An Initial Coin Offering (ICO) is a former popular method of raising funds for newly launched crypto projects using cryptocurrencies. It works like an Initial Public Offering in which the company sells its shares and raises funds. Typically, you can purchase crypto assets during their initial release in ICOs.
Mastercoin launched its first ICO in 2013. Ethereum (ETH) followed this method, raising around $18.3 million in 2014.
ICOs projects have proven risky for investors in the past. ICOs are vulnerable to fraud because they lack legal protections. Therefore people gradually lost interest in this ICO due to increasing scams.
In contrast, an Initial Exchange Offering (IEO) provides a safer alternative for investors to buy coins and tokens with assets directly from their exchange wallets during fundraising. Cryptocurrency exchanges also take advantage of IEOs to increase interest in their platform, gain access to more revenue, and access exclusive tokens.
Initial Exchange Offering (IEO)
An Initial Exchange Offering is an initial coin offering not conducted by the issuing company but by a cryptocurrency exchange. IEOs enable blockchain startups to raise capital by selling new digital assets like coins or tokens. Simply put, crypto exchanges help to oversee the token sale.
Startups and entrepreneurs have chosen to launch IEOs to raise crypto funds after experiencing many scam cases associated with ICOs over the past few years.
Initial exchange offerings have gained popularity mainly due to their transparency and ease of participation. Investors just need to establish an account on the IEO platform, perform the verification processes and start participating in the IEO. Companies creating new crypto assets can secure capital in seconds or minutes – compared to ICOs, which can take months to a year to raise funds.
IEOs On Exchange Platforms
IEO started in January 2019 when Binance Launchpad introduced BitTorrent Token (BTT). The initial public offering sold out within 15 minutes of launch and got funding of over $7.1 million.
In February, Binance’s second IEO of Fetch.AI (FET) tokens reached a $6 million hard cap in just 22 seconds. Other leading crypto exchanges have announced the launch of their own IEO platforms after observing the success of the Binance launchpad.
Below are examples of some popular IEOs platforms.
|Bittrex||Bittrex International IEO|
How Does An Initial Exchange Offering Work?
Startup platforms use IEO to get crowdfunding for their companies. However, they raise funds by working directly with crypto trading platforms to start a token sale.
Meanwhile, these cryptocurrency trading platforms carry out several checks before starting a token sale to minimize the risk of fraud and protect their reputation. These checks ensure that the new crypto asset is legitimate and meets the claims of the startup companies.
Before doing an IEO through an exchange, companies should mention the advantages of the blockchain project to strengthen the attractiveness of investors. However, a white paper is essential. Like an academic paper, a white paper educates and informs potential investors about a crypto project. It explains the product’s technical aspects, its structure, and the problems it aims to solve.
There may be other things like why investors and developers should be interested, market analysis, fund distribution, development strategy, growth forecast, marketing plan, and the team’s vision for the project. Before proceeding with a blockchain project, an IEO platform reviews this white paper and other factors.
Other factors that a cryptocurrency exchange should look for include the following:
- Considering the technology behind it
- Demand and tokenomics for it in cryptocurrency
- Background of the team behind the project
- Unique selling points of the currency
Once a crypto trading platform decides to proceed with an IEO project, contributors are asked to perform KYC and Anti-Money Laundering measures. Contributors and investors also get full transparency about the progress of the project.
Advantages Of IEO
- IEO platforms provide investors with a better user experience than ICOs.
- Investors’ confidence in their cryptocurrency investments has increased.
- There is a minimal risk because IEOs are regulated by the rules set by the crypto exchange.
- Since IEOs are executed through third-party exchanges, they operate smoothly. Trading platforms monitor transactions and may also provide development and marketing support.
- Exchange gives the project’s team access to legal advice and resources.
- IEOs are not open to the public, as only exchange members can access them.
- It makes it easy for interested parties to engage as they don’t have to commute between blockchain platforms and wallets to manage transactions.
Exchanges allow token holders to use their tokens to join IEOs. After going through the preliminary IEO procedures, such as registration, verification, and obtaining native tokens, you can buy digital assets through IEOs.
Disadvantages Of IEO
Although IEO has some major benefits, it also has drawbacks, including:
- Companies experience less control over their projects.
- All crypto trading platforms are different. Some may not be as strict in enforcing regulations or due diligence. Hence, risks increase.
- The crypto exchange can remove the project at any time.
- A project may lack participants due to limited access to exchanges by investors willing to purchase tokens.
- Listing fees can be high, especially on popular exchange platforms.
- With IEOs, there is a risk of crypto pump-and-dump scams. Scammers can create false hype for crypto to generate interest and inflate prices so they can sell all the shares soon.
Difference Between IEO And ICO
|Fundraising is conducted at||The crypto exchange||Token issuer’s website|
|Smart contract management||The crypto exchange manages the smart contract||The start-up conducting the token sale manages|
|Crowdsale counterpart||A cryptocurrency exchange||The project’s developers|
|Need for AML/KYC||Not necessarily – the exchange conduct AML/KYC on its users||Yes, it can vary between different crypto projects|
|Automatic token listing after the crowd sale||Yes – the exchange where the IEO is conducted list||No|
|Screening is required before a startup||Yes – the crypto platform screens the company before it enables it to raise funds||No – anyone can introduce ICO|
|Marketing budget required for fundraising companies||Relatively low||Significantly high|
Launching An Initial Exchange Offering
If you want to start your own IEO cryptocurrency project, you should remember the following essential points:
- First, you should consider your IEO project. Look at the current market conditions to ensure that your project is viable.
- The choice of a reliable crypto exchange is critical as the platform chosen will set the pace of competition and shape the future of the IEO project. A few are mentioned above.
- The next step in launching a successful IEO is drafting a well-analyzed and well-written white paper. It must include all information about how investors can benefit from the plan and its uniqueness.
- Your website serves as the digestible and digital version of the project’s white paper. So design a fast, secure, and user-friendly website.
- The next step is the development of tokens which can be done through blockchain platforms like NEO, Ethereum, EOS, and others.
- You should already consider the maximum funding requirement before placing tokens on your chosen exchange.
- Each crypto exchange has specific rules for listing tokens. So you have to meet all these requirements and pass the selection criteria. Once the exchange has completed checks, your crypto assets can be successfully listed on the platform, and the sale can commence.
Tips For Making Fundraising Successful
- Have a strong marketing strategy: Focus on creating quality blogs and articles about your project that can generate public interest. Advertise through platforms where your target audience (investors) can easily reach the project.
- Diversify your target audience: Have you noticed why major exchange platforms support multiple languages? Because to stand out in the market, it is important to diversify by focusing on communities other than English speakers. Therefore, leaving an audience is a pity.
- Build a community: You may face significant challenges even after listing the token on an exchange. Most investors on these platforms prefer popular cryptocurrencies like Ethereum and Bitcoin. Therefore, it is vital to get maximum support from your community. Try to get at least a hundred real backers before you fundraise.
Initial Exchange Offerings and Initial Coin Offerings created a lot of buzz and attracted huge funds into the cryptocurrency market. IEOs have been prominent in the successful launch of many blockchain projects. IEOs benefit all parties, including token issuers, investors, and cryptocurrency exchanges. Crypto exchanges monitor IEOs projects, but you should still do your research.