- When Initial Exchange Offerings first exploded into popular culture in 2019, many believed that it was the next natural step for crypto.
- Due to the greater security afforded to users, enhanced transparency and a more equitable system that opened up the market to new users.
When Initial Exchange Offerings first exploded into popular culture in 2019, many believed that it was the next natural step for cryptocurrencies and that it would eventually spell the end for the tried-and-true but flawed method fundraising that is Initial Coin Offering. Due to the greater security afforded to users, enhanced transparency and a more equitable system that opened up the market to new users, the future seemed to be bright for IEOs, however, it seems that this is all changing.
Things seem to be going wrong for IEOs now, with 90% of them losing more than half of their lifetime value. This is a large collapse for something that was meant to change the face of the crypto space. There are a number of reasons for the rather spectacular decline of IEOs, although, many in the crypto world seem to be surprised at the current developments.
Price Crashes and Scandals
IEOs initially experienced great returns for investors due to the excitement generated from the new medium of fundraising. Despite this initial flash in the pan, data from Longhash has shown that in terms of returns for investors, IEOs have a terrible average track record. The average return on investment for IEOs on the top eleven exchange platforms was listed at -80%, which means that if an investor dropped $1000 on an exchange, they would lose $800 of that investment. The two worst platforms for investors were Probit and p2pb2b posted average ROIs of -90%
Probit also broke the trust of customers, by telling them that they would be able to get them “one step closer” to appearing on CoinMarketCap. Despite this pledge, it was found that of the 54 IEOs that had been run or are currently running, only seven are currently listed on the site. This absolute failure in regards to managing client expectations, coupled with failed investments are breaking customer trust in IEOs.
It seems that regulators are beginning to turn against IEOs, with the SEC sending out an investor alert this month, sending out a warning to potential investors about the dangers of investing in IEOs. One of the main reasons for the agency setting out this alert was due to potential legality issues when applying an IEO to American securities laws.
The SEC issued the following statement: “As in the case of ICOs, depending on the facts and circumstances of the offering, the offering may involve the offer and sale of securities. This means the IEO may be subject to registration requirements that apply to offerings under the federal securities laws. Among other things, registration means that the company offering the digital asset has to provide important disclosures about itself, its business, the digital asset offered, and the terms of the offering to investors.”
If regulators begin to turn their attention to Initial Exchange Offerings, it may just doom what appears to be a sinking ship.
Exchanges Are Moving Away From IEOs
As a result of the current failings of IEOs, a number of cryptocurrency exchanges are beginning to distance themselves from this form of fundraising, citing a number of concerns. A lack of new blood exchanges coming into the IEO market will limit competition between the exchanges which are currently underperforming, causing the IEO market to continue its downward spiral.
TAGZ, one of the largest cryptocurrency exchanges in the world by global reported volume issued a statement saying that they would be stopping IEOs on their platform, effective from the 1st of February 2020. Bryan Seiler, the CEO & Founder of Tagz stated that the main reasons given for this change in stance was due to a noticed shift in the cryptocurrency market towards IEOs and a necessity for the brand to distance itself from unscrupulous exchanges that steal money from IEO projects, as a quick cash-grab.
Flaws In The IEO Business Model
Even when IEOs were first to public attention, there were individuals who noticed the evident flaws in their business model and the ways in which they would integrate with the cryptocurrency community. For example, cryptocurrency trader and “Bitcoin fundamentalist” Kir Kelevra has pointed out a number of flaws in the way that IEOs work.
One of the first negatives that Kelevra noted was that IEOs do not actually work in a way that improves the cryptocurrency market, and in fact that their systems are unfair. This is due to the fact that it gave exchanges too much power to decide on which projects were scams and which ones were not, whilst also handling the token sales and other regulatory and administrative functions themselves.
Pavel Kravchenko, co-founder of Distributed Labs took this one step further with his take on the situation. He argued that the IEO business model is incredibly vulnerable to manipulation, by using Binance as an example whereby he stated that they have taken on the combined roles of an investment bank, underwriter and auditor along with their exchange functions, something which he calls “problems waiting to happen”.
These types of criticisms have swayed certain individuals away from the idea of an IEO, due to the fact that they do not trust exchanges to act on their best interests without colluding and manipulating the market for their own benefit.
The question that was initially posed in this article was “are IEOs slowly dying?” Having explored some of the reasons for the decline of IEOs, the answer is not that difficult to see. ANy investment opportunity that has averaged massive losses for investors is going to struggle to find new investors who are willing to risk their capital on it, especially when considering that the average losses are so gargantuan. This coupled with the breaking of customer trust makes it hard to see how IEOs are going to bounce back in any way. It is more likely that they will die and fade into obscurity over time.
It is possible for IEOs to completely lose their footing and become extinct even more quickly if regulators such as the SEC begin to issue continued alerts and eventual bans for investors trading on IEOs. If such a thing were to occur, it wouldn’t be unlucky for IEOs to die out in a few months. For IEOs to survive, more exchanges with good ethical practices and improved methods of running an offering will need to create their own launchpads, however, as TAGZ has shown, exchanges may also now be more wary about creating their own launchpad.