Can you use crypto for fundraising?

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Since the time that cryptocurrency was introduced to the world at the beginning of 2009, a lot of developments have taken place. Crypto has made its way to almost all areas of finance, and this includes fundraising. The use of blockchain technologies has opened up many ways for startups, non-profits, and established businesses to raise capital. These are in the form of Initial Coin Offerings (ICOs), Initial Exchange Offerings (IEOs), and Security Token Offerings (STOs).

In this article, we will look at different ways in which crypto can be used for fundraising, the benefits offered, and the challenges of each method.

Initial Coin Offerings (ICOs)

This is one of the earliest and most popular methods of fundraising used by projects that run on the blockchain to raise capital. An ICO is when the founding company issues or sells its own cryptocurrency tokens or coins to investors in exchange for established cryptocurrencies like Bitcoin or Ethereum. 

The ICO process starts with the development of a blockchain-based project by a dedicated team. The project can be a new cryptocurrency, a decentralized app (dApp), or a protocol. The protocols provide a foundation for building decentralized applications, tokens, and other blockchain-based projects. There are different types of protocols in crypto, such as smart contract protocols (e.g., Ethereum's ERC-20), token protocols, and cross-chain protocols (e.g., Polkadot and Cosmos), among others.

After project development, the team publishes a detailed whitepaper that clearly states what the project's goals are, the technology it uses, and its financial plans. When the new token or coin is created, the team launches an ICO campaign with a clear fundraising goal, token price, and the duration they intend to sell the token for. The new coin is bought by investors and speculators with established and more stable cryptocurrencies, and when the fundraising is done, the collected funds are used to develop and launch the project.

The tokens are marketed as things that could have value in the future if the target funding is reached and the project is launched successfully. This is the time that makes or breaks many investments because less than half of ICOs make it to the 6-month mark after the offering. However, those that succeed have the potential to earn investors huge gains on their initial investment. Once a token passes the 6-month mark, its chances of becoming the next 1000x crypto of 2024 increase. Eliman Dambell from Techopedia mentions that a coin's potential to achieve 1000x returns is based on market trends, community support, and technological advancements, among other things. As crypto becomes more popular and widespread, a growing number of investors are seeking the next crypto that shows great promise of large returns. 

• ICOs provide startups with an opportunity to raise a large amount of money quickly from an international pool of investors since the startups do not have access to traditional venture capital.

• The fundraising is more inclusive since investment is not limited to accredited or institutional investors.

• Tokens issued in ICOs can often be traded on cryptocurrency exchanges soon after the ICO, providing liquidity to investors and founders alike.

• Since ICOs are mostly used to fund blockchain-based projects, they encourage the development of decentralized technologies and applications.

• ICOs are not affected by geographical boundaries or borders like traditional fundraising methods, meaning that investors from all over the world are free to buy the tokens.

• The process of launching an ICO can be less expensive and faster as compared to traditional fundraising methods like venture capital.

• Because ICOs operate in a regulatory gray area, a lot of challenges may arise, such as compliance issues and possible shutdowns.

• The anonymity and lack of regulatory oversight associated with an ICO make it attractive to fraudsters, whereby they manipulate the market by inflating the price of the token and then selling the tokens off for a profit, leaving investors with worthless tokens.

• Cryptocurrency markets are highly volatile, and the value of ICO tokens can fall dramatically, leading to potential financial losses for investors.

• Many ICO investments are speculative, with no guarantee of return on investment, and investors may lose their entire investment if the project fails.

• The technology behind ICO and blockchain projects can have security issues, leading to hacks and the loss of funds.

• Some ICOs lack transparency regarding their business model, team, and progress, making it difficult for investors to make informed decisions.

• In case an ICO project fails or the money raised through the fundraising activities is not used towards the development of the project, it can be difficult to hold the project teams accountable without the traditional governance structures.

Security Token Offerings (STOs)

This refers to the issuing of tokens that are backed by real-world assets, such as shares in a company. These tokens are considered securities and are subject to regulation. It can be considered a form of crowdfunding since it involves raising money from a large number of people.

• Unlike ICOs, STOs are structured in such a way that they are forced to comply with securities regulations, providing investors with a clear legal status of their investment.

• Because they comply with regulations, STOs are more attractive to institutional investors who seek assurance that an investment is legal and secure.

• Security tokens can be traded on secondary markets, providing liquidity for investors.

• Tokens can represent fractional ownership in assets, making it easier for investors to buy and sell smaller portions.

• The laws governing securities differ from country to country, making it difficult and expensive to deal with the various existing laws.

• The infrastructure for trading security tokens is still developing, with limited platforms and exchanges available for secondary trading.

• Although security tokens have liquidity potential, the number of active participants in the market determines the actual liquidity. 

Initial Exchange Offerings (IEOs)

IEOs are carried out on cryptocurrency exchanges, where the exchange acts as a middleman to review and list the token sale. IEOs can give investors a more secure and convenient way to participate in token sales, but due diligence is still important. An IEO can be likened to gambling in terms of uncertainty, risk, potential for high returns, and the fact that the outcome is beyond the individual's control.

• Projects are vetted thoroughly by the exchange acting as a middleman, which gives the token some credibility, especially if it is a reputable exchange.

• Tokens are listed on the exchange immediately after the IEO, providing immediate liquidity for investors.

• The people who are already using the exchange are potential investors, which increases the chances of a successful token sale.

• The fees that are charged by exchanges for hosting an IEO are very high, which can be a significant financial burden for startups.

• Some exchanges may require a share of the token sale proceeds, which reduces the available funds intended for the project.

• In the event that the exchange faces technical issues, regulatory problems, or security breaches, it can affect the IEO and the project's reputation.

Conclusion

It is apparent that cryptocurrency can be used for fundraising and has in fact grown popular over the years as a way of raising capital. Although there are risks and regulatory uncertainties associated with crypto fundraising, the expected benefits that the concept of cryptocurrency offers investors and developers outweigh the threats.