Token Sales (Blockchain series — Part V)
The financing behind blockchain platforms
Eventually, most companies need external funding to properly grow, expand market reach, and generate immense revenues. The actual funding process varies across industries and even companies. Traditionally, large sums of initial funding have been generated through a network of a few, high-net worth individuals. This archaic process has eliminated the ability of the general public to help finance prosperous businesses early in development, in return for certain advantages. With the development of blockchain technology, however, individuals can finance platforms through the purchase of tokens before the launch of an application. In 2018 alone, companies have raised over USD $7 billion through this method of funding. So why do individuals buy tokens? These digital assets provide purchasers with two potential advantages. The first is holder benefits, which includes access to all functionalities associated with the platform, possible token price increases, and potential bounty, bonus, or dividend allocation for long-term possession. The second is ownership rights, which grants users the opportunity to invest in the company, profit from revenue success, and have a direct impact on decision-making within the organization. The former describes utility tokens and the latter describes security tokens. A blockchain-based company can sell and distribute both classes of tokens to applicable individuals in many forms. The most common forms include pre-sales and/or token sales.
Before a token sale occurs, companies normally engage in either a private or public pre-sale. Private pre-sales consist of a limited number of token buyers who (1) are either pre-determined by the company engaging in the sale or (2) must meet some prior requirement, such as purchase a set amount of tokens. Token purchasers are almost always known to the company prior to the pre-sale. On the other hand, public pre-sales are open to all individuals who can legally purchase tokens in the country which they reside. Whether private or public, pre-sales offer the same common function; to provide an added incentive to buy tokens early. The price of tokens offered in pre-sales are commonly discounted compared to the price offered in token sales. Furthermore, increased dividends, bonuses, or platform rights are often granted to early holders. Dividends grant a specified amount of tokens (or percentage of tokens) to long-term holders, bonuses increase the amount of tokens purchasers receive during a pre-sale (i.e. a 50% bonus would grant buyers an additional 0.5 tokens after every token purchased), and platform rights include any aspect regarding the usage or functionality of the application, including early access, idea input, or voting privileges.
Following the pre-sale, a public or private token sale usually ensues. Similar to the pre-sale, a public sale offers tokens to a mass majority of individuals who can legally purchase tokens in their country of residence and a private sale offers tokens to a limited number of individuals who meet certain criteria. In a token sale, companies normally offer their digital assets to the general population for the purpose of expanding their funding potential. Companies, therefore, are not familiar with their holders following public token sales. Unfamiliarity can create misunderstandings between the organisation offering tokens and the individual holding tokens. Although misunderstandings can result in frustration and token-price volatility, a public token sale is the most sensible method to raise the cash necessary to further the development of a platform and the resolve constant issues that arise. A public sale allows the common person to contribute early to the success of a platform, exposes a vast number of possible token purchasers to a company, and distributes small risks over a large number of individuals. This differs greatly when compared to a private sale, which retrains the amount of possible token purchasers and distributes large risks over a small number of individuals.
Whether public or private, token sales offer vastly different price points and incentives in relation to pre-sales. The price of tokens offered are almost always increased and the incentives are almost always minimised or nonexistent. For example, a company sells tokens at USD $2.00 with a consistent 40% bonus and a 4% dividend for 3-month long holders during the pre-sale. During the token sale, the company would most likely increase the price beyond USD $2.00, eliminate the bonus, and reduce the dividend to 2%. The opposite, however, can arise as well. If the pre-sale is sub-par in regard to the amount of tokens sold, a company may need to offer more incentives to holders or even reduce the price during the token sale.
When to Buy Tokens
Depending on the progress of development, the road-map, the future potential growth, the level of uniqueness of the platform, the credibility of the team, and the degree of risk aversion of the token purchaser, an argument can be made to buy tokens in either the pre-sale or the token sale if able. The pre-sale allows token purchasers to receive more benefits, but also more risk. The token sale allows token purchasers to receive less risk, but also less benefits. Overall, token sales present a more prosperous opportunity for the common individual to purchase tokens. Although these token holders will likely be given less incentives and higher prices, the platform will be further developed, the outlook will be more clear, and purchasers will still be able to buy tokens at a reduced price compared to future prices.
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