ICOs vs Traditional Crowdfunding

Crowdfunding: Ways for a large group/organization to raise money

• Selling shares (selling ownership of the company and receive cash)
• Issuing debt (receive cash and pay back the amount borrowed with interest)
• Pre-selling of goods and services(receive cash before the delivery of the product/services

It is the task of the regulatory authorities to monitor and prevent dishonest and fraudulent people from attracting investments. 

ICOs generally do not have their risk addressed by regulatory authorities.

ICO is a method of raising funds used by cryptocurrency/blockchain-based startups. The new cryptocurrency created by the startup is sold to parties willing to invest in the project, in exchange usually for Bitcoin or Ether.

A Bitcoin/Ethereum address is usually displayed to the project’s website for receiving funds. The new cryptocurrency is expected to be used in the applications of startups, to fund the project, pay employees etc. If the project succeeds, the investors gain accordingly as the new cryptocurrency appreciates in value.

ICOs can bypass complex regulatory requirements required by banks and official authorities in traditional capital raising processes e.g. IPOs. “Donations” and “presale tokens” are some of the terms used to avoid investment related legislation.

Investors actually receive tokens which are then listed and traded on private exchanges (the equivalent of NASDAQ for tokens).

Ethereum is an example of a successful ICO project.

Ethereum’s crowdsale bitcoin address: https://blockchain.info/address/36PrZ1KHYMpqSyAQXSG8VwbUiq2EogxLo2

The ICO Process:

• Startup companies publish a whitepaper stating what the project is about, the goal of the project, the amount of funds needed to kick start the venture and how many tokens the pioneers of the project will keep in their possession
• Additional provided information include the cryptocurrency accepted and for how long the ICO campaign will run for
• Believers of the startup’s project buy an amount of the tokens offered usually in Bitcoin or Ether, similar to shares of a company sold to investors in an IPO
• There is a possibility that the funds raised do not meet the minimum target funds set beforehand. In such a case, the funds are returned to the investors and the ICO is considered unsuccessful
• TokenMarket is a website you may want to visit regularly in order to stay up to date regarding upcoming ICOs
• Anyone who wants to participate should evaluate the project beforehand in order to draw a fair conclusion regarding its potential.

ICO vs Crowdfunding Characteristics:

• Project is usually related to the application of blockchain technology/decentralization in various industries.
• Traditional fundraising methods may include any type of project
• The project’s webpage usually contains a whitepaper which may not identify risks
• There are no rules and regulations for full disclosure, as required in traditional fundraising methods
• Investors and people behind the project often do not need to self-identify
• Identities of investors are usually known in traditional fundraising methods
• The amount raised is transparent but no one is sure how much of the funds come from investors. BTC and ETH payments to an ICO deposit address are publicly visible but it is hard to know whether creators deposit some of the funds the project to create momentum
• Early investor advantage - Early investors are usually offered a better price than later investors. Ethereum’s early investors received 2000 ETH per 1 BTC and later investors received only 1337 ETH per 1 BTC. 
• Coin allocation - Project usually states how coins are going to be used (i.e. 70% will be sold in the ICO, and the project will retain 30% of the tokens). 
• Sometimes, if minimum target is set and not reached, investors are refunded and the project is cancelled. Whereas when maximum limit is reached, additional investments are refunded
• After the issuance, tokens can be either used in a new blockchain, as altcoins or on top of existing blockchain in the form of colored coins or smart contract tokens.
• ICO investors seek to make profits, as if they select a project which is going to be proved successful, probably the value of the tokens will rise. Some investors also believe that the token may be proved useful for their application use (e.g. running on a smart contract platform)
• Investors may also seek to sell the new tokens as soon as they are listed on cryptocurrency exchanges
• Cryptocurrency exchanges are mostly willing to list any token to their platforms, as this helps them to make money from trading fees. Therefore, the successfulness of the project does not really affect the exchanges. As long as there is volatility and active trading, exchanges are still able to make money
• This comes in contrast with the traditional stock exchanges, which impose requirements on the companies they list such as periodic public disclosure of financials
• For investors, only one thing is for sure. They have to wisely select the projects they choose to invest on

As a conclusion I would advise any potential investors to consider actual blockchain based projects to invest on, which should enhance disruptive character and useful services for the society. This would make their token indeed practical and potentially able to yield returns.