Are Initial Exchange Offerings (IEOs) An Improved Version of Initial Coin Offerings (ICOs)?
Blockchain-based initial coin offerings (ICO) introduced a new type of crowdfunding method which became increasingly popular during the historic crypto market bull run of 2017. According to ICOdata, there were only 29 ICOs (in total) launched in 2016 and they raised a combined $90 million.
During 2017, however, the ICO market really took off as the fundraising method helped 875 different ICO projects generate more than $6.2 billion (in total). Between December 2017 and January 2018, cryptocurrency prices reached record-level highs as the market capitalization of all digital assets surpassed the $800 billion mark.
ICO Campaigns Raised Billions Of Dollars In 2017, 2018
The price of Bitcoin (BTC), the world’s most dominant cryptocurrency, recorded an all-time high of nearly $20,000 on December 17, 2017. Although cryptoasset prices continued to fall sharply the following year (in 2018) with a few ups and downs, the ICO market still managed to generate over $7.8 billion through 1,253 different public token sales.
While ICOs do offer a unique approach to raising funds for blockchain projects, there have been numerous scams orchestrated under the guise of ICOs. According to a report released in July 2018 by the Satis Group, more than 80% of ICOs in 2017 were scams and over 10% of the capital invested was lost due to fraudulent activities.
A comprehensive ICO market research report published last year revealed that around $100 million in investor funds were lost due to exit scams during the first two quarters of 2018. Moreover, the median ICO return-on-investment (ROI) for Q2 2018 was -55%.
In addition to many scams involving ICOs, the US Securities and Exchange Commission (SEC) has issued warnings to firms looking to raise funds through the controversial crowdfunding method. Recently, the federal regulator filed a lawsuit against the managers of the $100 million Kik ICO. As alleged in court papers, the Kik ICO was an “illegal securities offering.”
IEO Fundraising Campaigns May Hold Token Issuers More Accountable
In order to improve upon the ICO model, a newer type of fundraising method, called initial exchange offerings (IEO), have been introduced. One of the main differences between IEOs and ICOs is that, in most cases, a centralized cryptoasset exchange (like Binance) manages the fundraising process.
For example, Binance’s platform and ecosystem – which consists of the Binance Chain and Binance Launchpad – has been used to launch several token sales including ones for BitTorrent (BTT), Mithril, and the Harmony project. These public crypto token sales are referred to as IEOs because a digital asset exchange’s platform plays a role in facilitating the crowdfunding campaign – instead of the project founders themselves.
While a crypto token’s developers are involved in raising funds, IEOs are arguably an improved version of ICOs because a cryptoasset exchange operator, like Binance or OKEx, is assuming some level of responsibility when allowing projects to use their platform to raise capital.
Unlike ICO campaigns, which are not overseen or vetted by another third party, the newer IEO model holds crypto token sale managers accountable (to a certain extent). For instance, an exchange operator will have some minimum standard and/or criteria for evaluating crypto projects, before allowing them to use their platform to conduct token sales.
Only Allocate 1-5% Of Investment Portfolio To Crypto Tokens
However, crypto exchanges are also incentivized to support the trading of as many tokens as possible – as they primarily earn through trading fees. In order to cover costs and make profits, it’s possible that exchange operators might be quite lenient by allowing projects to conduct token sales – without thoroughly assessing the legitimacy of the product(s) or services the project founders intend to offer.
For these reasons, investors must do their own research before investing in crypto token projects launched via IEOs, or in any other manner. The cryptoasset market is also a highly speculative and a high-risk investment sector due to the extreme volatility of cryptocurrencies and also because the blockchain space is still in its early stages of development. Most advisory firms and analysts recommend only allocating between 1-5% of an investment portfolio to cryptoassets.
Initial Coin Offerings (ICOs) revolutionized the crowdfunding concept in a multitude of ways by enabling access to retail and institutional investors from across the world. Crypto spring in 2017 can largely be credited to the ICO boom. In 2017, ICOs saw unprecedented returns to investors both institutional and retail. Albeit the bull didn’t last for long, the early adopters in the crypto space during 2017 made huge profits.