Regular crowdfunding vs. crypto—what’s the difference between these two? Well, most people have a challenge in differentiating these two, and we shall make it easier for them in this post. But first, let’s define these two terms:
- Crypto funding – also known as ICO (Initial coin offering), is a distribution event for tokens that are hosted on a blockchain. During ICO events, people can buy tokens, in exchange for normal cryptocurrencies, like Ethereum and Bitcoin.
- Crowdfunding – this also resembles crypto funding. Here, a startup announces a business idea and then releases a date to fundraise for the idea. Before the crowdfunding campaign starts, the startup releases information about the idea, and why the market needs such an idea. Now, when the crowdfunding campaign starts, the startup starts accepting contributions from backers or investors. In case the funding threshold is not met, the startups refund the backers.
With that, let’s look at the differences between crypto funding and regular crowdfunding.
Both crowdfunding and ICO are accessible to the public. However, most crowdfunding campaigns are geographically limited to countries where the crowdfunding platform can operate. For instance, you can only access Kickstarter if you are in the US, UK, Canada, New Zealand, Australia, and a few other countries. That means you cannot access this platform if you are not in any of those countries, and you cannot accept contributions from anyone outside those countries too.
ICO, on the other hand, is hosted on a blockchain. Today, Ethereum is the most common platform for ICOs, as it makes it easy for people to create and trade tokens. Besides, you can access the Ethereum network from anywhere across the world. However, some countries like the US and China have restricted some ICOs.
ICO investors are also users of the product
When you invest in ICO, you buy tokens, which gives you the rights to the product or service offered by the company. As an ICO investor, you neither get a stake in the company or any rights to the company’s profits. That makes you not only an investor but also a user or customer of the company’s product.
For crowdfunding, on the other hand, leads to the creation of a tangible product or project. However, the campaign creator is the one who determines how they can reward the investors. Mostly, an investor can get voting rights or a profit share of the product. In the event they get an interest paid depending on the amount invested, it’s known as crowdlending. Thus, the value of your investment depends not only on the success of the project but on the reward system too.
The success of ICOs hinges on how the market sees the market token value
Typically, an ICO doesn’t create a physical product. Rather, it creates a digital product that’s publicly traded. Thus, to get investors depends on how the market sees the value of the toke that they get. The market value, as well as the value of ICO investment, is greatly determined by the anticipated future usability of the crypto crowdfunding platform.
Besides, it’s the responsibility of the issuing company to token’s initial value. However, it is a big challenge to predict the future success of a pre-ICO. Because of this, tokens can be easily over- or under-valued.
Crowdfunding, on the other hand, allows investors to receive rewards depending on their investment. However, you cannot find a secondary market to trade crowdfunding perks, unlike for ICO tokens. Thus, investors can’t get any capital gains when they sell their investment.
However, you should also note that there are two sides to the coin—although ICO has higher risks, the potential returns are also higher.
Another major difference between ICO and crowdfunding is how they are regulated. Because ICO and crowdfunding campaigns require comparatively small dollar amounts, and donors don’t expect ROI, they are mostly unregulated. There are no serious regulatory consequences of running a crowdfunding campaign so long as the crowdfunding platforms and participants follow the required banking rules.
ICOs, on the other hand, have different regulations. Because ICO investors expect ROI, most governments across the world consider ICOs to be the same as IPOs. Thus, their tokens are traded in securities exchange, which makes them to be regulated like a stock market. ICOs are completely banned in other countries because they are new types of assets that cannot be regulated easily.
Unlike buying an IPO, buying ICO tokens doesn’t mean that out rightly owns shares of the company. Further, ICOs cannot give you equity, and they rarely give voting rights to anyone who holds the tokens. Thus, it doesn’t seem right to regulate ICOs strictly as IPOS. However, you should note that ICOs result in tokens traded on secondary crypto exchanges. Because these tokens do change in values, and investors expect an ROI, governments are concerned about protecting consumers. This is particularly true because a lot of ICOs have turned out to become scams or failures.