There are a lot of startups, one way or another connected with cryptocurrency. At the same time, the use of blockchain technology has become widespread in various spheres of human activity. But even the most promising and relevant ideas cannot be realized without the attraction of capital from outside. Moreover, smart, but relatively poor young people who do not have the necessary start-up capital, create a large share of new developments. The success of their undertakings depends not only on the value of their ideas but also on the ability to organize properly the collection of the necessary funds. We will take a closer look at one of the ways to attract funds to projects – crowdsale.
Table of contents:
- What is crowdsale?
- Why do developers need a crowdsale?
- How is crowdsale different from crowdfunding?
- The legal aspect of investing.
- How to minimize risks?
Users greeted quite reservedly the emergence of the first cryptocurrency. There was a great deal of skepticism. However, the digital money industry has been able to overcome this skepticism for 10 years of existence. Cryptocurrencies demonstrated rapid growth and potential for further development.
What is crowdsale?
The sphere of digital money often presents to audiences rather unusual and relevant developments. Not only large investors are willing to invest in them, but also not very wealthy users. There are many investment options for both big money and moderate amounts. Such diversity is one more confirmation of the development of the crypto market.
If you take WP (White Paper) of a serious project, you will find in its description several ways to attract investments. Among them, quite possibly, you will meet and crowdsale. If we talk about ICO (initial offer of coins), then a comparison with an IPO (initial public offering) is appropriate. At the same time, crowdsale is comparable to crowdfunding.
ICO brings cryptocurrency to the market, making it a subject of trading accessible to everyone. Crowdsale is a pre-sale of a token, even before its release on the crypto exchange. The coin has a low price at this stage, which will not be either on the ICO or on the exchange. If this cryptocurrency will grow in price in the future, then the inverters will receive a significant profit. In this case, income can be expressed in hundreds and even thousands of percent.
Thus, crowdsale for the development team is a simple way to launch an idea at the initial stage of its development, without a long search for a large investor. This is an opportunity to purchase tokens at the lowest price for investors, as well as to receive additional bonuses from their purchases. Some projects provide for the payment of dividends to holders of tokens or the opportunity to use the services of the company.
The circle of people, participating in the crowdsale, is limited and consists of serious large investors who are ready for significant investments. Although willing is much more.
Why do developers need a crowdsale?
Behind any undertakings is the time-consuming work of the startup team. The cost of developing and maintaining software functionality. Conducting research and marketing activities. All this requires funding, which is often not affordable for the development team. Therefore, the main goal of a crowdsale is to attract collective funding to a new project to support its entry into the market.
The second goal of a crowdsale is no less important, although it has a secondary function. Developers can evaluate the viability and relevance of a future project by implementing a token’s trade. Low demand for coins indicates the presence of deficiencies in the concept or the lack of sufficient demand for the final product. There is still an opportunity to make significant changes or to stop the project at stage of crowdsale. In addition, the investor can calculate future profitability and income based on statistics of the sale of coins.
Tokens enter the market and begin to live their own lives after launching the project. Investors buy and sell them. Coins have a market price, which, with the successful development of events, grows and promises participants of pre-sale a huge profit.
How is crowdsale different from crowdfunding?
Traditional classic crowdfunding has the goal of attracting financing in real money. The developers, seeking funds to create a new product, use this. Pre-orders for a future product or service are formed in the process of collecting the necessary funds.
Crowdsale is a different process. Buyer receives crypto coins or tokens. This asset is not material. It’s just an electronic record, which is confirmation of involvement in a particular project. This entry provides access to the service offered by the developer. The token serves as a kind of internal payment unit. For example, you invested in a service related to the provision of taxi service. After the launch of the application, you can use to pay the pre-sale tokens for travel.
Thus, the main difference between crowdsale and crowdfunding is in the form of an asset, which is acquired by the buyer. In addition, such kind of sale offers complete independence of the project and no need to legalize the income of the investor.
The legal aspect of investing.
Recently, investment in new projects, related to the development of blockchain technology, is at the peak of popularity. However, not all developers can implement their projects with the help of crowdsale. There are some reasons for this:
- The project didn’t receive sufficient funding, and investors, who supported it, lost irrevocably their investments.
- A prospective project may lose its position drastically due to management errors.
- The development team, after receiving financial support, may terminate its implementation.
Crowdsale is a high-risk financial investment, which, in addition to the standard risks for the investor, is complemented by the absence of a legislative settlement process. Accredited investors can count on the legal protection of their investments with traditional investing. A cryptocurrency market has a decentralized management system, in which most legal laws don’t apply to it. At the same time, finances belong to the informal sector of the economy.
