Fundraising For Cryptocurrency Projects: Here’s Everything You Need to Know

PUBLISHED Oct 30, 2022, 9:51:10 PM        SHARE

imgTobi Opeyemi Amure

Startups, existing firms, and even multi-million dollar corporations go through numerous stages of development in order to carry out their objectives and initiatives, as well as grow and explore more industry options. To assure company continuity and expansion, such organizations may resort to fundraising as a method of financing their next phases of development at various periods.

The crypto market is no exception: crypto companies that are just getting started need funding to create, build, develop, manage, market, and expand.

Fundraising For Traditional Businesses

From the dot-com bubble of the 1990s to the rise of fintech companies in 2010, funding ideas, projects, and companies is not a novel concept. Fundraising has been a hallmark of progressive times and a driving force in assuring stable, developing innovative technology. Traditional means of raising funding for enterprises include:

Bank Loans

This is the most popular and fundamental method of financing any firm. The terms are straightforward: the bank offers a specific loan amount decided after an asset or chain of assets is put up as collateral, which is to be repaid with an agreed-upon interest after a set period of time. Failure to repay the loan within the agreed-upon period will result in the bank seizing the assets put up as collateral.

Bank loan financing can be difficult to obtain since banks typically use a variety of criteria to determine which firms to lend to. They often necessitate substantial collateral, significant personal financial commitment, investments from the business owners, a standard business, and excellent credit, among other factors.

Initial Public Offering (IPO)

There is also the IPO method of financing, which engages general public investors. An IPO works by a private firm offering its shares to the public in order to raise funds for future development. As a result, the company goes public, and private investors can profit from their investments through dividend generated by the company's profits and the selling of their shares, which rise in value in parallel with the company's overall value.

Venture Capital and Angel Investments

Finally, a venture capital fund is a popular approach for a firm to raise funding. This method of financing involves venture capital firms and a group of investors who pool their funds and identify several startups with the expectation of high returns. Startups seeking venture capital funding usually send a prospectus to venture capital firms outlining the risks and advantages of potential investments.

The venture capital managers are then tasked with discovering and evaluating firms with higher potential returns. Unlike bank loans, venture capital funding provides funds in exchange for equity—shares of the company—with the potential to earn more as the company expands.

Angel investment, on the other hand, is wealthy individuals committing capital to companies in their early phases. Unlike venture capitalists, angel investors base their investments on the common visions that they and the business owners share, rather than the viability of the business.

Fundraising For Cryptocurrency Projects

In addition to traditional means such as venture capital funding, the blockchain and crypto industry introduced a fresh set of methods. These techniques arose from the specific features and elements of crypto-related businesses such as tokenization, crypto exchanges, and so on, as well as the increasing interest in crypto funding following the 2017 ICO Craze, which saw several projects go live with ICOs at the time.

Although many of the projects did not hit their marks, a few turned out to be massive successes, and this surge resulted in the establishment of additional funding methods for crypto projects such as IEO, and IDO.

Initial Coin Offering (ICO)

An initial coin offering (ICO) is the cryptocurrency counterpart of an IPO. A nascent crypto company that wants to raise money to create a new coin, develop an app, or offer a product or service can use an ICO as a form of fundraising. ICO investors receive a new cryptocurrency token issued by the firm in exchange for their investment, similar to how investors receive shares of a company in exchange for their investments. These new tokens reflect a stake in the expanding company and can be used to gain access and benefit from utility provided by the project in the form of a product or software service.

While ICOs continue to be a popular fundraising technique, many ICOs have been known to be fraudulent or to be launched by companies that performed poorly. Only a few legitimate, top-performing crypto projects have provided investors with high returns. Furthermore, unlike IPOs, which are subject to a high level of regulation and bureaucratic processes, ICOs are largely unregulated, with little to no institutional oversight.

Initial Exchange Offering (IEO)

Project fallouts, security violations, fraud, and other ICO-related vulnerabilities forced the development of alternative, safer, and more trustworthy methods of fundraising while ensuring that investors do not lose their capital and receive some type of return. To address these limitations, initial exchange offerings (IEO) and initial DEX offerings (IDO) were introduced. IEO works in a similar manner to ICO in that tokens are made available in exchange for investment. The primary distinction is that the new tokens are released on cryptocurrency exchanges like Binance, Kraken, and FTX rather on the project's website or other untrustworthy channels. This listing provides potential investors with some confidence because the reputation of the chosen exchange is also at stake.

Before listing a new project token, exchanges typically have conditions that must be met. Also, because of the exchange's visibility and ease of transaction, more investors will be able to access the token after it is listed. The exchange acts as a launchpad, managing tokens and boosting the startup's marketing and sales capability.

Initial DEX Offering (IDO)

This approach also arose as a reaction of ICO flops, but it also compensates for IEO shortcomings such as high listing costs, imprecise vetting processes, token sales commissions, and potentially biased control. Under IDO, token listings are handled via decentralized exchanges such as Polkstarter rather than centralized exchanges such as Binance. The key difference is that, rather than being at the mercy of listing through submissions and centralized criteria, the community of the decentralized exchange makes the decision for approval.

Smart contracts execute transactions such as fund transfers, and legal constraints such as know-your-customer (KYC) and anti-money laundering (AML) are not necessarily available. This allows investors to purchase restricted tokens from specific locations. US citizens, for example, can have access to limited platforms such as centralized launchpads under this approach.

Bottom Line

Some speculate that the bear season is nearing a close end, with most coins trading in green lines as the month comes to a close. Existing projects will almost certainly pick up, and start-ups requiring financing will almost certainly emerge in larger numbers. Crypto regulations are also becoming more stringent by the day, with countries such as the United States issuing CNBC guidelines and the SEC conducting investigations into high-profile projects such as Yuga Labs and celebrities such as Kim Kardashian. The regulations will almost certainly have an impact on crypto adoption, and we may require new investors as a result, or there may be a shortfall of capital if the policies are unfavorable.

Storing your cryptocurrencies in online wallets, exchanges and software wallets exposes you to risks of being hacked. Consider storing them in a hardware wallet today

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