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Posted by Mollie Porein - 23 May, 2019

Cryptocurrency: Pros and Cons of Funding

When starting a business, one of the most immediate obstacles will be securing funding. For some businesses, this is a straightforward and painless process, but it usually represents a challenge. Regardless of how easy it is, there are more choices than ever before when it comes to choosing a source of funding.

While many businesses still go down the traditional route of drawing up a business plan and seeking a loan, a growing number are turning to newer options. Crowdfunding has proven to be particularly popular and has bought us some amazing success stories, as well as some spectacular failures, of course.

Why Choose Crypto?

cryptocurrency bitcoin

Cryptocurrencies are an evolving market and are rapidly gaining regulatory acceptance, if not approval, around the world, although they are still often viewed as risky by traditional speculators. Of these, it is an even smaller group that actually makes investments utilizing cryptocurrencies.

However, cryptocurrencies lend themselves well to a crowdfunding approach. Raising some or all of your funding in the form of cryptocurrencies is no doubt risky, as the value of crypto is prone to more and stronger fluctuations than fiat currencies are. You can use a site like Coin.live to track many cryptocurrencies and see how the price changes. You should do this before you start making investments, so you know what you’re getting into. Then again, sometimes these fluctuations will work in your favor.

A great way of utilizing crypto to fund your startup is to accept crypto donations alongside a traditional Kickstarter campaign. Kickstarter is still the king of fiat crowdfunding, but not everyone will want to donate through Kickstarter. You can always replicate your Kickstarter pledges, or even create some new ones, to entice visitors to your website to donate with cryptocurrency.

ICO

An offshoot of crowdfunding has been the initial coin offering - ICO. Modeled on the more traditional initial stock offering, an ICO opens up investment in a business by allowing any investors who want to invest to do so in exchange for a portion of the business. But instead of investors buying stock from the business, they are buying cryptocurrency.

An Example

To understand this, let’s imagine that we’re starting a business that is going to provide cloud computing services to its users. We would first devise a business plan and put together a proposal good enough to build a website around. We would use this website to explain why people should invest in our business.

Our customers would be able to purchase cloud computing power to run commercial cloud-based apps on. We would give them the option to pay using either fiat currency or our own proprietary cryptocurrency token, let’s call it CloudCoin (Cc). We would sell a package that costs $100/month, but only 50Cc. We would then spend six months to a year taking investments and building our blockchain network.

Once finished, an airdrop would occur and all of those who had invested would receive a number of tokens relative to their investment. Each token would, therefore, be equivalent to $2 when buying one of our packages. Once listed on crypto exchanges, these tokens would have monetary value and could be exchanged for other currencies or used to buy services from us.

CloudCoin may begin trading on the market for $1.50 and, therefore, would provide cheaper access to our services. Our business could then redistribute or exchange the CloudCoin that comes back to us.

Accepting Bitcoin as a Funding Option

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Bitcoin has traditionally been used as a way of funding the cost of goods and services rather than for large investments. However, some people are interested in the possibility of accepting Bitcoin as a way to fund their business. There is nothing inherently wrong with doing this, so long as you are feel comfortable doing so.

At the moment, Bitcoin is a fairly untapped area of securing funding and this may give you an edge. Lots of Bitcoin enthusiasts are interested in supporting new businesses with this method of payment, and many are eager to invest due to the limited number of startups currently going down this route.

However, because Bitcoin isn’t a traditional currency, it does carry some risks when used for investment. Market fluctuations are the biggest thing to be aware of, especially if you hold on to the currency for any length of time. While these fluctuations could work out in your favor, they could also go the other way as well, leaving your business with negative equity.

Another hurdle you’ll have to consider is which businesses will accept the Bitcoin that you have. It’s not a common method of paying for startup business expenses at the moment, and this could limit the amount of options you have available to you. Essentially, you’ll be looking at a similar problem to that your investors had; while you may be willing to pay for things with the currency, you may not be able to as easily as you’d hoped. Perhaps the safest move here is to convert the Bitcoin into a traditional currency on receipt.

Not all businesses are suited to ICOs, for traditional businesses cryptocurrencies represent a very risky funding option. They are best used to supplement more mainstream fundraising methods.

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Topics: Finance, Funding