Bitcoin Crowdfunding is Catching on in China

Bitcoin crowdfunding has taken off as a means to grow startups in China, with dozens of projects embracing the popular funding method to finance a variety of novel use cases.

One of those use cases currently being explored is selling part-ownership in a discussion forum to encourage quality over quantity in user behavior. Chinese forum Bikeji.com is offering its members the opportunity to become part-owners of the site through a crowdsale of shares in the company. In doing so, the forum's founder hopes to demonstrate the value of crowdfunding to the wider Chinese digital currency community.

Gang Wu, the founder of forum Bikeji.com, said selling valuable stakes in his online community has already made a dramatic improvement to the quality of conversation.

Explaining the thinking process behind creating Bikeji.com, Wu told CoinDesk he was fed up with the incumbent Chinese language bitcoin forums which, according to him, have too many advertisements, unsubstantiated rumors, and even outright slander.

There needs to be a space for more rational discussions, Wu said at his Zhongguancun, Beijing, office from which he also runs interest-bearing bitcoin wallet service Haobtc.com.

The result is his member-owned forum. Dedicated to cryptocurrency discussion, the forum has a Reddit-style reward point system and gives users the option to verify their ID – both measures intended to incentivize responsible posting.

Bitcoin crowdfunding in China

What is most remarkable about this forum, however, is its fundraising process.

On 16th November, Wu posted a proposal to raise 85 BTC in a WeChat group called 'Aisi Shuzi Huobi' (爱思数字货币 or 'love thinking digital currency'). Anyone who sent a bitcoin to a designated address would own 1/100 of the site, which had already already been online for two weeks by that point. Wu personally owns 15 shares and is responsible for the website’s day-to-day maintenance.

Within hours, the fundraising target was reached.

This is just one example of the newly emerging Chinese bitcoin crowdfunding scene. A quick scan on the Internet reveals about a dozen such projects over the past year – with most taking place in the mining sector.

One of the largest is Silverfish, a scrypt-coin mining operation. The project raised 5,600 BTC in late 2013. At that time, with the BTC price above $800, the valuation of the company was well beyond $10m.

The share value today, however, has dropped from its IPO price of 0.5 BTC per share to 0.07 BTC over the course of about a year. On 2nd December, the company announced that it would suspend dividend payments, citing capital strain as the cause.

Benefits and downsides

Wu concurred that "high fatality" was the norm for these ventures. He said he has personally invested in several bitcoin crowdfunded projects, including the aforementioned Silverfish. Most floundered. Some were outright scams, more were unprofitable due to bad timing, like Silverfish.

Since its launch, the litecoin price has dropped from $23.80 to $3.73 at press time, while hashing difficulty has grown substantially as scrypt mining transitioned from GPU rigs to ASICs like bitcoin.

When asked about the appeals and drawbacks of bitcoin crowdfunding, Wu said the positive is that bitcoin is a "free currency" allowing transactions directly between any two individuals – the verifiability of any transactions on the block chain to some extent removing the necessity of a third-party platform like Kickstarter.

The downside, Wu said, is lack of protection for investors:

"Investment is a professional activity. Most people simply don't have the experience or knowledge to make an educated evaluation of the risk."

In addition, bitcoin's unregulated nature is a double-edged sword. While it removes some legal hurdles, it also makes it difficult (if not impossible) for investors to seek legal redress when disputes arise – this also leads to a higher number of scams in the space.

Culture of risk taking

All of its problems notwithstanding, bitcoin crowdfunding in China is becoming its own vibrant subculture. Wu pointed out that a culture of risk taking is very strong among bitcoin investors there. Financial gain is not necessarily 100% of the motivation, he added: a sense of camaraderie in a small close-knit community is also a factor.

For Bikeji.com specifically, Wu believes that bitcoin crowdfunding has certain marketing value, especially by helping 'high-quality' users; the forum's crowdsale has attracted notable investors in the Chinese bitcoin space.

Wu expects that being a formal shareholder in Bikeji will give these BTC 'dignitaries' more incentive to post actively, thus attracting more users.

Fledgling business model

One month after its launch, Bikeji show all signs of being a robust forum. The number of registered users has exceeded 400, and new posts are frequently published.

Some of the project’s idiosyncrasies, however, may prevent it from becoming a replicable business model.

Its success has as much to do with Wu’s personal reputation, which, one may argue, is a bigger factor than the profitability prospect of the project itself.

Since Wu guaranteed investors full refunds if they opt to exit, the only downside risk is the possibility he will renege on that promise – but this risk, given the relative small investment amounts (and the fact that Wu is a well-recognized bitcoin entrepreneur) is likely low.

In addition, the project is a forum, meaning its success or lack thereof is relatively easy to ascertain. Regardless, Bikeji is just one example of the many types of use cases that startups in China and beyond could explore by tapping into the growing popularity of bitcoin crowdfunding.

Crowdfunding image via Shutterstock