The Mixed Results of Digital Currency-Powered Crowdfunding

Recently, I wrote an article about monetizing content production on the Internet that also examined and compared tipping and micropayment options in the cryptocurrency and fiat currency spaces.

In the article, I covered two crowdfunding platforms, Patreon and Beacon Reader, as they both were recurring fundraising models and specifically focused on funding content creation.

An examination of crowdfunding overall is also warranted as the global industry is massive and growing fast, expanding from $6.1 billion in 2013 to $16.2 billion in 2014. For 2015, researchers have predicted that the industry should more than double again to $34.4 billion. This trend suggests that crowdfunding will even surpass venture capital funding in 2016. In comparison to raising fiat currency, crowdfunding in the digital currency ecosystem has had mixed results.

Globally, there are now hundreds of crowdfunding sites that are broad in their fundraising efforts or target particular verticals, such as art or a specific industry like real estate. There is also some distinction in how platforms incentivize crowdfunding. Crowdfunding research firm Massolution breaks up the incentivization into the following models: lending-based, equity-based, hybrid-based, royalty-based, donation-based and reward-based. For this discussion, we will look at the platforms that focus on rewards, donations and equity.

The largest, most popular mainstream crowdfunding platforms are Kickstarter, Indiegogo and GoFundMe. Kickstarter and Indiegogo are rewards-based platforms, with the former having a more strictly vetted application process and the latter having a more automated one. GoFundMe gathers charitable donations for individuals or families, whose plight is pitched on the platform. All three have a 5% base fee and processing fee of 3% or more. Since launching in 2009, Kickstarter has reportedly raised more than US$2 billion for more than 95,000 projects. Last year, GoFundMe claimed that it surpassed Kickstarter’s fundraising in 2014 by raising $470 million to the other platform’s $444 million. Another important statistic for crowdfunding is project success rate. While GoFundMe has less clear results, the difference in the success rates of Kickstarter at 36.75% and Indiegogo at 10% is attributed to Kickstarter’s stricter curation process.

There is a significant difference between equity crowdfunding and the other models of crowdfunding. For the equity model, those that fund a project become investors in the project as they are sold equity by the project founders. Like every category in the space, equity-based funding is growing fast, increasing 182% to $1.1 billion in 2014. Mainstream examples of equity crowdfunding platforms include Crowdcube, Seedrs, and Angel List.

The crowdfunding model in the cryptocurrency and blockchain technology sector has been predominantly equity-based or token-based, but it has had a very mixed level of results. There are also differences in the goals of various projects, whether to just launch a new currency or sell tokens in support of distributed applications. The uniqueness of blockchain protocols is that they rely on the sale of their own proprietary digital currency, can spin off tokens for other parties and act as crowdfunding platforms. This is the complexity that has resulted in success and failure.

Without discussing bitcoin itself and the multitude of coin offerings, it is useful to examine the successes and failures of token sales and a number of platforms that were supporting actual distributed applications.

An earlier example of an initially successful token generating crowdsale was MaidSafe, a decentralized network designed to operate without specialized servers and data centers. Utilizing the Mastercoin protocol as a platform in April 2014, the project raised over $7 million in Mastercoins and bitcoins. Mastercoin, later rebranded as Omni, is a digital currency and protocol built on the bitcoin blockchain, and designed to fund other decentralized applications. However, the project encountered a setback when the value of Mastercoins, 50 percent of the tokens raised, plummeted in value and reduced total project funding to $5 million. In this case, the result could be attributed to cryptocurrency volatility, and for the protocol itself the situation was worse. After their own successful coin sale in 2013, founders and holders of Mastercoin planned to fund protocol-based projects with funds totaling $30 million, none of which came to fruition as the digital currency’s price tanked and never recovered.

Swarm, another digital currency-oriented crowdfunding platform that received a great deal attention in 2014, also had plans to enable companies to sell cryptographic shares, powered by a Mastercoin-competitive protocol, Counterparty. But Swarm’s run ended up in very murky territory. After itself receiving funding, the platform introduced its “first class of startups” in October 2014. Swarm planned a second class of startups, but in August 2015 revealed a pivot away from its original focus on distributed crowdfunding. In December, Coindesk included it in 2015 list of failed bitcoin startups. Swarm surfaced by releasing a new governance model, but still does not appear to have a web presence.

Probably not worth mentioning is Blocktrust, a crowdfunding platform based in Portugal that only hosted one campaign. The campaign was for a social messaging app called Sendchat. The token sale was a failure, followed by Sendchat’s supposed acquisition by Blocktrail. Then the app simply ceased to exist.

Most recently, high profile Koinify announced it was shutting down operations, wiping out all remaining wallets and data. The platform only hosted two token crowdsales, both of which were relatively successful. Token-sharing social messaging app Getgems raised 2,633 bitcoins in December 2014, while Factom picked up 2,278 bitcoins in May 2015. Observers were surprised after the Factom sale closed when Koinify announced it was pivoting in a new direction, building a platform that will “democratize and reinvent corporate ownership and organizational structures.”

The record-breaking story of Ethereum‘s coin sale is also another example of success impacted by token price volatility. In its September 2013 offering of digital tokens, Ethereum raised 31,529 bitcoins or at the time more than $18 million. Although considered the fifth largest crowdfunding project ever, the value of Ether dropped significantly from a high of $2.19 on August 14th, 2015 to a low of $0.63 on September 28th, resulting it its market capitalization dropping from $132.3 million to $46.8 million during the same period. In October, Ethereum founder Vitalik Buterin revealed that the project only had the equivalent of US$2.5 million in cash remaining in its reserves. Apparently, the major cause of the foundation’s limited funds was the lower price of its proprietary currency and its failure to sell off its holdings in bitcoin before the bitcoin price dropped to $220 in early 2015. Since then, the Ethereum Foundation has cut costs and is promising to be the next generation of blockchain technology. Nonetheless, it is still important to highlight the risks presented by essentially market assets.

Interestingly, prediction market startup Augur raised $5.3 million in funding from a digital token sale that ended on the October 1st, 2015, making it the 21st largest crowdfunding project in history. Built on Ethereum, Augur sold its Reputation tokens in return for both Ether and bitcoin, the prices of which were terribly low but have significantly recovered since the Fall of 2015 (Ether is x3 in value, and bitcoin almost doubled).

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Courtesy of CoinMarketCap.com

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Courtesy of CoinMarketCap.com

There continues to be upside for crowdsales in the ecosystem. Hong Kong-based platform Bnktothefuture.com appears to be inundated with bitcoin and blockchain technology firms utilizing its platform. Some of these campaigns are for prominent ventures that include Bitcoin GroupBitPesaFactom, ShapeShift, Startcoin, Satoshi Point, Storj.io, TibditUnoCoin, Uphold and most recently Synereo.  The funding campaigns are not tokenization, and both investors and projects are strictly vetted by the platform’s management.

Coinsilium’s successful crowdsale late last year on Seedrs demonstrated that there is opportunity for blockchain tech projects and startups to find mainstream platforms to raise funds.  The campaign enabled Coinsilium to concurrently offer shares on London’s ISDX, raising $1 million in capital. Of course, the difference is that Consilium was selling traditional shares rather than tokens.

In addition to price volatility, equity crowdsales present regulatory issues in most jurisdictions, regardless of whether it is digital or physical shares, bonds or some other security in the project. Some observers believe this is what drove platforms like Swarm and Koinify to either shutdown or change their business model.