Are IEOs a Passing Fad or Are Their True Value Yet to Be Unlocked?

2019 has been the year of IEOs. With less than 2 months to go before we march into 2020, I think it’s a safe claim to make now. What’s surprising here is that barely a year ago, crypto pundits had almost unanimously declared that 2019 would be the year of STOs. But when has the crypto market ever listened to the mandate of the people? So what started as a novelty in January, had become a rage by the middle of the year. And although the intensity has reduced a bit now, there is no sign of the IEO chariot stopping.

ICO Bad, IEO Good

The last quarter of 2017 was possibly the best time to be a crypto investor. Bitcoin was reaching new highs every other day, altcoins were pumping as if on steroids, ICOs were giving insane returns. It looked like nothing could stop the crypto market capitalization to cross the trillion dollar mark. And then it all turned sour. 2018 saw Bitcoin crashing through the floor, dragging down the entire crypto market along.

ICOs lost their charm, with most of them getting dumped on listing.

A handful (such as Quarkchain, Elastos and Holochain) still managed to return multi-fold profits, but the charm associated with ICOs was gone. In fact, a lot of these ICOs ended up being mere exit scams. They were even blamed for the fall of the crypto market, with people claiming that ICOs selling off their raised funds was what had caused the bear market!

(BTC price started its uptrend in the first quarter of 2019, and with it we saw the rise of the IEOs)

In essence, IEOs aren’t much different from ICOs – both are instruments through which blockchain projects raise funds for their growth and development. In case of an ICO, the onus lies on the investor to assess the legitimacy of the process; a tough task for an ordinary individual. On the other hand, the token sale of an IEO is conducted by a particular crypto-exchange. Since the exchange’s reputation gets associated with the project, it’s fair to assume that the exchange would have diligently audited the project.

Furthermore, IEO sales are invariably followed by the listing of the project’s token on that exchange within a few days of the conclusion of sales, providing liquidity to investors. In case of ICOs, token sales didn’t even come with a guarantee of listing, or delayed for months in some cases (cough, Wanchain, cough)! And finally, exchanges typically allow only verified customers to participate in their IEOs, taking care of all KYC requirements on behalf of the project.

Binance and the Birth of IEOs

The modern-day hullabaloo regarding IEOs might have started with Binance’s announcement of BitTorrent’s token sale on their Launchpad platform back in January, but they had actually dabbed with this concept as early as 2017. Conducted in December of 2017, during the peak of the bull rush, Bread and Gifto were technically the first IEOs. Back in those days, people had failed to appreciate Binance’s tactical move, and had shrugged them off as just another profit-making ICO.

Hosting token offerings involves dealing with a host of regulatory and supervisory issues. Binance kept their cards close to their chest for a year after that, refined their Launchpad procedure, and announced their return to the scene with a bang (BitTorrent actually did a 15.4x in USD ATH).

This IEO model was soon picked up by other exchanges, and a host of IEO platform announcements followed – KuCoin came up with Spotlight, Huobi launched Huobi Prime, and OKEx gave us Jumpstart to name a few.

The success of BitTorrent was repeated by Fetch.ai and Celer, which piqued people’s interest in IEOs. Around the same time, Bitcoin broke out of its year-long slump, bringing cheer and positivity back in to the crypto-markets. This helped the cause of the IEOs to a great extent as well. If this report is anything to go by, IEOs listed on most of the large-volume exchanges have generally done quite well, so much so that Binance got quite frisky and even toyed with the idea of IDOs for a while.

Every self-respecting exchange has a platform for conducting IEO sales today (image courtesy 

CryptoPotato

)

Life After Listing

Just like the ICOs in their heydays, the first few months of the IEO chapter ran on steroids. The craze surrounding projects that got selected through Launchpad was reminiscent of the madness surrounding altcoin listings on Binance in 2017.

Investors started buying (still untradeable) tokens for as high as 4x of their IEO price through OTC channels on Telegram and Discord.

Projects like Matic, Harmony and Elrond kept the momentum on. Other exchanges also started making their presence felt, surpassing Binance in terms of ROI now and then – BlockCloud on OKEx touched 18.1x and Top Network on Huobi breached 13.9x in terms of ATH in USD.

Unfortunately, life for IEO investors hasn’t always been rosy, specially the ones who pooled through Discord (you know who you are). When it comes to authenticity of the IEOs, there has been the occasional bad egg, but for the most part exchanges (at least the popular ones) have done their research properly before selecting a project. In any case, reports of exit scams are almost unheard of when it comes to IEO.

Even so, there is nothing that can guarantee the long term price sustainability of token prices. And what has skyrocketed in a matter of days has usually come crashing to the ground really hard.   

How IEOs Helped the Exchanges

Binance had initially followed the FCFS model for IEOs, but it soon realized that this idea could be utilized to drive up the price of its native token BNB. They swiftly moved on to a new model where the number of IEO tokens a customer could buy depended on the number of BNB in the person’s account. And as has often happened in the crypto world, other exchanges like KuCoin and Huobi didn’t waste any time in adopting this new model again  (seriously, Binance should start considering filing patents for their ideas).

This led to a chain of events – greater the ROI of a project, more the demand for the exchange’s token, and higher its price movement.

As an aftermath of this model, an interesting situation arose. There have always been accusations (like this article by CRED) that exchanges charge projects a considerable amount of money (in tokens) for listing their tokens. As soon as the token shows a positive price action, the exchange sells all the tokens paid as listing fee – no obligation held back the exchange here.

In the new IEO model, however, the price appreciation of the exchange’s token itself became dependent on the success of the projects that were listed. If investors saw successive IEO projects getting dumped, they would lose interest in holding the exchange’s tokens as well. This effectively meant that even if the exchange had been paid a listing fee for ‘selecting’ that particular IEO, they wouldn’t do anything that would cause the token price to crash.

