Built on the cryptocurrency market, millions of dollars worth investments have been raised through ICOs.
But, before we consider how to milk this new fundraising opportunity in crowdfunding, let’s first get down to the basics of what an ICO is and how is it related to crowdfunding.
Before we get into ICO crowdfunding platforms, let us discuss crowdfunding.
What is crowdfunding?
Crowdfunding implies raising money for your business or idea with the collective efforts of other individuals. This could be family, friends or any other individual who trust your idea and wants to invest in it for a share in the profit.Though the crowdfunding space is highly volatile as of now, many startups are taking up crowdfunding for funding their venture as opposed to the venture capital model.
Another interesting feature regarding crowdfunding is the merging of its earning possibilities with MLM business.The MLM top leaders can crowdfund their business by accepting small donations from the members of their network and accumulating the funds for the business.
Crowdfunding software is available now a days to connect the individuals with an initiative with potential investors. Payment gateways are integrated with the software to aid the easy transfer of payments. This software helps to keep track of the payments received and details of the investors.
What is ICO?
An ICO or Initial Coin Offering is an answer to the highly controlled and centralised fundraising process. Ideators ditch the complete hassle of the lengthy funding process and raise the capital by blockchain technology.With just a plan of action on a white paper, a website and basic skills in coding, anybody can raise the requisite amount of capital from the cryptocurrency market.
Role of Bitcoins and other tokens
Bitcoins and other token currency forms the core of this fundraising process.Today, with the onset of Ethereum, a platform for creating token currency, there are plenty of tokens and an equivalent number of token trading platforms in the market.
You can build your own cryptocurrency such as Bitcoin, Litecoin, Etherum, NEM, etc. and promoting it is a relatively easy task now.
How does ERC20 tokens come into play?
ICOs utilise ERC20 tokens majorly for their crowdfunding activities. The enterprise that wants funding will develop ERC20 compliant tokens and float them . The investors buy them and have an opportunity to make gains. The enterprise will continue developing its own blockchain.Did you know?
Ethereum is a cryptocurrency project that managed to raise $18 million through ICO crowdfunding and reached an approximate of $1 billion market cap in 2016.Addressing the Risk factor in ICO crowdfunding
Experts call ICO as a high risk and high reward investment. The absence of regulations from the centralised institutions has made this decentralised system of fund raising a bit haywire.Because ICO is little bit on the unregulated plateau, the possibility of fraud or scams should be on your radar.Though there is a high risk involved due to the absence of regulations, with the execution of smart contracts, transparency has been imparted to the whole system of ICO crowdfunding.
Smart Contracts are self executing contracts encoded into blockchain. Upon the fulfillment of the contract, the payment is transferred to the party else it goes back to the other party.
Know more about the execution of the smart contracts.
How will ICO crowdfunding help the enterprises?
Speaking in terms of economics, there is a period of negative cash flow in the period from the conception of the project and profitability. This is the reason why a lot of good ideas remain in the cocoon. Here is where ICOs becomes the saviour.Initial Coin Offerings allows the startups and existing business to fund the project in this period of negative cash flow until they begin to generate positive cash flow from the sale of their product/service.
Before ICOs, investors were limited to angel investors and Virtual Capital investors but due to the geography, social class and language barrier, this is not accessible to everyone. The entrepreneurs have to pay a hefty price too. These investors can change the direction of the project to routes the innovators don't want to pursue. They may demand significant equity in the new business.
How are the funds raised?
When a startup firm wants to raise money through an ICO, the events unfold as follows.
1.The firm creates the plan on the white paper which usually consists of the following details.
1.1 What the project is about.
1.2 Upon completion, what needs will the project address.
1.3 How much money will be required to undertake the venture?
1.4 How many tokens will the benefactors keep for themselves?
1.5 Which type of money will be accepted.
1.6 How long will the campaign last.
2. During the campaign, supporters of the firm’s project will buy the distributed cryptocurrency with fiat or virtual currency. This can be compared to shares of the company sold to investors in an Initial Public Offering (IPO) transaction.
3. If the required amount of money could not be raised, the campaign is deemed unsuccessful and the money is returned to the investors.
4. If the funds could be raised within the specific time frame, the money is used for initiating the new scheme or completing an existing project.
Bitcoins and other nft token currency forms the core of this fundraising process.
Though the concept is still in the incubator, we can be assured that there will be more innovations in the future with blockchain technology making rapid strides. In the future, ICO’s might face some regulations from the government, but as of now, the industry seems to be quite positive about the future of ICO.
Addressing the apprehensions with ICOs?
It is quite possible that there will be a lot of apprehensions especially since the investment through ICO involves a huge risk factor and they are justifiable. To be on the safer side, people with a sound knowledge of cryptocurrency should consider this investment. One must be careful while investing in ICO campaigns as there are a lot of fraudulent campaigns too.Though the concept is still in the incubator, we can be assured that there will be more innovations in the future with blockchain technology making rapid strides. In the future, ICO’s might face some regulations from the government, but as of now, the industry seems to be quite positive about the future of ICO.
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