The lack of political influence on cryptocurrency provides it with many advantages. However, the holders of tokens are not at all protected from fraudulent actions. There is no actual legalization of relations with the project team when investing in a crowdsale. Cryptocurrency investors have to rely only on the credibility and reputation of the creators, taking into account the high degree of risk of investments.
The organizers and participants of the crowdsale are forced to rely on such rather shaky categories as trust and reputation. They take on quite serious risks because they have no legal status. A simple example. The company runs a crowdsale and implements a large number of tokens. After that, the project either collapses due to errors in management or disappears. What should depositors do, whose rights and money are not protected? Therefore, there is plenty of work for legal professionals. However, first of all, the interest of governments and other state structures is needed to correct the existing situation during crowdsale.
The only consoling fact is that the cost of tokens after entering the market can bring significantly greater profits not only to investors but also to the creators. Thus, the development team is interested in the successful implementation of the idea after crowdsale.
How to minimize risks?
The highest profitability comes from projects with a high risk of losing investments. You should follow general rules and take into account the specifics of the investment method in order to minimize risks and really earn money on a crowdsale. What should an investor pay attention to when choosing an investment object?
First, it’s necessary to evaluate the elaboration of the idea. This is the subject of funding at the crowdsale stage. Further success of the project depends on prospects and correct formulation of the idea. It’s desirable that the chances of its success are confirmed by successful testing or actual development.
Crowdsale comes from the words “crowd” and “sale”. This fully reflects the concept of the event. The high level of interest of the crowd of investors to the project indicates that it’s to be implemented. In addition, the tokens will be available for sale on the cryptocurrency exchanges soon. At the same time, a low indicator of interest may be the reason that the project will not even pass the ICO.
The competitiveness of the future project has a huge impact on the value of the company’s tokens. There can be several similar projects at the same time at the crowdsale stage because the cryptocurrency market is developing at a rapid pace. This increases the risk of failure of one of them due to the lack of adequate funding. The investor should also consider competitors, which already have a project. Properly assess the relevance of the project among end users. Will clients need services and ideas?
Liquidity of tokens can significantly reduce the risks of their purchase during crowdsale. Projects offer various further uses of own coins. For example, profit from the company’s dividends, internal project use, and sale at an increased cost. A good project has several options. So, if the project was realized, but the cost of tokens did not change the indicators too much, then the investor can still count on income. He can get it from the profit of the services, which the service provides.
During crowdsale investor must carefully study the White Paper of project, which reflects the concept and future development strategy in full. Study the team members and their previous successes. Some users believe that the documents in such cases are compiled equally for all projects. If they have already dealt with investing in crypto development, they will not see anything new there. This is a mistake. In each case of crowdsale, the conditions for attracting finances and the distribution of future incomes are unique. Belated claims on your part will not correct the situation. Therefore, if you are unable to independently examine and evaluate the documentation, then contact the specialists for expert assessment. In addition, in some cases, the companies, initiating the crowdsale, turn to the experts for project evaluation. Then everything is easier. You should ask about the reputation of the experts, which made the examination.
The future investor should pay close attention to the development strategy during crowdsale. The attracted finance is important to direct to the development of the company’s capitalization. Developers should not only have perfect knowledge of the blockchain and IT technologies to do this. They need to understand business planning and management well.
The main features of a reliable project:
- the fundraising company is registered;
- the documentation is correct;
- the team has a clean reputation;
- the site has full information about the agreements and rules;
- the project has an escrow account and a ready working protocol;
It’s always worth remembering that high-risk projects should invest only free finance, allocating only part of the investment portfolio for one project.
Crowdsale is a new convenient investment attraction method. It provides additional opportunities for earnings to investors and removes the need to confirm income and pay tax on it. It has a high level of profitability and risks. An investor can earn thousands of income even by investing in insignificant finances.
However, there are a number of shortcomings of investments of crowdsale. First, all risks are borne by the investor in the absence of any legal regulation. Secondly, profit is possible, but not guaranteed. Sometimes it has to wait for years, until the moment when the coin “shoots”. Sometimes this may not happen at all. In addition, a fraudulent project may be disguised as a crypto project. Developers will disappear immediately after collecting money.
Thus, the future investor should pay close attention to the study of the development strategy and the developers, on the actions of which the future cost of the token and the efficiency of the project depend. Thanks to this, he will be able to minimize the risks during crowdsale.