IEOs (Initial Exchange Offerings) are a new way to raise funds for launching a new token. They have gained popularity in 2019 as an alternative to ICOs (Initial Coin Offerings) and STOs (Security Token Offerings). Compared to the latter two, IEOs provide for simpler token sales, listings, and trading by using a cryptocurrency exchange as a middleman.
However, not all that glitters is gold. IEOs have a number of hidden hazards crypto holders should be aware of. Let’s have a quick overview of the pros and cons before you make your next investment decision.
Advantages of IEO
Initial exchange offerings look like the perfect starting point for an aspiring crypto project that needs investment. Given the bad reputations of ICOs due to fraud, the patronage of a trusted cryptocurrency exchange significantly improves the credibility of a new token. Potential investors are more likely to entrust their funds knowing that the CEO won’t escape with their money, and that he can be held accountable for any fault. Being listed on a reputable platform is also good, free marketing.
Cryptocurrency exchanges benefit from becoming a crowdfunding platform, as well. Firstly, they are receiving a commission, which is fully worth the effort if the token is successful. Secondly, they attract more users: to participate in an IEO, you need to be registered and must have passed KYC verification on the pertinent trading platform. This can make them more competitive against other exchanges if the project behind the token attracts a lot of public attention.
Disadvantages of IEO
On the flip slide of the coin, empowering an exchange to act as a middleman smacks of centralization. A very limited number of people hold control over token circulation, which increases the chances for price manipulation, pump-and-dump schemes, the use of trading bots, etc. The mere chance of such schemes occurring could scare many potential investors away.
Added to that is the sense of incomplete ownership of the virtual currencies. Given that the exchanges own the private keys of all the wallets, users do not truly own their tokens; the trades take place on the exchange rather than the blockchain.
Another drawback of IEOs is the limited access to the token sale. If the offering lasts for a short period of time, and the registration procedure takes a long time, not every investor will manage to pool his funds in time.
A factor that does not bother traders following the hype is the underlying value of the token. While an exchange’s brand is good to kick off token marketing, it is the real demand for the token that makes its success long lasting.
Finally, potential investors should take into account the liquidity of the IEOs. For a virtual asset to be liquid, it needs to be listed on a couple of different exchanges, thus giving the investors the freedom to choose where to buy or sell tokens. Initial exchange offerings can appear to be too restrained in this regard.
What About Exchanges Themselves?
While ICO fraud is unbeatable in terms of frequency of its occurrence, cryptocurrency exchange scams win from the perspective of the amount. According to a recent study, crypto traders can be defrauded of up to $114 million, as was the case of a Sofia-based crypto exchange theft — so far the biggest in 2019.
Cryptocurrency trading platforms have also been noted faking the trading volume, highly centralizing their assets, promising unrealistic yields, not communicating with customers, and even falling victim to hack attacks — an activity often associated with exit scams.
Therefore, potential investors are often worried not only about the token’s performance within the exchange’s ecosystem, but also about the platform’s viability in general. Many of them conduct preliminary in-depth analysis with the help of tools such as ORS CryptoHound.
IEOs have paved their way to success in early 2019. Undoubtedly, they offer multiple benefits for both aspiring tokens and cryptocurrency exchanges. The former gain in credibility and save on marketing expenses, while the latter bet on attracting more users and earning commissions.
However, many investors still remain cautious in regard to IEOs, the reasons being the high asset centralization, incomplete token ownership, limited access to the initial token sale, lack of value, and low liquidity. Traders may also be suspicious of crypto trading platforms themselves given the amount of theft still taking place.