Tech Nomad Notes
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Tech Nomad Notes

wtf is Initial Exchange Offering?

Disclaimer: this is a personal opinion of the author written solely for community-sharing purpose. This is not investment advice, nor a dig at any particular project / media outlet / cryptocurrency exchange.

Back to the future?

I can clearly remember mid 2017: the blockchain space boiling up with ICOs spree putting them to the pedestal of ‘innovative fundraising’. In a matter of months the market was full of self-proclaimed ICO experts and advisors who promised to come up with a crypto business model in one Q&A session. No need to dwell on this further — we all remember this craze.

Two years in, and it feels like history repeating itself. With the onset of crypto winter, and ETH price fluctuating at $86 lows, crypto needed a major boost. Is Initial Exchange Offering set to become another hype rally that will end the period of stagnation? Or maybe this time this is a breakthrough funding mode indeed, an upgraded version of notorious ICOs, so to say? Too many parallels with 2017, but of course this phenomenon is running on new rails.

For those who still wonders how this industry works

No doubt, the blockchain industry is a two-sided coin — there are good and bad actors, just like everywhere else. There are enthusiasts who believe in ‘making the world a better place’ building new infrastructure layers and economic models from the ground up, and there are speculators who’s merely trying to make money out of air without any other concerns whatsoever. Most often than not, cryptocurrency media and cryptocurrency exchanges fall for the latter category. As a community, we all try to keep pace with positive dynamics of development and adoption, but the dark forces running underneath are more subtle and much harder to detect. That’s why (as always) we’ll try to bring those to the spotlight.

This is how crypto exchanges actually make money

The only reason for big exchanges getting a chance to rule the ball was super speculative nature of the industry at large with trading taking the lion’s share of the field. While in ‘outdated’ fiat economies assets and financial derivatives were launched mainly to establish new speculative markets, where big players could earn money leaving smaller players off-board. Of course, these financial instruments have way more applications, but this is one of the utmost importance. With crypto, the speculative nature of the markets has elevated to new heights. If you run a crypto exchange with significant (not fake) trading volumes, there are several ways you can launch your personal gold mine. Exchange commissions? Also a profit source, yet the real money is made by virtue of way more exciting activities.

Listing of new assets might well be referred to as Crypto Gold Rush One. Here are the two premises to consider. For one, the sheer amount of crypto startups way exceeds that of trading pairs to fit the market size and liquidity. Also, it’s no secret that the larger share of the crypto community is distributed among several exchanges, 10 or 15 max. Now imagine you’re a CEO who wants to pump up a token (obviously, to the moon, no less). To do that, you will need a farm of hamsters who start buying an otherwise useless token, once it starts to grow ‘organically’. This is tricky business, because exchange users are at the same time its customers, while manipulating the market becomes an end product. The entry point to this game is a notorious listing fee that amounted to millions of dollars as reported not so long ago. Demand is high, and there’s no room for everybody — so the sky is really the limit for crypto exchanges when tagging the price.

What else is there? How about manipulating the price directly. When you have all the skin in the crypto exchange game (you see all orders, stop losses, pending orders and amounts of tokens on the balance of each account), the only way to get rid of temptation to convert this knowledge into crisp dollars or bitcoins is to yield to it. Corrupt situation is aggravated by the fact that the listing fee also includes a significant percentage in tokens. This is why exchanges have a direct interest to pump fresh-out-of-oven coins (the majority of which are garbage by economic design) and sell them high. Hence, Bitfinex/Tether price manipulation allegations.

Easy money source number 3 is (secretly) supporting money laundering (maybe). No brainer, when there is a financial institution that is not heavily regulated (and operates with such pseudo-anonymous asset class as crypto), it will be used for money laundering. Chainalysis recent report only confirms this.

Payola, is this you?

The reality is that the blueprint scenarios of making money in crypto haven’t changed much since 2017’s ICO boom. Up next — another force of crypto’s dark side, aka media outlets. We wrote for some of them in the past, and gotta say — the bribery behind the scenes is everyday normal. And while journalism is often conceived as the world’s second oldest profession, with crypto media landscape this is probably the only truth. The ‘payola’ system is trivial: you pay — you get interviews and mentions no matter how shitty the project is. Past ICO hype brought considerable profits to crypto media, but crypto winter made them tighten their belts. Hence, reduced press-release prices, etc. (again, an observation from behind the scenes). The industry is not the same as it was in 2017, but main players are still there.

Crypto Gold Rush Two

You might read a thing or two about #IEO basics springing around the Internet. We won’t dwell on this any further, as this is only the tip of the iceberg. Anyway, the major takeaway: it’s the exchanges that are now leading the whole fundraising round. To bring your amazingly crafted token to the market, you don’t need ICO agencies, experts, advisors or corrupted media anymore (not quite sure about the latter though). With IEOs, a crypto exchange acts like a human orchestra executing marketing, fundraising, distributing and underwriting functions all-in-one. Now exchanges are stronger than ever, so you’d better be in management’s close circle to make some dough. Or have an exceptional project, of course. In essence, running an IEO looks like short-term borrowing of a crypto exchange’s trust and customer base. Running fundraising would allow exchanges to add at least two new sources of income to their table — (1) fundraising fees (2) improved utility of their native token. The majority of exchanges that have tokens previously used them only as a discount tool (and therefore real demand was not high). Now, with IEO craze on, exchanges added a couple of new features to economics of their tokens, including lottery and holding incentives. Now tokens are getting pumped — look at Binance coin. What a wise strategy, indeed.

The bottom line

At the end of the day, what we got is basically this. Exchanges earn money, projects earn money, media companies earn money. But, who will pay for the champagne and lines of cocaine? Hamsters, as usual. First it looked like a copy-paste from the ICO era, but the industry matured since those times. The industry of IEOs seems to develop differently. Exchanges’ management understand that any market oversaturation would end up like the last months of ICOs with hundreds of projects with zero investment rate. Their tricky IEO business would be done, and this is not cool. That’s why we see major exchanges selecting the lucky strikes very carefully now. Probably, the IEO market will soon organically divide into two: global and local. Global market will be occupied by major exchanges trying to select solid projects, while local markets (such like Chinese, Japan, Thailand, Russia&CIS, etc) will be full of frank bullshit. Both markets will surely have listings that don’t need a token, and even application of blockchain technology in the first place. The technology is sti too complex, ans majority of early backers understand from zero to nothing, so they just buy and hodl. This begs the question: do all the major players of this game — crypto exchanges — really have resources to audit each and every project they give their blessing to? On a positive side though, IEO surely presents a great chance for legit newcomers to emerge from oblivion. Yet, considering the industry’s super speculative nature, in most cases money and hype will still come first — just like in the good old days.



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