A cryptocurrency crowdsale is a method of funding a project through the sale of digital tokens that give their buyer the right to participate in an idea being funded by the sale.
What Is a Cryptocurrency Crowdsale?
The cryptocurrency crowdsale is designed to turn ideas into reality through the issuance of tokens. Like Bitcoin, a token is not something you can physically hold. Instead, it is an electronic record—a kind of digital poker chip—stored on your computer, or mobile device. Tokens are sold on the Bitcoin blockchain and the Ethereum blockchain, which are public marketplaces accessible to anyone.
Tokens consist of a cryptographic string of letters and numbers designed to let you participate in the digital project that will eventually be launched as a result of the crowdsale.
Depending on what service the project offers, the token will serve as a kind of access ticket to that service. A crowdsale token does not grant project ownership or any voting rights.
How Cryptocurrency Crowdsales Work
Unlike traditional crowdfunding through sites such as Kickstarter or Indiegogo, a crowdsale doesn’t pre-sell a widget or promise to put your name in the credits of a movie. Instead, it sells you something you might not know what to do with unless you are clued in: the token.
On the Ethereum blockchain, the token is called ether, and on the Bitcoin blockchain, it is called bitcoin. These blockchains consist of cryptographically secured blocks. A new block is created for each trade made.
You can access the blockchain by opening an account with any brokerage firm that allows cryptoinvestments. These include eToro, Coinbase, and Robinhood.
Say the project is a mobile app that lets you find ridesharing partners. You might use the tokens you buy to pay for your rides. Conversely, if you are the owner of the vehicle and you give someone a ride, you may be paid tokens by the network. So the tokens are a kind of currency for use within a specific digital service.
The crowdsale generally happens before a project has officially launched its service. It is designed to generate funds for the development of the project, helping to pay for software developers, marketing budgets, and all the other things a startup needs. Some crowdsales accept Altcoin as the currency. Ether, Bitcoin, and selected Altcoins can be purchased on fiat exchanges and cryptocurrency-to-cryptocurrency exchanges.
A fiat exchange allows for direct transfer of U.S. currency into cryptocurrency, while the cryptocurrency-to-cryptocurrency exchange allows exchange of cryptocurrencies.
The crowdsale can also be used to measure interest in a particular project. If no one buys the tokens, then the company developing the project might want to reconsider its options.
In many cases, the tokens will be bought and sold on the open market after the crowdsale, gaining their own market value independent of the application they are used for. Early adopters who believe in the product or service can stand to make a good profit if it succeeds.
Disadvantages of Cryptocurrency Crowdsales
There isn’t yet much accountability in a cryptocurrency crowdsale. If a company sells a bunch of tokens and then collapses due to bad management, or simply vanishes, nothing protects the people who invested.
The U.S. Securities and Exchange Commission (SEC) has strict rules about issuing financial securities, such as shares in a company. There haven’t been many, if any, regulatory investigations of companies engaging in crowdsales.
Alternatives to Cryptocurrency Crowdsales
Initial Coin Offerings (ICO) are considered security sales by the SEC, which means they fall under SEC regulation. ICOs are tokens based on the value of the company. These represent ownership in the business and some give voting rights the way a traditional stock would. All ICOs must be registered with the SEC, just the way an Initial Public Offering (IPO) must be for a company's stock.
- A cryptocurrency crowdsale is a way of funding a project through the sale of tokens.
- These tokens are digital strings of code that allow for participation in the project.
- Crowdsales are not regulated by the U.S. Securities and Exchange Commission.
- These sales offer no ownership in the company, and can be risky.