Funding your game through cryptocurrencies

There are countless ways to finance your game's development, but one of the rising new trends is the use of cryptocurrencies.

This has perhaps been best demonstrated by Reality Gaming Group, which used an Initial Coin Offering (ICO) to secure $3.5 million towards work on Reality Clash, it's mobile augmented reality multiplayer shooter - "Think Pokémon Go with guns," as the studio puts it.

It's a respectable figure, but the method by which it raised this money may be new to many developers. Put simply, the firm sourced these funds by selling virtual currency ahead of the game's launch.

"The in-game currency is called Reality Clash Gold coins - or RCC Gold - and during the ICO investors could buy these coins for a limited period at a big discount to the price of the coins when the game is launched next year," co-founder Tony Pearce explains.

"As an added incentive, ICO investors could also buy exclusive weapons, which will not be available from the Reality Clash store when the game goes live. These weapons can also be traded on the blockchain - you become a virtual arms dealer and can make money."

The entire venture revolves around the rise of cryptocurrencies, which Pearce describes as "a math-based, decentralised convertible virtual currency that is protected by cryptography."

He adds: "In simple terms it's a form of digital money that's designed to be secure and, in many cases, anonymous."

"Investors in an ICO are basically speculating that the coin they are buying will be worth more in future"

Pearce offers a quick guide to what cryptocurrency really is. The fact that it is decentralised means that, unlike real-world currencies such as the pound, there is no central issuing authority. While they begins life as a virtual currency, not unlike those found in video games, cryptocurrencies can be also directly converted into real-world money - hence the increasing value people and businesses are placing on them.

As an example, Pearce tells us that one Bitcoin can be traded for upwards of $5,500. Bitcoin is, of course, the most famous cryptocurrency having been the first to emerge way back in 2009. Since then the concept has seen new currencies proliferate, to the point where there are more than 900 available on the internet today.

So how do you use them to fund your development? In Reality Gaming Group's case, the team utilised an Initial Coin Offering, where they offer virtual coins - in this case RCC Gold - instead of shares, as they would in an IPO.

"Investors in an ICO are basically speculating that the coin they are buying will be worth more in future," Pearce says. "In a sense, much like how shares could be worth more over time should a public company successfully grow its business, revenues and profits.

"Initial coin offerings have raised more than $2 billion in 2017 so far. More than 250 ICOs have taken place since January 2016, with total ICO deals and funding increasing at a faster rate than traditional equity deals and dollars."

Following the success of Reality Clash's ICO, Pearce describes the process "like an 'A round' on steroids" and is keen to see more games developers explore the possibilities.

"If you're looking for early investment an ICO can really kick start your company," he says. "However, investors will only invest in your ICO if they believe your coin will raise in value in the future.

"An ICO can really kick start your company but investors will only invest if they believe your coin will raise in value in the future"

"Any company planning an ICO must be able to explain in detail how their coin will be used in the future - this is normally via a white paper available to download on your website."

Distributing a white paper via your own channels, he notes, is considerably easier than "meeting the diligence requirements of the VC market". But he reiterates the coin you offer needs to have future value for investors, and the white paper needs to be thorough.

"There is no point just reversing a coin into your business for the sake of it," he says. "Crypto investors are becoming much savvier and will consider the team and white paper in detail if they are serious."

There are other, crucial differences between employing cryptocurrencies and seeking venture finance. For one thing, some venture investors attempt to influence how the firms they have funded are organised, or request equity from early-stage businesses.

"With an ICO, there is no equity dilution for the founders," Pearce says. "It can also be very liquid for the investors, who can sell their coins at any time on exchanges, rather than having to wait for you to sell your company in years to come.

"Finally, because ICOs aren't securities, at least in the minds of their promoters, and not therefore under the ambit of the SEC, they are not bound by the SEC's requirements about qualified investors and the like. To be qualified to invest in an ICO, broadly, you have to own directly some coins."

There are disadvantages to this newfound form of finance. Perhaps the most notable is that, unlike the vast majority of funding channels, you do not know who your investors are - nor do you know what they intend to do with your (hopefully) valuable virtual currency.

"You never know whether they will just 'pump and dump' your coins on the blockchain exchanges as soon as they receive them," Pearce warns. "As the owner of the coins you are selling in the ICO (in our case RCC Gold coins) you want to keep the value up so the community continues to buy them, hence increasing the value of your company.

"The market has gone ICO crazy and there are now so many to choose from. But it may be that as ICOs become more regulated, their appeal diminishes"

"There are also a lot of scammers. We had our website completely cloned and adverts appeared on Google advertising our ICO but sending people to a look-a-like website with a different wallet address to send your investment toNi. Plus, lots of scammers pretending to be us on Facebook and Slack. Get a great community manager, scan all social networks 24/7 and be quick to react on scammers."

Nevertheless, Reality Gaming Group remains a stalwart believer in the power of cryptocurrencies to fund your game. But as the world becomes increasingly aware of how these currencies work and seeks stricter control, Pearce warns the window of opportunity may be narrowing.

"The market has gone ICO crazy and there are now so many to choose from," he says. "More and more regulation is happening, typically to catch up with technology. It may be unwise to expect ICOs to remain outside regulations for the medium term; the recent SEC release would suggest that this is indeed the case for at least the US, and clearly the format is now extremely risky in China, which has historically seen a lot of coin trading activity. It may be that as ICOs become more regulated, their appeal diminishes."

China went as far to ban cryptocurrency trading earlier this year, in part because the self-governed currencies are difficult to monitor compared to real-world monies. Interestingly, this still hasn't prevented interested parties in China stocking up on things like Bitcoin.

"Reaching the community is tough. You need to be on all the ICO and cryptocurrency forums and get the crowd speaking about your company"

So who even invests in ICOs? The vast majority of traditional gamers may be unaware of cryptocurrencies but Pearce reports there is "a very wealthy and large community of cryptocurrency buyers and sellers" who have already invested in the likes of Bitcoins and Ether and are looking for new currencies to invest in.

"Reaching this community is tough," he says. "You need to be on all the ICO and cryptocurrency forums and get the crowd speaking about your company. If you have an exciting ICO, the word can quickly spread in the crypto sphere.

"The only way we could communicate with fans of our ICO was via our website or our social accounts, such as Twitter, Facebook and Slack. In one week we had over 30,000 follows on Facebook and almost 40,000 on Twitter.

"The interest increased every week - although we did see a slowdown when China banned ICOs, but this soon went away. We had a few competitions that we ran - one competition was win an exclusive gun with your name written down the side. This got a lot of great reaction on the online crypto forums."

As a result, the studio has earned $3.5m towards the development of Reality Clash, and all the coins sold have either established an eager audience waiting to spend their gains in the final game - or sell and trade them in a way that will hopefully attract more people to the mobile title.

Pearce concludes: "Once you have all those lovely Bitcoins and Ether invested in your company the next problem is changing it to Euros or Dollars - but that's another story!"