You’ve no doubt heard about “crowdfunding,” one of the biggest buzzwords of the twenty-teens when it comes to payments. Maybe your social media feeds are stuffed to the gills with advertisements soliciting investment in the Next Big Thing on platforms like Kickstarter and Indiegogo. Perhaps you’ve donated in a GoFundMe campaign to help out a friend or organization in need. These platforms leverage small contributions from a wide pool of independent funders in order to build up the capital that projects – from board games to tech
marvels to disaster relief efforts to a much touted bowl of potato salad – need to get from the conceptual stage all the way to customers’ doorsteps.
One of the -teens’ other biggest tech talking points is the rise of cryptocurrency and blockchain technology. You’ve probably also heard about the volatile, yet occasionally very lucrative, Bitcoin and its marketplace, now flooded with hundreds if not thousands of similar digital currency alternatives all competing for market share and valuation.
Blockchain + Crowdfunding = ?
Combining these two new-school financial technologies has created a compelling alternative to the traditional fundraising process for many startup firms. Where once their options were limited to seeking venture investment in exchange for equity, or going public in an IPO (initial public offering) and issuing stocks to would-be investors in the public market, tech-savvy startups have begun appealing to a wide variety of investors by launching blockchain tokens of their own on a fully digital, unregulated market. This process is called an Initial Coin Offering, or ICO.
Much like an IPO, in ICO is attractive to investors because the cost barrier to entry is low and the potential for return on investment is high if the issuing company gets off the ground. Imagine having bought a few shares of Google or Facebook back when they went public! As such, many investors want to learn how to get started trading and investing in the ICO market. What do you need to know about investing in ICOs, and how can you get started? Read on.
1: Know Your Market
Even within roughly the past year, ICOs have raised over $600 million as opposed to $140.30 million raised by established Venture Capital firms. That’s a lot of firms, and a lot of coins! It’s vital for any potential investor in an ICO to do their research. Firms will usually publish whitepapers to establish the goals of their particular project. These papers are not only informative to investors: they serve as a method through which new ICOs gain credibility and legitimacy among blockchain experts. There are many independent websites that track the launch of new ICOs, their whitepapers, and details about the associated firms. These sites will often help investors new to ICOs to learn more about the feasibility of any given ICO and its potential for success or failure. It is incredibly important to do your due diligence and research before committing your hard-earned cash, much in the same way that you would before investing in a stock. However, unlike stocks, ICOs are traded on an unregulated market, so it’s much easier for ICO issuers to mislead potential investors with false information. Research will help you spot any potential scams or unstable investments.
2: Get Digital Currency
The other major difference between ICOs and their stock market equivalents is that you cannot buy into an ICO with fiat currency. In order to participate in the ICO market, you will have to set up a digital wallet and purchase a currency – most commonly Bitcoin (BTC) or Ethereum (ETH) – with which to buy ICO tokens or coins (analogous to shares.) Different ICOs may only accept payment in particular currencies.
You will need to sign up for a digital exchange – Coinbase is one of the most popular – in order to trade fiat currency for digital currency such as BTC or ETH. You will also need a “wallet” to store that currency once it is purchased. A wallet is the crypto equivalent of a bank account with which you can send and receive different supported currencies, and is fundamentally different from an exchange account in that it provides private, secure keys for each transaction. There are a great many wallet apps out there, so find one that works with the currency you need and the ICO coin format you wish to invest in. As a starting point for ETH, we’d suggest MetaMask for its easy browser integration and simple interface.
Once you have researched an upcoming ICO with enough potential to warrant your investment, you can purchase coins which then reside in your wallet and are subject to changes in valuation over time, much like shares of stock. Most ICOs will have step by step guides on their websites to guide potential investors, but the process is similar for most.
If you missed out on the launch window of a particularly interesting ICO, worry not! There are online exchanges – a vast list of which can be found at ICOBench – on which you can trade among the coins of ICO offerings that have already been issued.
ICOs are burning up the charts at the moment and many investors have cast aspersions of a “bubble” scenario, but this article is not the place to speculate on that possibility. For now, good common sense, time investment in research and analysis, and good financial principles should direct investors toward ICOs that they find compelling. As this funding tool matures, it will likely also change and become more subject to regulation. For now, it has opened the door to a new breed of technologically savvy and digitally aware firms seeking to grow capital and achieve their business goals in new and powerful ways.