IPO, ICO, STO, and Now IEO: How Many Acronyms do We Need Before We Run Out of Letters in the Alphabet?
Disclaimer: This is not financial advice and no companies or products mentioned or implied are being endorsed!
With cryptocurrency, ICOs (Initial Coin Offerings), a brand new type of raising capital came into being. ICOs came out of the need for raising capital for cryptocurrencies that were exploding onto the cryptocurrency scene. There was no way for the first cryptocompanies to raise capital because the technology was new and it was not mainstream, never mind regulated. In addition there was a philosophical issue blocking traditional capital raising methods like IPO (Initial Public Offering). The problem was that cryptocurrencies were not recongised as legal. Bitcoin, the first cryptocurrency, was “born” out of “thin air” by a person, or group of people, known as Satoshi Nakamoto. Once released, it was completely decentralised and belonged to absolutely no one. While there are theories about who this Nakamoto is, no one knows for sure. So here you have a completely government free digital form of stored value. No one is responsible for it or what happens to it. Only holders of Bitcoin were “in charge” of what would happen. Having said this, the only way a change could be made to Bitcoin would be if the Bitcoin community, anyone holding Bitcoin, come to a complete consensus on the change. With such a situation. the potential was unleashed for a digital store of value for the people, by the people. Then Ethereum was launched. This was supposed to be a superior version of cryptocurrencies. However it turns out to be different and both currencies can happily live side-by-side. Once Ethereum was launched, a platform for developers was created where they could start launching Dapps (decentralised Applications). Here enters the enormous challenge to overcome, namely, how to raise funds! Ethereum also introduced a second problem. It now became possible for any company or developer(s) to create their very own cryptocurrencies extremely easily. In addition other platforms were developed to compete with the Blockchain in order to solve scaling, user friendly, and other issues. With all these innovations plus no regulation due to the decentralised nature of the cryptocurrency world, the massive problem of raising capital needed to be addressed.
Enter the ICO
ICOs were the new innovation that were born out this necessity. They solved the capital raising issue. An ICO is essentially a crowd fund raising initiative. Legal issues, scams, fraud, and hacks lead to the dawn fall of ICOs. The ICO still exists, but people are much more careful about investing in them. Research and risk management are taken more seriously. This was one cause of the current cryptocurrency bear market. A number of companies folded and there were very serious monetary losses, especially on the investors’ side. So now what?
STO, the “New” ICO
Security Token Offering (STO) came next. Dependent on the SEC (Securities and Exchange Commision) and other security regulators, STOs did not seem to take over, nor did ICOs disappear. The promised holy grail of capital raising did not live up to its promising start.
IEO to the Rescue
Apparently IEO (Initial Exchange Offering) is coming to the rescue. An IEO is an ICO released on an exchange. In other words any cryptocurrency a company wants to finance is launched on an exchange instead of as an ICO or STO or an IPO for that matter. Binance is the most active exchange in terms of IEOs. Binance’s Medium article was an impetus for this article. They explain more acronyms than I have the patience to do LOL. Now we have added more acronyms, but will this prove to be the answer?
Advantages of IEOs
There are a number of advantages to an IEO. A big advantage is the KYC (Know Your Client) and AML (Anti Money Laundering) are already done if you have an account. The other big bonus is that the cryptocurrency that is being launched is already on the exchange and more importantly is more likely to work and be legitimate. In addition, the cryptocurrency is likely to succeed because of the backing of the exchange, the liquidity the exchange offers for the concurrency, and being listed on the exchange makes the project more widely known.
Disadvantages of IEOs
The most dangerous aspect of an IEO is the perception that if an exchange backs this company, it will be a success. You always have to do your own research. Exchanges are centralised and therefore vulnerable to hacks. Exchanges also have to have enough volume to hold an IEO and make it successful. Another issue is that when the cryptocurrency launches on the exchange there is high volatility. However how long or how volatile is impossible to predict. The market behaves is always unpredictable and the false sense of security an offering on an exchange provides might actually be worse than an ICO. No one is responsible for loss other than the person who bought and/or sold whatever cryptocurrency was listed. You have to manage your risk and be prepared to be the one who bought at the highest. We are still in the bear run. This might be a way to stimulate a bull run or it might not.
Conclusion
While an IEO is a great idea and might prove to be the best way to raise capital for cryptocurrency, it might turn out to be another acronym that is added to our growing list. Having said this, there is no such thing as a one size fits all. So IEOs are a good thing because they provide another option.
Are the companies listed securities? Are they therefore legal? How much responsibility should and will the exchange and/or company take if the IEO is not successful or are hacked? What if funds that are meant to be invested are hacked before they can be invested? There are still many issues to discuss. Exchanges are open to a lot of problems. They also offer a lot of solutions and perhaps the next millionaires or possibly billionaires.
Greed and fear remain great traps. Therefore never trade or invest more than you can afford to lose, manage your risk, do your own research, and find out your tax laws. That said, hopefully this will contribute to a swing upwards that will help lead to a bull market for cryptocurrency again.
