What is a Cryptocurrency Crowdsale and How Does It Work?

Following the recent and ongoing explosion in digital currency and the subsequent creation of numerous online business start-ups and projects, the crowdsale has been born. Along with crowdfunding, it is now increasingly employed as a tool to raise capital for a diverse range of business endeavors.

Crowdfunding has taken off to such an extent that there are now websites such as Kickstarter and Indiegogo that have been created with the express aim of generating funding through donations. The latest evolution of the idea that uses cryptocurrency has now entered the fray and it goes by the rather appropriate handle of "crowdsale".

The Difference between Crowdselling and Crowdfunding

Before delving further into exactly what cryptocurrency crowdselling is, and how it works, it may be useful to examine how it differs from conventional crowdfunding. While crowdfunding nearly always offers its investors a product, a service, or even some citation as a benefactor, a crowdselling doesn't.

Instead, crowdselling, in particular, cryptocurrency crowdselling, sells its supporters a token or cryptocurrency coin. Those buying into the crowdsale don't get to physically hold a coin or token as they are digital entities that have a market value. This does, however, put another potential benefit into the hands of the investor in the form of a tradeable digital currency. This may also include the possible benefits of access to the service or system that the investment is being generated to provide.

Blockchain Technology and Crowdselling

One of the main features of crowdselling in cryptocurrency is that it is able to make use of the tried and tested blockchain technology through the creation of smart contracts. The contracts are pre-programmed to calculate both equity and token (coin) values in the form of rewards. The system makes use of the proof of ownership system that is built into the contracts tied to each investor's specific level of funding.

Crowdsales can be viewed as a form of crowdfunding within the digital realm of cryptocurrency. One of the more flexible aspects of blockchain technology is that there is an ability to retrofit it for specific needs or tasks and this has also made it an ideal fit into the crowd-selling mix.

So why have a Crowdsale?

One of the main benefits in favor of the cryptocurrency crowdseller is that funds for their project can be raised outside of the auspices of conventional banking and financial institutional systems. It can also offer an efficient and effective method to generate large amounts of funding over a relatively short time span.

A large chunk of start-up costs is attributed to software development, marketing and in many cases operating hardware. It follows, that a new enterprise is likely to want to generate funds before the project actually goes live.

A Potential Double Whammy

Another attractive aspect that plays a major role in attracting people to a cryptocurrency crowdsale is the effectual double usage of the coins or tokens that they acquire during the sale. Not only does the purchase of the digital currency make their stake in the initial project of value, once they are purchased, but the digital coins can also then be traded on the open market or even sold.

Such an attractive proposition is one that draws in potential investors who are able to recognize the possibilities of buying-in low to cash out later if the project enjoys a high level of success. That said, cryptocurrencies have a reputation for being highly volatile trading commodities which provides a further possible positive for investors over time.

The Pros & Cons of Accountability

One of the primary reasons why many start-ups are turning to the cryptocurrency crowdsale model is because it is, as of yet, unregulated and free from the interference of financial controls. While this is great news for the many businesses and individuals that have chosen it to fuel their start-ups, it does make it less secure than conventional investing.

In a worst-case scenario, an investor could potentially end up with a few lines of worthless code that represent the investment they thought they were making. While most of the schemes that are funded in this way are created to support genuine projects, there are some that will be designed with the sole intent of pulling in cash. They may even subsequently vanish completely from the digital landscape.

Whilst there are no guarantees with any kind of investment either "real world" or digitally based, at least investors in the traditional sense are afforded the protection of certain checks and balances. Both the investor and the business involved are compelled to be accredited to some minimum standard requirement that is not afforded to those involved in cryptocurrency crowdfunding.

A Double-edged Sword

This absence of accountability is one of the factors that have made cryptocurrencies and crowdselling such an attractive proposition for both the project creators and the investors.

Another advantage is for those who have vigorously bought into the philosophy of the community and decentralization that cryptocurrency provides along with certain levels of anonymity and security.

At this moment in time, investors and project creators enjoy the benefits and the risks that come with the digital territory. If or when the current situation should change it is questionable whether the cryptocurrency marketplace is likely to benefit or suffer under such increased accountability.

Is crowdselling the way to go?

Cryptocurrency crowd selling is, at present, on the roll and for all intents and purposes, it looks set to continue rising as a highly effective method of fundraising and digital currency investment. While there are rumblings of rumors concerning increased accountability in the realms of digital currency, as of yet, there is no evidence to suggest any changes are just around the corner.

As with any kind of investment, there will always be a level of risk that can naturally balance out the potential gains of shrewd investors.

The key to maximizing the chances of success for both investors and project creators is, therefore, likely to lie in a well-planned and professionally executed cryptocurrency crowdsale.

Cover Photo by Shuttershock