Crypto Alphabet

What is a crowdsale?

Over the last few years, crowdfunding has emerged as a way to generate the money needed to turn ideas into reality. Now, though, the cryptocurrency world has generated another form of fundraising: the crowdsale.

Unlike traditional crowdfunding, a crowdsale doesn’t pre-sell a widget or promise to put your name in the credits of a movie. Instead, it sells you a token.

A token is an intrinsic component in a next-generation cryptocurrency 2.0 application. Like Bitcoin, it isn’t something that you can physically hold. Instead, it is an electronic record – a kind of digital poker chip – stored on your computer, or mobile device.

Tokens are designed to let you participate in the project that will eventually be launched as a result of the crowdsale. Depending on what service the project offers, the token will serve as a kind of access ticket to that service.

If the project is a software application that lets you find ridesharing partners without the use of a central website, for example, then you might use tokens to pay for your rides. Conversely, if you are the owner of the vehicle and up giving someone a ride, you may be paid tokens by the network. So the tokens are a kind of currency for use within a specific online service.

The crowdsale generally happens before a project has officially launched its service. It is designed to generate funds for the development of the project, helping to pay for software developers, marketing budgets, and all the other things that a cryptocurrency startup needs.

It can also be used to measure interest in a particular project. If no one buys the tokens, then the company developing the project might want to reconsider its options.

The really interesting part of a crowdsale is what happens to the tokens later on. In many cases, they will be bought and sold on the open market, gaining their own market value independently of the application that they are used for.

This is another way to encourage early adopters. They may buy tokens because they believe in the potential of a particular online service. If the project becomes as successful as they think, then the tokens might increase in value, turning them a pretty profit later on.

But the rules around crowdsales aren’t yet clear. Regulators have strict rules about issuing financial securities such as shares in a company, for example. Should tokens be classified as securities, and therefore regulated? The position on this isn’t yet clear, and each case will probably be judged on its own merits.

Are you buying tokens speculatively? Or are you purchasing tokens simply because you really want to use the application? Are you prepared to accept the loss if the service never launches? Never invest anything that you are not prepared to lose.