Initial coin offerings—once the favorite method to raise money from investors and crypto enthusiasts—is being ousted by newer, more promising initial exchange offerings. How do the two methods differ and who exactly benefits?
The Downfall of ICOs
Raising money was among the first thing cryptocurrency entrepreneurs figured out as the young industry developed. Initial coin offerings (ICOs) provided a way to sell tokens to the public and raise millions of dollars from thousands of users in a short amount of time.
This model quickly proved to be the best way to get large amounts of cash—with few strings attached. The model was soon adopted by virtually every company that launched a token between 2017 and 2019.
However, the crypto crash of 2018 proved to be fatal for the financing model as large selloffs, loss of purchaser confidence, and increased regulatory pushback substantially reduced the amount raised via ICOs. With the entire industry now looking for another way to raise money from investors, “IEOs” were born.
Simply put, initial exchange offerings are ICOs that are closed off to the public. Instead of marketing new cryptocurrencies to everyone, companies are now using crypto exchanges to preview projects and offer tokens to their customers. The project teams behind the new coins need to comply with the exchange’s requirements. The exchange, in return, protects the contributors to the project.
As such, the model supposedly reduces the chances of getting scammed, or at least that is the perception, and retail investors have started to return to token offerings. Bloomberg reported that about $180 million has been raised so far in 23 different exchange offerings, with most of them taking place in the past two months.
Experts Can’t Agree on IEOs Impact on the Market
Bill Shihara, chief executive officer of Seattle-based exchange Bittrex, said that this model has the potential to be larger than the ICOs of 2017. Reportedly, the exchange was seeing “significant demand” from both users and token teams.
Bittrex was slated to hold its first IEO on Mar. 15th before cancelling the offering last minute.
The IEO model was pioneered by Binance, the largest cryptocurrency exchange in the world. The Malta-based company launched an IEO earlier this year with the popular software file sharing application BitTorrent, which raised a record-breaking $7 million in less than 15 minutes.
However, Zach Fallon, a securities lawyer who worked on ICO issues at the US Securities and Exchange Commission, said that IEOs “take everything from an ICO and make it worse.” Jeff Dorman, a partner and portfolio manager at Los Angeles-based Arca Funds echoed the statement, saying that the fundamentals of an IEO are directly at odds with the decentralized ethos embedded in crypto.
Nejc Kofric, CEO of Luxembourg-based exchange Bitstamp, told Bloomberg his company is “staying away from IEOs.” He said entering this space is “short-sighted” and that the industry needed to be more regulated before more companies step into the market.
Having the backing of an entity as large and as trusted as a cryptocurrency exchange should make IEOs, at least in theory, more attractive to large investors. Aaron Bron, an investor and Bloomberg Opinion writer, disagrees with the statement.
He pointed out that the due diligence conducted by exchanges is unclear and inconsistent. He added that the process revolves more around assuring investors that the coins will trade—without considering the underlying value of the project. These conditions allow purchasers to offload risk to the next buyer, at a profit.
Despite the split opinions on IEOs with some companies supporting it and analysts doubting their effectiveness, it seems that the financing model is here to stay. With more than $80 million raised in March 2019 alone, the market could start to see the next wave of token offerings.