Cryptocurrency Crowdsale Definition and Example
A cryptocurrency crowdsale is a public offering to invest in a new cryptocurrency or other digital asset, such as a non-fungible token (NFT). Cryptocurrency crowdsales can raise funds for anything related to cryptocurrency or blockchain, including development in a project or new business. Some initial coin offerings use (ICOs) crowdfunding to raise money for development.
New cryptocurrencies, non-fungible tokens, or other digital assets are released to the public often through crowdsales. Crowdsales for cryptocurrencies can raise millions of dollars but have also been used in Ponzi schemes and other fraudulent activities.
It’s crucial to regard any crypto crowdsale with extreme caution. Regulators have brought enforcement actions against bad actors using crowdsales to raise money from investors.
How Do Cryptocurrency Crowdsales Work?
Each cryptocurrency crowdsale is unique, but as a potential investor, here’s what you can expect:
1. Promoters Decide on the Crowdsale’s Goals
Crypto crowdsales that raise the most money tend to have clear goals and guidelines for how the crowdsale works and how the proceeds will be used. Some promoters also specify a “soft cap,” which is a minimum amount that needs to be raised, or a “hard cap” that limits how much money can be raised through the crowdsale.
2. Token Creators Establish Guidelines and Rules
Creators and developers of cryptocurrency coins and tokens use blockchain technology to set rules and guidelines for creating, transferring, and using cryptocurrency. Behind the crowdsale is likely a smart contract, a blockchain-based computer program that initiates transactions to remove the need for trust. For example, if you were to buy an item on Amazon, you trust the company to send you the item, and it trusts you to pay for it.
A smart contract removes the need for this trust because it executes each side of the transaction for both parties—when the buyer and seller both accept the transaction in their software or wallet, the smart contract transfers the funds (cryptocurrency) from the buyer and initiates whatever process is needed to get the item from the seller to the buyer.
3. Token Creators Promote Their Cryptocurrency to Potential Investors
Once the new cryptocurrency is ready, token creators and promoters work to drum up interest from investors. That typically involves a mix of online marketing strategies, including a presence on social media. Token promoters also send out free currency through cryptocurrency airdrops—random token giveaways.
4. Find a Platform to Offer the New Cryptocurrency
A platform is sourced, and the sale goes live. Anyone can participate and buy a token, often using another cryptocurrency. In some cases, the project leads to a breakout success like Dogecoin or Shiba Inu. Others may be scams or fall flat, so view cryptocurrency crowdsales with extreme caution.
Alternatives to Cryptocurrency Crowdsales
If you want to invest in cryptocurrency, you don’t necessarily need to assume the risk of a crowdsale. Instead, you can consider buying a more established cryptocurrency like Bitcoin or Ethereum from a regulated exchange.
Another way to get involved with newly created blockchain assets is through NFTs. Non-fungible tokens signify ownership, typically of unique artworks, videos, and other digital assets.
Pros and Cons of Cryptocurrency Crowdsales
- Opportunity to buy new coins at low cost
- Funding from many sources
- Among the first to buy, hold, or trade a cryptocurrency
- High risk
- Risk of regulatory action
- Opportunity to buy coins at a low cost: The overarching goal is to get a coin at its low initial price before it becomes popular and more valuable.
- Funding from many sources: Selling the new cryptocurrency to many different people can create a community for the new cryptocurrency and generate excitement and broader adoption.
- Among the first to buy, hold, or trade a cryptocurrency: Being one of the first investors in a cryptocurrency can create exciting trading opportunities for those who enjoy participating in high-risk, fast-paced marketplaces.
- High financial risk: There is a real possibility that tokens being offered in a cryptocurrency crowdsale will not create returns. There are tens of thousands of tokens in existence, their numbers are increasing daily, and most are designed for use within a blockchain—not as an investment opportunity.
- Risk of regulatory action: Future regulations or restrictions might broadly affect the cryptocurrency's value or the viability of crowdsales.
- Unregulated: Crowdsales, much like initial coin offerings, are not regulated. Many people have become fraud victims through ICOs and crowdsales.
Are Cryptocurrency Crowdsales Worth It?
Because cryptocurrency dominates the headlines, this type of crowdfunding has received attention from the Securities and Exchange Commission (SEC) because many of the tokens offered can be classified as securities. For example, in 2020, the SEC charged executives of Ripple Labs for operating an unregistered digital asset securities offering.
Because participating in a cryptocurrency crowdsale can be risky, it’s wise to limit your exposure to cryptocurrency crowdsales to a small portion of your investment portfolio.
A cryptocurrency’s value could increase by 2x, 10x, or even 100x, but it could also drop to zero. Strong community and wide adoption are necessary for a new cryptocurrency to succeed.
For many people, cryptocurrency crowdsales are not worth the risk. If you choose to participate in one, be sure not to invest more money than you can afford to lose.
- Cryptocurrency crowdsales are a method for getting new digital assets into circulation.
- Cryptocurrency crowdsales raise funds for developing a new digital asset that uses tokens and blockchain technology.
- Investing in newly released currencies is risky, so evaluating a cryptocurrency crowdsale carefully is essential.