crowdfunding – Forex Academy

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.

Why Bitcoin?

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.

Final Thoughts

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.

It is already a cliché today to say blockchain and cryptocurrency have revolutionized pretty much every industry. Blockchain started a revolution. The old system of the banking industry and governments were quick to realize the revolutionary power of the tech. That is why there were attempts to regulate or outright ban blockchain and crypto in some countries.

However, blockchain has won against all naysayers.

For the financial industry, it has been the Holy Grail that enabled small businesses in the United States – over five million of them – to access capital and to thrive. Entrepreneurs who had little to no chances to fund their ideas without begging the banks and venture capitalists have been among the biggest beneficiaries of the cryptocurrency boom.

It is true to say the odds have been good for the people who, for years, have been shut out of opportunities because of their gender, age, race, or where they are from. Considering that small businesses have always been the backbone of the US economy, the problem of open bias in the access to capital was a problem that badly needed to be fixed once and for all.

The JOBS Act merging with cryptocurrency has brought a storm of disruption that opened the floodgate of opportunities for everyone with a small business.

The brief history of the blockchain religion

Bitcoin was released by an anonymous individual or group of individuals called Satoshi Nakamoto in 2009. Very few people will go into history as witnesses of the birth of this new technology that would rapidly grow to take over every aspect of humanity from the money we use to how we govern ourselves. It was the blooming of the idea that decentralized ledgers were the solution to the lack of trust between two people when a transaction is made. This new tech quickly proved to be the antidote to the kind of system manipulation that resulted in a great recession and almost crashed the global economy in 2008.

Today, everyone has a good idea of what blockchain really is. A fair number of people today agree that cryptocurrency may be the future of money. It started with cryptographers and software enthusiasts playing with bitcoin and explaining it to anyone who cared to listen. True believers know that blockchain is a revolutionary trust system because it is simple.

The Bitcoin whitepaper describes Bitcoin simply as a peer-to-peer network that makes it possible for two people to transact and exchange value without the need for a middleman or a third-party. Bitcoin keeps rewarding its believers, and it is enticement enough for more people to want to derive value from it.

As with everything healthy for an economy, the success of Bitcoin created dozens of similar offshoots cryptocurrencies. Bitcoin Cash, Ethereum, Litecoin, Zcash, Monero, and every other cryptocurrency with unique features have contributed something new to the blockchain world. In the case of Ethereum, their ERC-20 platform has been just as revolutionary as the blockchain itself. Small businesses had the power to create their own tokens for capital.

The JOBS Act and the age of crypto crowdfunding

JOBS is an acronym for Jumpstart Our Business Startups Act. It was signed into law with little publicity in 2012. This was the legal whistle that the game was on, and every small business could legally raise funds by selling equity in crypto tokens. By pitching directly to the crowd, entrepreneurs no longer needed to beg VCs and bankers for capital.

The JOBS Act law was an update to the Securities Act of 1993 that modernized the finance law in one simple way: by easing various regulations that governed the US Securities and Exchange Commission, in the process streamlining ways in which businesses in the United States could raise funds. It encourages small businesses to pitch directly to the masses and back it up with equity.

The JOBS Act was written to directly impact how far startups can go to raise funds. It gave them irresistible exemptions when they issue shares on the blockchain in the form of tokens or cryptocurrency. This means small businesses could develop their own assets and sell it directly to investors without having to go through the pain of IPOs.

The law essentially leveled the small business equity crowdfunding market by guaranteeing every investor that as long as they agree to the terms and conditions of a coin offering (ICO), they could buy equity directly from a small business.

Crowdfunding and the opportunities it brings

To understand why crowdfunding was such a disruptive force in the startup and small business world, you just need to appreciate the three severe problems in the current systems that it fixed:

☑️ For over 80 years, it has been virtually impossible for most people to invest directly in small businesses by buying shares. The stock market was inaccessible because of all the brokers and regulations companies had to deal with. Now, they can legally and easily create special-purpose funds to sell directly to the crowd.

Equity-based crowdfunding has proven more effective and accessible compared to traditional reward and debt-based capital funding alternatives.

☑️ Small businesses have always had a hard time winning over investors because of the bureaucracy that bogs traditional equity-based funding. Before the JOBS Act was passed, very few businesses had the legal backing to sell shares because the only option was an initial public offering (IPO). It’s just sad that IPOs are slow and expensive.

This act essentially saved entrepreneurs the commissions they had to pay to brokers and lawyers, and the government removed all the unnecessary legal hurdles.

☑️ Tokenization of shares became the most popular way for businesses to get liquidity fast and affordably. With ready-made blockchain implementation platforms such as Ethereum evolving each day, it became straightforward for small businesses with limited resources to create and roll out smart contracts with commercial value.

The ERC-20 contract offered simple yet powerful tools for businesses to develop and issue their own cryptocurrencies and tokens.

Building a community of believers key to tokenization success

It may be easy for a business to raise funds on the blockchain by creating and selling digital assets, but there is a price to pay to actually make the sales. Considering how stiff the competition is for the small but growing pool of investors, only entrepreneurs who can convince potential investors that their assets are worth their money succeed in selling them.

Startups and small businesses that go this route have to be creative and impressive to win subscribers. The cryptocurrency crash of 2018 taught them to be even more selective where they put their money in the crypto market.

It takes a great effort to build a community of believers and investors that will buy into a business’s idea. For entrepreneurs that put the effort, the reward is worth it in the end. As a rule of thumb, the number of subscribers the small business gets in three months during beta is indicative of how the market will value shares when the offer opens to the public. This information can even be used to get favorable terms from traditional investors, including venture capitalists and bankers.

The best thing about crowdfunding using a smart contract is that it offers the opportunity for a business to win the minds and wallets of backers anywhere. Since blockchain is not limited by geographic barriers, it allows entrepreneurs to create a mega community of people from any country in the world. Casting such a wide net has made it possible for them to get support from sources they least expected.

According to the World Bank, 2016 was the first year when small businesses and startups raised more money from crowdfunding than from venture capital. The crowdfunding environment has evolved fast since then to become a global phenomenon as businesses in all industries rush to raise capital by issuing their own digital assets. These assets serve their purposes in different ways from medium of exchange to store of value. Every blockchain expert predicts a bright picture for businesses that embrace and rigorously take advantage of the financial innovations brought by blockchain.