The turn of 2017-2018 has been the peak for ICO’s, with $1.6 billion raised in December 2017 alone, the ICO craze’s highest grossing month. From there, proceeds fell off dramatically over the course of last year, ending with a comparatively modest $74.5 million raised in December 2018.
With waning ICO enthusiasm and new regulations, including a full ICO ban by the central bank of China, blockchain startups have been strategizing new ways to fundraise for their ventures. Initial Exchange Offerings are the next iteration.
The Difference Between an ICO and an IEO
An IEO differs from an ICO in where the coins go. With an ICO, the startup supplies tokens directly to investors. Whether those tokens will ever be tradeable on any exchanges, or just fizzle out, is part of the risk of the investment.
With an IEO, the startup supplies the tokens to an exchange instead. Investors can purchase tokens there, already available for trade. In theory, this removes one step of risk for the investor.
This Positions Exchanges to Vet IEO Ventures in Advance
If the exchanges are doing their jobs, they’ll screen out the dud tokens like the ones who eventually gave ICOs a bad name. When a token appears on their exchange, they’re attaching their reputation to it. So they’re motivated to only offer legitimate tokens.
A startup called RAID recently planned an IEO on crypto exchange Bittrex. Just hours before the offering went live, Bittrex reneged and cancelled the IEO. RAID’s plan to raise $6 million was thwarted because Bittrex found out RAID had terminated its partnership with its data analytics company. Bittrex saw the partnership was integral to RAID’s success, and without it Bittrex was no longer confident launching RAID’s coin. This is a good example of the exchange looking out for their own interests as well as those of the investor—something that wouldn’t have happened with an ICO.
However, there’s no guarantee that exchanges will do this level of due diligence to vet every token they offer. And even if they do, there’s never any guarantee about which direction a token will go. So you still have to be smart about your investments.
IEOs are Easier For Investors and Better for Startups
To participate in an IEO, you have to be part of an exchange like Binance (the first exchange to embrace IEOs), Huobi, Kucoin or Bittrex. In some cases, they may require you to buy their native tokens first, and use those to trade for the IEO token. But other than that, it’s much easier than participating in ICOs, because the process is uniform for whatever exchange you’re using.
It’s also easier for startups, because the exchange handles the logistics of the offering, freeing the company up to focus on development. This turns around and benefits the investor more, because the company you’re investing in has a stronger position. Instead of putting all their time (and marketing resources) into an ICO, they’re passing it off to the exchange and getting back to work on their great idea.
That said, the exchanges don’t offer this service for free. Startups will have to be prepared to pay for an exchange to host their IEO, either in advance or as a percentage of funds raised.
IEOs Might Boom… But They Haven’t Yet
IEOs are the same idea as ICOs, but approached with more sophistication and security. They haven’t become as popularized yet as ICOs, and we don’t know if they will. But to the investor, that could give you a jump on early adoption. When looking for IEOs to invest in, just remember not to assume the exchange is doing all the work. Approach with confidence, but do your own research to determine which upcoming offerings are the truly worthy investments.