Initial Exchange Offerings (IEOs)
A brief study
The crowdfunding models have seen fair share of innovation since the mainstream online payment applications have emerged. Bitcoin enabled sending money across the world cheaper & faster; opening new frontiers for innovators to kick-start their business in exchange for “token rewards”. This particular crowdfunding model in cryptocurrency ecosystem is popularly known as Initial Coin Offering or ICO.
ICOs enable projects to raise money from the investors, which usually expect the appreciation in price of the “tokens” they get in lieu of the investment they make. The investment decision is based on a project’s business idea, which is usually expressed in a Whitepaper. Basically, the cryptocurrency investors look at the following factors before putting their money into a project –
Team Size, Advisers, Whitepaper, Marketing Efforts (Facebook, Telegram, Twitter, LinkedIn, Reddit, Medium among others), Funding Cap, Project Location, Project Sector
For an investor to make an informed decision about an ICO project; all a project had to do was to create a good online reputation. During the year 2017, around 717 projects completed their ICO with 69 projects reaching the Soft Cap and 48 making the Hard Cap whereas in 2018, 138 projects reached hard cap while 438 projects made it to Soft Cap out of a total of 2284 projects according to cointelegraph. Suffice to say the ICO Market is not dead, yet.
It is natural for an ICO project to try to list their token on an exchange soon after an ICO concludes. ICOBox – an ICO platform charges 40 bitcoin (or BTC) for a basic package that provides a platform for crowdfunding, legal and marketing support. IDAX charges around 20 BTC per listing with additional marketing charges. The fee may depend on the project, the exchange and the market conditions.
With the recent crackdown of regulatory agencies on ICO projects mentioned in my previous article and the scams that have resulted due to uninformed decisions taken by the investors, new financing models have emerged; one of which is known as Initial Exchange Offering or IEO. An IEO is essentially an ICO as a platform offered by an exchange.
Here is my recent interview on the subject, note that my research about IEO was still ongoing when I did the interview and so I decided to write this article to provide more details.
According to CoinMarketCap – Binance, one of the biggest cryptocurrency exchange (by trading volume) saw an overall decrease from a monthly US $3.5 billion in March 2018 to US $1.5 billion – 0.6 billion in February 2019 (in trading volume) and this trend is synonymous with most exchanges. So it makes sense for the exchanges to offer their exchange as a platform for ICO to quick-start liquidity, therefore paving way for a healthier market.
Among the top 10 exchanges Binance, LBANK and Coinbene currently offer IEO as a platform. Binance, through Binance Labs and Launchpad carefully select projects that they want to be involved with. Their IEO platform dates back to December 2017, when they supported Gifto Official and helped them raise US $3.4 million. Bread, BitTorrent Inc. and Fetch.AI are some of the other projects that Binance supported while successfully raising US $6 million, US $7.2 million and US $6 million respectively. Fetch.AI sale raised US $6 million in 22 seconds even faster than a few minutes it took to distribute BitTorrent.
Dobi supporting BNOW, UPbit_official connected Allbit Exchange supporting VANTA Network, Coinis supporting REMIIT are few examples that Exchanges have come out in support of good projects which are compliant with applicable laws and have a legitimate business plan. Be sure to check out Liquid, CoinTiger and Bitmeta among other exchanges for IEO support.
Of course the token issuers (ICO Projects) will have to bear heavy cost for getting themselves endorsed by an exchange which in turn have to put their reputation on line for the project. For the investors, it is easier to invest when an exchange is endorsing a project but at the same time, they have to go through the KYC process of every IEO they want to be a part of, and that can be a deciding factor for many.
IEO brings a new fundraising option building over ICOs. Will the regulations make it harder for projects to raise funds through IEO will be interesting to watch. IEO supporting exchanges will need strategic build-up of teams that can examine a potential ICO which can be beneficial for their trading volume.
- Cointelegraph ICO Trend 2018 vs 2017: https://cointelegraph.com/news/ico-market-2018-vs-2017-trends-capitalization-localization-industries-success-rate
- Personal IEO Research (Google Sheet): https://docs.google.com/spreadsheets/d/1H2Ozj4U-m_Atzl-XIP9nnRr_Btl5cD5Vq1PclHkldDU/edit?usp=sharing