A crypto token sale is a relatively new wave of opportunity in the world of cryptocurrency that all investors and crypto-enthusiasts have no doubt heard of already — and if you haven’t then you’ve definitely been missing out! Let’s get you caught up then…

A token sale is essentially a means of fundraising for crypto-currency projects via the trading of tokens via the blockchain.

So, if we skip the jargon, a token sale is a tool for investing in digital economies by trading crypto-currency (bitcoin, ethereum, etc) for an opportunity to trade in a new economy which is quite different but familiar to how we currently invest in financial assets by trading FIAT (regulated currency that we know and use everyday) on the stock market. It’s different because this investment is currently made prior to the project reaching maturity or even being introduced to the market. However, it is familiar because investors expect that the value of their tokens will increase over time as the economy and project builds in value due to trading activity or achieving its stated goal. Since token sales are highly speculative, it means that it’s more likely to be embraced by investors who have high-risk portfolios (including startup investors) than those who prefer to stick to the traditional, low-risk investments.

Benefits of Token sales

While many of us (including me) are now waking up to the opportunities of token sales, they are not new. In fact, the first token sale was held by MasterCoin (now OmniLayer) in 2013 while the Ethereum protocol is arguably the most widely known example of a token sale that led to a successful product that continues to appreciate in value. The investor interest is definitely increasing in token sales with examples like the Brave browser’s token sale raised $35 million in the first 30 seconds! We’re also seeing startups like healthcare startup Patientory proving to be break-out cases where they raised significant investment via token sale instead of the typically lengthy traditional fundraising.

How Token sales change the landscape

The crypto world is still generally misunderstood and comments like those coming from Jamie Dimon aren’t helping. Since bitcoin is seen as a direct attack on banks and financial institutions, there remains a ton of controversy over the true value of bitcoin and whether it should be treated as a currency or an investment. However, the concerns around purchasing tokens are primarily around the likelihood that these investments are not being made in vaporware — essentially making it a scam.

There are essentially two kinds of token sales right now— typically a technology startup utilizing its own token (e.g. Patientory) or directly into a protocol (which can be utilized by other startups or projects)and in both cases, the valuation is determined by trading activity on the crypto-currency exchanges. However, it is difficult to speculate whether the proposed use-cases will indeed be useful and practical. This is particularly concerning in cases where the project is essentially building a crypto-currency atop an existing crypto-currency in which case its sustainability is questionable. Why invest in “SuperCoin” (built atop bitcoin) instead of investing in Bitcoin itself? This calls for additional due diligence from investors and supporters of these crypto-currency projects. Essentially, they are exposing themselves to even greater risk than investments in pre-seed and seed startups.

However, the huge opportunity of token sales to usher the emergence of new fundraising economies where startups and technology projects (including opensource) can directly gain support from their investors and supporters. This is similar to the work pioneered by VentureHacks and Angelist but lacks the due diligence tools. Fortunately, behind any successful token sale is consistent communication from the organization and a large community drive focused on educating and encouraging potential investors.

How to get involved

First, keep in mind that trading for tokens is done via the blockchain so having experience and knowledge about the risks involved is essential. You won’t be able to ask your traditional stock broker to handle these transactions for you….at least not yet. This means you need to do your own homework.

Currently, many token sales are launched on Ethereum using the ERC20 smart contract standard. This smart-contract standard provides strong consensus backed by secure token data which provides some reliability. You can also monitor their progress via websites like CoinMarketCap. You can also stay informed of upcoming tokens via sites like TokenMarket and TokenData.

With all of these opportunities presented by token sales, the big question is how does the traditional investor become involved while managing risk and conducting due diligence? Unfortunately there is not much in the way of law or regulation when it comes to crypto-currencies. Fortunately, there are interesting projects like Polymath which aim to answer this question. Polymath will launch in October 2017.

Personally, I think it won’t be long until many companies switch to using tokens as a method of fundraising prior to their IPO (initial Public Offering) similar to how Pebble famously raised millions via Kickstarter crowdfunding three times before it was acquired by FitBit. It’s a space to watch but I suggest that you get your feet wet with trading bitcoin and ethereum if you’re completely new to the game. I’ll share how I’m getting started with investing in tokens with the next article.

Photo of the Polymath team

Interested to know more? Check out these articles for additional reading:

Thanks to Arvinda R for help with revisions and references