Initial Coin Offerings (ICOs) rose in popularity in 2017 due to the potential gains traders could make.
ICOs, more commonly referred to now as IEOs (initial exchange offerings), are a novel way of crowdfunding projects harnessing blockchain technology. Traders contribute cryptocurrencies (or fiat, occasionally) to the project and in return, get some of the project’s tokens.
Created through what’s known as a Token Generating Event (TGE), those tokens represent a unit of value within the IEO project’s ecosystem and are normally used to access certain functions on a platform or product.
The tokens can of course be traded after being listed on exchanges.
IEO contributors often speculate that the value of the tokens they buy will rise in value in the future, earning them profit.
Unlike an Initial Public Offerings, IEOs do not give the contributor a stake in the company. If they did, they would be security tokens, like traditional company shares, and governed by securities regulations.
The IEO funding model offers a viable option to a space that has been the preserve of venture capital.
According to Coinschedule:
- In 2016, 43 token sales were held, 2017, 209, and in 2018 there were more than 600
- In 2017, the amount of money raised through token sales was around 11.4 billion USD. Between January and May 2018, token sale funding had already reached 13.7 billion USD.
- A recent study by Stratis Group revealed that 80% of token sales in 2017 were scams.
- Some of the most profitable token sales in 2017 were Spectrecoin (741.42x), Neblio (84.83x), Icon (43.30x), Qtum (73.71x), and Tron (42.80x)
Should developers pivot to IEOs over VCs?
IEOs offers a viable alternative to the venture capital route, but they come with their fair share of risks.
Money raised through token sales is considered revenue hence IEOs have to pay taxes. This has led to the emergence of countries with more lenient regulatory measures such as Malta.
Also, token sale contributors have to be careful where they put their money. Not only are token sales rife with potential scams, but there are no guarantees of profits, especially during bear market conditions.
How do IEOs work?
Most projects looking to IEO will develop a whitepaper that includes all the vital information about the project, such as the business plan, token sale details, token inflation/deflation model, the team and other important information.
Advertisement of the project follows shortly, after which the project can proceed to the contribution phase.
How can I participate in an IEO?
There are different levels of contribution depending on the amount of capital you have.
Private sales offer cheaper prices but they require larger investments.
The public sale usually has a lower capital limit, but the price of tokens will tend to be higher than the private sale entry.
Participating in an IEO is relatively easy on a platform like Liquid. The website holds all the information about the project, the whitepaper, the contribution process and all the official channels.
Outside of Liquid, token sales can be a little more complicated and require jumping through a number of hoops.
On Liquid, after following the token contribution process, tokens tokens are sent straight to your wallet.
If you’re taking part in a token sale outside of Liquid, be careful with whom you share your personal information – and never reveal your private keys!
Exchange listings usually happen after token distribution.
What makes a good IEO?
There are a number of bare minimums that an investor needs to look out for to gauge the prospects of a project including:
- What does the project seek to solve? Is the problem clearly stated, and how do they go about solving it? Is there a working minimum viable product?
- What are the team’s credentials?
- Are there any partnerships (even potential)?
If you invest quickly and rashly in IEOs you might get burned.
The success of a project is never assured, and projects might fail, returning zero value on investment.
Even the best projects hold financial risks, albeit in the short term, and investors have to be prepared for this.
One of cryptocurrency’s goals is financial inclusivity and democratization. But with some token sales, contributors with the most money are able to buy the most tokens at the best prices, unfairly balancing the odds in their favour.
Also, the large amount of money involved in IEO has attracted hackers and scammers looking to exploit unsuspecting traders.
Investors have to be vigilant of their own cybersecurity. Using a safe and secure platform like Liquid is a smart move.
What is the future of IEO?
There is no limit for what can be tokenized, but the wild days of 2017 are most likely a thing of the past. Token sale returns were far less favorable in 2018 and many of those projects that crowdfunded in 2017 have struggled to survive the bear market.
Regulation of how token sales are conducted and best practices will play a large role in improving the landscape.
To echo the blockchain proposition of self-governance, the regulation of crypto can arise from within, but does not necessarily have to end there.
Being able to participate in a legal-friendly environment will lift the status of the space in general, and give confidence not only to more potential investors (retail and institutional) but also to more visionaries who need funding for their ideas.
But the token sale space is evolving and as we look forward, quality projects will continue to rise to the surface.
The Liquid Token Sale Platform
The Liquid token sale platform streamline the deficiencies of the current IEO landscape.
By launching a token sale on Liquid, developers are able to focus on the project development while the management of the process is delegated to the platform itself.
All this is done in a regulatory compliant way, meeting KYC/AML requirements, with an exchange listing after the sale to provide liquidity.
A lot of progress has been made in the blockchain space and we are now seeing legitimate companies and projects establish themselves and continue to innovate. For traders, token sales are not the slam dunk they once were, but with prudence, there are still opportunities.