital ledger. It consists of entries called blocks, which are linked together into a chain using cryptography. A blockchain is not stored on a single server, but is distributed across a large number of nodes. Each new block added to the chain has a digital signature of all the previous ones. This prevents retroactive tampering, as modifying one block modifies all subsequent ones. The computations required for adding and validating new blocks are performed by multiple machines on the network.
Cryptocurrencies use blockchain technology to record transactions between different parties. Properly speaking, cryptocurrency tokens don’t really exist – there is simply a record of transactions from one address to another. Due to their distributed nature, cryptocurrency networks don’t have a central point of vulnerability that hackers can exploit. All cryptocurrencies so far are public, which means that anyone can access the ledger and view the entire transaction history, all the way to the original block. Blockchain application development service provides the potential of blockchain technology in your business and bring in, security and transparency to your system.
Cryptocurrencies can be traded at exchange markets much like conventional currencies. In principle, anyone with an internet connection can buy cryptocurrency. In practice however, each exchange has its own rules for buying currency, and they might limit their services to nationals from select countries. Cryptocurrencies can be exchanged for goods and services, but the options for doing so are still fairly limited. In all other respects, cryptocurrencies are the same as their conventional counterparts.
Crowdfunding is the practice of raising small amounts of capital from a large number of people for finance a business venture. It is typically done over the internet through the use of specialized platforms such as Kickstarter and IndieGoGo. The two main types of crowdfunding are reward-based, and equity-based. The former involves companies pre-selling products or services in order to get their operation off the ground without incurring debt, or being forced to sell shares. The latter allows backers to acquire equity in a company in exchange for funding.
From a business perspective, crowdfunding offers several advantages:
- It allows business owners to attain low-cost capital without reaching out to venture capitalists, banks, or other traditional investment providers
- Launching a successful crowdfunding campaign can work as proof of concept for a product or service, which opens up new investment opportunities in the future
- best digital marketing agencies argue that crowdfunding is a means of gathering a critical mass of followers at the same place, for easier b2c communication
From the point of view of potential investors, crowdfunding can also be a worthwhile proposal:
- Investors get to support companies that provide niche products and services which they couldn’t obtain otherwise
- Crowdfunding allows small-scale investors to acquire equity in industries which were traditionally out of their reach
- Crowdfunding platforms enable investors to have their opinions be heard by businesses
Initial Coin Offerings
As we have mentioned in our introduction, blockchain technology and crowdfunding can be combined to create initial coin offerings, whereby backers receive cryptocurrency tokens in exchange for their patronage. Early backers are motivated to buy the coins in the hope that their value will increase after the project gets underway. This makes IPOs similar to initial public offerings, with the main difference being that IPOs are usually targeted at institutional investors, whereas ICOs target private ones.
The biggest Initial Coin Offering success story is the smart contracts platform Etherium. The project’s initial coin offering took place between July and August 2014, and it raised more than $18 million. The initial going price for the Ether token was $0.40, and at the high-point of the cryptocurrency craze near the end of 2017, it rose to $1,417. As of 2018, Etherium is the leading platform for launching ICOs, with more than 80% market share. The success of Etherium drove many enterprises to start their own cryptocurrencies, and by the end of 2017, ICOs raised almost 40 times as much funding as they did in 2016.
The Future is Here
Crowdfunding and cryptocurrencies work hand in hand to the advantage of businesses, as well as investors. As more and more ICOs keep hitting the market, the investment space is becoming progressively democratized, setting the stage for a future where the lines that separate entrepreneurs, investors, and consumers are becoming increasingly blurred.