Before the world started seeing cryptocurrency as a valid way of sending and receiving money, global charities and fundraisers relied on slow, geographically-limited, censorship-prone, and expensive donation methods. Admittedly, raising funds to promote educational content for children with special needs wasn’t a particularly easy feat a decade ago – just, for example. Bitcoin came, and activities in the crowdfunding space started breathing a new life. Fundraising for charity causes moved from local to international audiences, and project champions shifted their reliance from donors to the general public.
In this article, we look at how the adoption of cryptocurrencies (Bitcoin) has transformed crowdfunding. We will review why Bitcoin was best suited for the job and the different forms in which crowdfunding has manifested.
It would be unfair to dismiss the contribution that altcoins have made to the transformation of crowdfunding. However, Bitcoin remains the leading crypto and, by far, the biggest contributor to this transformation. The transformation has mainly been due to the following characteristics, which fiat currencies lack:
#1. Anonymity – There are crowdfunding causes in which contributors wish to remain anonymous. The (relatively) anonymous nature of Bitcoin has made this possibility a reality.
#2. Global presence – Unlike fiat money, Bitcoin is available in virtually all the countries of the world. This has made it a suitable currency for collecting donations from multiple countries.
#3: Lower transaction costs – Compared to traditional money transfer platforms, Bitcoin offers relatively lower fees. While this might not make much difference to a user donating $5, a charity could realize massive savings, particularly if it has to bear the transaction’s cost.
While Bitcoin has taken the lead, other cryptocurrencies have gained popularity in the recent past, especially due to increased privacy concerns. For instance, Monero, Zcash, and Dash have seen a rise in use among fundraisers focused on privacy.
Centralized versus Decentralized Crowdfunding
The case against centralized crowdfunding has been gaining momentum, with proponents arguing that it goes against the spirit of cryptocurrencies. Centralized crowdfunding has nothing to do with the centralized nature of fiat currencies. Instead, it is the idea that crowdfunding should not be facilitated by organizations in business just for that. There are firms, such as Patreon, whose core business is collecting funds on behalf of charities. Such organizations have been condemned for giving preferential treatment to charities they consider worthy of public support.
Given this background, crowdfunding can either be organized privately or through centrally-managed platforms. Similarly, it can be done for individuals or organizations. Crowdfunding platforms are able to reach a wider audience within a short time, but usually charge some commission. Some of the common ones include Classy, Fundly and Crowdwise, which are popular among nonprofits. For personal fundraisers, sites such as GoFundMe and YouCaring are common. Individuals can also raise funds by posting requests on social media. The bottomline is, there is no one way to crowdfund.
So, let’s look at some of the different ways through which Bitcoin has made the crowdfunding scene more exciting.
#1. Venture Capital (VC) Funding
When small and medium-sized enterprises want to expand, they usually seek capital from investors. In such cases, investors offer their support in exchange for part ownership of the enterprise, which they call equity. Such investors can end up acquiring a majority stake in the enterprise and controlling the company, possibly against the founders’ vision. This undesirable situation is easily avoidable through alternative crowdfunding approaches discussed below.
For various reasons, such as higher returns, venture capitalists have shown a lot of interest in supporting blockchain projects such as PiggyBank, BlockCypher, and Chronicled. The growing prospects for Bitcoin have further boosted the confidence venture capitalists have on blockchain-based startups.
Apart from inspiring traditional venture capitalists, Bitcoin has also created a new breed of crypto-focused VCs such as Node Capital. The contribution of such VCs in powering new enterprises cannot go unnoticed. For instance, investments in companies such as Coinbase and Ripple are now paying off handsomely.
#2. Initial Coin Offerings (ICOs)
ICOs have become the new standard for startups to raise funds for their projects. Unlike traditional venture capital funding, ICOs do not target high net-worth investors, neither do they promise equity in the business. On the converse, they allow ordinary people to contribute to the growth of a project and get tokens in return. These tokens can be redeemed, exchanged for crypto or fiat money, or accord holders special privileges in the company.
ICOs provide startups with a promising avenue for generating funds for whatever project the founders envision. Without the widespread adoption of Bitcoin, most of these startups would still be struggling to raise capital to bootstrap their operations.
#3. Anonymous Donations
Crowdfunding has found its way to anonymous donations, especially in the wake of increased government censorship. Where authorities believe organizations are raising funds for clandestine or outright illegal projects, they normally freeze donations. For organizations that insist on pursuing their fundraising objectives despite government restrictions, anonymous fund transfer becomes the only available option.
Bitcoin offers a substantive level of anonymity when it comes to transferring funds. While receiving addresses can be linked to a specific organization, the actors behind the organization can choose to remain anonymous since transacting with Bitcoin does not necessarily involve any know-your-customer (KYC) processes. The obscurity provided by Bitcoin’s privacy also benefits donors since those who do not wish to be identified with a certain movement can donate without leaving any trace of their identity.
Activism has equally benefited a great deal from anonymous donations, thanks to Bitcoin. Activist movements, such as #EndSARS would have suffered a large blow if donations were restricted to fiat money. You see, it is very difficult to raise money to fight a government when you’re relying on currency issued by the same government you’re fighting. Other than beating logic, such efforts are tantamount to pushing against the wall.
Bitcoin has shaken many finance subsectors. Crowdfunding, which is a form of alternative funding, is among those sectors that have seen a massive transformation. Bitcoin has made crowdfunding possible from privacy-focused charities to those seeking support from global audiences in circumstances where it was previously impossible. The idea of crowdfunding using crypto has also inspired new funding initiatives, such as anonymous donations. It has also become easier for small organizations like startups to raise funds to power their ideas. End users have had new opportunities to contribute to ideas they believe in and would love to support – something that was less heard of before the age of Bitcoin crowdfunding. Overall, Bitcoin has made crowdfunding more accessible to the masses, which has in turn inspired radical ideas across the fundraising industry.