What is an Initial Exchange Offering (IEO) and How to Use It for Trading
Initial Exchange Offerings are all the rage in cryptocurrencies these days. Where once Initial Coin Offerings (ICO) were the funding method of choice, that changed during this past year. These days, ICOs are few and far in between, while IEOs are having their time in the sun.
What exactly is an IEO, and why are they so common these days?
It’s all related to raising funds for cryptocurrency projects.
In ICOs, investors would hand money to the project team in exchange for a certain amount of crypto on a given blockchain. There were many reasons why this was problematic, mostly due to scams and failed projects.
IEOs work differently. IEOs, as their name implies, have a crypto exchange platform as its middleman. You don’t hand money to the developers, but to a crypto exchange that’s teamed up with them. In exchange, rather than the project team awarding you some tokens directly, you now get them from the crypto exchange platform.
What advantages do IEOs bring?
For investors, many can be identified. For one, when a crypto exchange site pairs up with a crypto project, the exchange’s reputation is put on the line. If the development team doesn’t meet the stated goals, there is exposure. If the project fails, or worse, if it happens to be a scam, the exchange will take the main blow.
This means that the crypto exchange site does its due diligence before accepting projects into its EIO offerings. This includes checking the project’s whitepaper, its members, and making sure the goals are both attainable and realistic.
Exchange sites can even back out of an IEO at any time before it takes place if they find anything shady. It has actually happened before. And it will happen again, at least with reputable exchanges.
So for an investor, there’s a big reduction in the risk taken when compared to an ICO. That doesn’t mean the project can’t be a scam, but it’s much less likely to be one.
There’s still a risk associated since projects can fail. Sometimes the failure is nobody’s fault — unforeseen circumstances can arise, after all. These circumstances can be unexpected overheads, market shifts, or new laws making a project unviable.
Still, an IEO is much less likely to end up with you losing your money than an ICO.
As exchange sites host more and more IEOs, each site will develop a reputation for the results of its projects. While right now it’s difficult to tell, with time, you’ll be able to somehow predict results based on the exchange backing the project.
For example, an exchange site with a 95% success in its IEOs would be considered highly trustable. If another site has projects that regularly fail, however, then perhaps investing there wouldn’t be wise.
It will take a while for numbers to add up to anything statistically significant, but they will. Predictions of these kinds already happen in businesses, and it’s only natural that IEOs will follow suit.
How does it work for crypto trading?
For investors and traders, IEOs are simple. That’s actually one of the big advantages to them.
While with ICOs you had to look into when they would happen and how to participate, with IEOs you’re ready to participate from the start. Assuming the IEO is backed by an exchange site you’re registered with; all you need to do is log in and buy your crypto.
There’s no longer any need to register using obscure sites or look into what payment methods the project accepts. If the exchange site accepts a payment type, the IEO will. This includes paying for crypto IEOs with other cryptos.
There’s only one thing you should keep in mind — as, with ICOs, there are a limited number of tokens on offer during IEOs. This means that, for projects with high expectative, the IEO tokens might sell out within minutes.
There are also cases when an IEO is highly on demand, where an exchange site might go down during the offer due to excessive traffic. While serious exchange sites try to prepare for these situations, they are often impossible to completely avoid. Think of the Ticketmaster website, and when an iconic musical act announces a one-off concert. If it can happen to them, it certainly can happen to crypto exchanges.
So what’s the catch here? Are exchange sites doing this out of goodwill?
The main way they profit is by taking a cut of the sales gross. Since the website is using an existing software infrastructure, there’s no monetary cost to running one. The amount of work, outside of making sure the project is legitimate, is minimal.
To put it simply, IEOs are most profitable for exchange sites. However, since their reputation is at risk, at least, credible exchanges do try to offer only credible IEOs too.
There’s more. Some exchanges allow for special rates for those customers buying into IEOs using the exchange’s own token. For example, Binance is known for cutting transaction costs for people paying with BNB.
It might look like a net loss due to lost transaction fees, but it isn’t. Whatever Binance is losing in transaction fees, it’s gaining in users for its own token. In order for people to be able to pay using BNB, they first need to buy BNB.
This means many more users will both buy and hold the native Binance token. Numerically speaking, that’s way more valuable than a tiny fee.
And how do developers profit from this?
First, an IEO legitimizes the development team in a way an ICO can’t. If you’ve managed to get any of the best cryptocurrency exchanges to accept your project for an IEO, your project is at least believable. Thanks to the rising mistrust of blockchain projects, that alone can be invaluable.
Second, you’re assured at least an exchange will list you. This might sound silly, but there are far too many cryptocurrencies out there. Most of them don’t have the users or community interest that Ethereum or Bitcoin has.
This means that exchange sites often have to decide what to list — and what to delist. Launching a crypto project with a leading exchange listing is, therefore, a huge thing.
A third way in which developers profit from IEOs is advertising. An ICO was supposed to get funding, but a lot of money had to be spent to get people to know the ICO was going to take place.
Since IEOs are backed by a crypto exchange site, the exchange is expected to handle part of the advertising. This doesn’t mean the project will get ads during the Superbowl, but by just announcing the IEO in the exchange site, the local community will know. And the bigger the community, the better.
Should I invest in any IEO? Wait a minute. It is evident that the current bitcoin value is a big boost for IEOs.
Although IEOs are safer than ICOs, safer doesn’t mean safe. They’re less likely to fail but investing in any IEO that cross your path will likely end up in tears… and bankruptcy.
Even when exchange sites have vetted the projects, they host IEOs for, you should do your homework too. Look into the project — who handles it as well as the track record. Look at what is on offer, and if there might be a place in the market for it. Try and find uses for it that are realistic.
And then, if it still sounds convincing, take the risk.