Crowdfunding and ICOs are both fundraising solutions. The terms are sometimes used synonymously, but they are fundamentally different in nature. Crowdfunding campaigns raise money in exchange for a financial reward. ICO participants buy a token.
478 A.D. – The Greek city states launched a counterattack against the Persian army. The Hellenic alliance sent out a fleet composed of 20 Peloponnesian and 30 Athenian ships under the command of Pausanias.
The confrontation with Persia turned out to be expensive. No single Greek city-state could pay for large-scale military campaigns, so each member of the pack would pay a fixed amount of tribute. Any proceeds from the campaigns, such as war booty, would be shared.
The ancient Greek city-states were essentially crowdfunding their military campaigns. Several entities put their funds together to share a “project”. They shared the revenues as well as the risks. Hence, crowdfunding is nothing new, the only thing that has changed is that we nowadays organize it online.
Initial Coin Offerings (ICOs), on the other hand, are an innovation of 21st century for sure. However, reading the popular news, there seems to be some confusion regarding the differences of crowdfunding and ICOs.
So, let’s shed some light on the issue.
Crowdfunders provide money in exchange for a financial reward; ICO participants buy a token
Crowdfunding has exploded after the financial crisis, when it became more difficult to take loans from banks. The World Bank has recently predicted that the global investment via crowdfunding platforms will hit US$ 93 billion by 2025.
The concept of crowdfunding is as straight forward as military funding in ancient Greece. A business is raising money from private investors for either a single project or an entire company. Investors mostly get a profit share and bear part of the risk. Most crowdfunding campaigns are organized online via platforms such as Kickstarter.
During an ICO, a company raises money by selling a token at a pre-designated price in exchange for either fiat or cryptocurrencies. Most ICOs are initiated by tech startups, especially blockchain companies. The token can eventually be used on the software platform built by the issuing company, or they can be sold on a secondary market.
ICO investors are not only “investors” but also users of the company’s product
Traditional crowdfunding usually results in the creation of a physical project or product. It is up to the campaign creator in which way he rewards investors.
Mostly, investors get a profit share, sometimes also voting rights. If they simply get an interest paid on their principal, it’s called “crowdlending” – essentially the same as p2p-lending.
Hence, the value of the investment comes down not only to the success of the project, but also the reward scheme.
During an ICO, and investor buys a token, hence the right to a product or service. ICO investors do neither receive a stake in the issuing company nor rights to the company’s profits. Technically, they are not only “investors,” they are also users/ customers of the company’s product.
The success of an ICO depends on how the market perceives the token value
ICOs do not create a physical product, but a digital product that is listed on an exchange and publicly traded. Therefore, investors are dependent on how the market perceives the value of their token. This market value and thus the value of an ICO investment is mostly driven by the expected future usability of the platform.
Moreover, the issuing company sets the initial value of the token. But pre-ICO, it’s almost impossible to predict its future success. Thus, tokens are prone to substantial under- or overvaluation.
On the other hand, crowdfunding investors may receive a reward on their investment. But there is no secondary market for trading crowdfunding perks like there is for ICO tokens. Hence, investors cannot reap any capital gains by selling their investment.
That said, there are always two sides of a coin. While the risks with an ICO could be higher, potential returns will be higher as well.
Crowdfunding and ICOs are both largely unregulated, but STOs could change the game
ICOs have earned themselves a sketchy reputation, as they are subject to little or no regulation. However, most crowdfunding projects are not regulated either.
Some crowdfunding platforms add an extra layer of security, by running a fraud department that conducts background checks. But that’s nothing anybody should rely on.
Recently, there has been a major trend in the ICO market towards more security. The new concept of STOs (Security Token Offering) aims at creating a regulated token market.
STOs sell tokenized investment products and have to be registered with the financial market authority in the respective country. Hence, they are subject to strict regulatory oversight and financial market laws.
Crowdfunding and ICOs are fundamentally different in nature. Investors should understand the differences and always conduct a solid due diligence before investing in any project.
Both financing solutions are growing in popularity, but the opportunities that come with blockchain technology are way more exciting than traditional crowdfunding platforms. The blockchain scene is still young, but financing volumes raised via ICOs have doubled in 2017 and again in 2018. This trend is likely to continue.
And pointing back to the Greek Armada: An Army Coin is already in the making, not in Greece, but in the US.
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