How to Raise Seed Capital as a Crypto Start-up
An Initial Coin Offering (ICO) is the means by which cryptocurrency start-ups raise their seed capital. The process is unregulated and avoids both the scrutiny and accountability demanded by banks and venture capitalists. Backers purchase the new cryptocurrency for cash or Bitcoin at an introductory rate, hoping to profit when the project succeeds.
Crowdfunding, Initial Public Offerings and ICOs
Crowdfunding took hold shortly after the turn of the century as a popular means of raising money for personal projects and small businesses. Some crowdfunding proposals offer rewards, but crowdfunding is essentially a vehicle for donations. In short, donors don’t expect to see a return on their contribution.
Initial Public Offerings are the first shares that a company sells when it goes public. It’s the way a private company raises capital for expansion, and investors expect the shares they purchase to rise in value over time and generate a profit. IPOs are highly regulated and subject to oversight by financial and governmental authorities.
Initial Coin Offerings are basically a hybrid of the two. They draw investors who are looking to turn a profit but do so in an entirely unregulated market. The cryptocurrency start-up will set a minimum funding requirement to launch their project, and then sell their coins (tokens) to backers at a low introductory rate. If they reach their target within a specified period of time, the money raised will be used to further the project. If they fall short, the money is returned to the investors.
Why Invest in an ICO?
In theory, there’s money to be made by getting in on the ground floor in the rapidly expanding cryptocurrency market. In some cases, a great deal of it. The Ethereum project sold its tokens for pennies and each is now trading above $200. Bitcoin has quadrupled in value over the past year. There are now estimated to be over 800 cryptocurrencies in circulation, in a market worth almost $90 billion.
With new ICO start-ups emerging almost daily, there’s obviously an eager demand for what many see as fast and easy money. Others, however, are not so sure.
The Risks
In an industry entirely removed from any form of regulation, the incidence of fraud is high. Unsolicited offers that promise guaranteed investment returns should be viewed with a healthy dose of skepticism. There is absolutely nothing guaranteed in the world of ICOs, and at best it can be viewed as a high-risk investment with the potential for above average returns.
Established blockchains like Bitcoin are already meeting most cryptocurrency needs, and it’s only a matter of time before the market becomes saturated. The tokenization of everything from gambling to real estate will, at some point, hit a wall. As of February 2018, it is estimated that over half the ICOs issued in 2017 had failed. Ultimately, the value of all cryptocurrencies is tied to the price of Bitcoin, and as that market fares, so do your tokens.
Finally, regulators are starting to catch up to the cryptocurrency market, and the Chinese have already banned ICOs. Regulating the industry won’t necessarily be a bad thing, removing some of the uncertainty that currently exists in backing new cryptocurrencies. Your new meal ticket, however, may not be able to meet those yet to be imposed regulations.
The bottom-line is that while ICOs are far from secure, they can be profitable if you do your research and know exactly what the project you’re backing hopes to achieve. That means educating yourself on the fundamentals of cryptocurrency exchanges, being able to spot a scam, and asking the right questions when you find a project that you think has potential. Start small and invest only as much as you’re prepared to lose, and one day, you may actually find a winner.
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