Moreover, projects listed through IEOs typically release a small portion of their total tokens to the public on listing, and private investors are paid through monthly or quarterly installments, thereby ensuring that there are simply not enough tokens available in the market to dump the price during the listing phase itself.

Inspite of the anti-scam and anti-dumping protection that IEOs offer over ICOs, many projects have seen their token price go below the IEO sale price.

Case in point – BlockCloud, a blockchain-based advanced TCP/IP architecture which promises to provide improved quality for dynamic networks. Listed at a price of $.005, BLOC tokens soared to $0.089, before crashing down to $0.0018. Today it’s trading at $0.0024 – a grand ROI of 0.5x.

BlockCloud - a great pump followed by a unholy dump

Now if the exchange had no ulterior motive of dumping the token price, who exactly was responsible for this? Were there whispers of a scam, or did investors just become disillusioned with the project due to lack of progress?

What Determines Long Term Value?

It's not even been 10 months into the IEO story, and we already have more than a 100 IEOs to choose from. And though the time period is hardly sufficient to properly analyze the factors that might affect the long term price sustainability of a project, we'll still try to make sense out of this madness here.

Top 10 IEOs by Current ROI (as per 

CryptoRank

)

Popularity of the IEO platform would be a major factor in my opinion. IEO projects listed on exchanges like Binance, Gate.io, OKEx, Huobi and KuCoin have generally returned profits to investors (unless you were waiting for a moonshot and missed your mark). If you don’t trust the exchange, it’s going to be difficult to trust a project which the exchange has backed as well. And while popularity is not the true measure of trust, it’s nonetheless a good starting point in the absence of other indicators.

IEO ROIs for various exchanges (as per 

CryptoRank

)

There is the curious case of V SYSTEMS though, which is listed at #10 in terms of current ROI. V SYSTEMS is a blockchain database cloud project that is creating a secure underlying infrastructure platform, with a special focus on DeFi applications.

V SYSTEMS' IEO was held on little known Chinese exchange ZB.com, where the VSYS token soared up to 24.6x. Even after a considerable correction, the token is trading at 2.8x now. VSYS is listed on KuCoin as well, and it can be argued that KuCoin’s reputation had much to do with their performance, but it still remains an exception to our hypothesis here.  

Token liquidity is another critical factor. Announcements of new exchange listing assures investors that the project is at least trying to increase their token liquidity, if nothing else. Moreover, every exchange might not be available to users all over the world. Under such circumstances, the possibility of trading tokens on multiple exchanges becomes even more important.

Binance itself had restricted customers in the US from accessing their website, till they came up with their US counterpart.

A notable exception here is Tokoin, #4 in our list of IEOs ranked by current ROI. Tokoin is a blockchain startup from Indonesia which is trying to accelerate the growth of emerging markets is South-East Asian countries by using distributed ledger technology for identity verification and transaction book-keeping.

Listed on KuCoin through their Spotlight program almost 3 months ago, they are yet to be listed on another exchange (as per CMC). That hasn’t affected their token price, and although it’s down from its ATH of 9x, it’s still trading at a more-than-respectable 4.2x.

Amount of funds raised through IEO should be another factor affecting the token price performance. As has been typically seen in case of ICOs too, projects which target a lower hard cap during their sales have more space to grow in the market, and on an average outperform projects which start with larger market caps in terms of ROI.

IEOs which have done well have usually had their hard caps set between $0.5million to $3million, a range which can be considered to be reasonable for a blockchain project.

Do keep in mind that projects usually also raise funds through private investors simultaneously, but the bulk of the initial circulating supply is comprised of tokens sold through the IEO.

But just like the other 2 cases, we have BitTorrent (#7 in the list of IEOs by current ROI) spoiling our theory here. BitTorrent is a peer-to-peer network running on the TRON blockchain, which allows content creators to directly monetize their work and earn payments in crypto.

BitTorrent’s hard cap of $7.2million can by no means be considered to be moderate. Going by Binance’s IEO details page, the initial circulating supply of BTT tokens actually corresponded to a market cap of $10.8million. And the token price skyrocketed to 15.4x, corresponding to a market cap of $166million! So much for our assumptions.

So, What’s the Secret to Success?

Only the top 10 IEO projects were considered as a sample set, and we found an exception to each of our hypotheses. If we dig deeper, I’m sure there will be many more. Reputation of exchange, higher token liquidity, initial market cap, nothing seems to matter so much. Is it back to the Wild West days of the ICOs then, when tokens would just pop up for no reason whatsoever?

One common factor which ties these 3 projects is that they are led by individuals who have established themselves as virtuosos in their respective fields. Justin Sun, CEO of TRON Foundation, is also the owner of BitTorrent. While he is hated by more than those he is loved by, his contribution to establishing Tron as one of the top 10 coins by market cap can’t be ignored by any means of imagination.

V SYSTEMS’ Chief Architect is Sunny King, the creator of Proof-of-Stake consensus algorithm and “the single most original altcoin developer” as per Vitalik Buterin. And as for Tokoin, their CEO Reiner Rahardja leads a group consisting of multiple sectors and industries, and has been awarded the ‘Top 2 Indonesia Successful Young Entrepreneurs Under 40’.

So yes, there’s no magic formula, but just sheer hard work and a sense of commitment which can ensure that an IEO gives positive returns to its investors. All 3 of these exceptions have working products out in the market today, and the same holds true for other projects in the list of winners too.

And even though IEOs might be safer to invest in than ICOs today, the truth is that reading about the project’s vision and looking up the team’s credentials is the only possible way of making an informed choice. But you knew that all along, isn’t it?