As a blockchain or fintech investor, you have to keep up with the pace of the ever-changing market and investment opportunities. Two years ago, ICOs had dominated the fintech industry, especially the blockchain/cryptocurrency space. Any blockchain startup could easily raise funds through an ICO as long as the development team came up with a convincing whitepaper that proved that the underlying project was viable. The startups benefitted by acquiring the capital needed while investors benefitted by making profits from the sale of the tokens at a later stage or using the tokens in paying for services connected to the project.
However, since 2018, ICOs have continually become less attractive to investors, especially due to scammers taking advantage of the lack of proper regulations on the ICOs. Instead, investors are now running for IEOs since they have some degree of safety. Though STOs are safer, they are yet to pick in the industry probably due to their strict requirements and IEOs have stepped in to fill in the gap.
But how do you go about investing in IEOs to ensure that you make the most profits? How can you be sure that the IEO is profitable or not?
Below are the number of things that you should consider as an investor before commit yourself in an IEO:
- Do thorough research about the IEO
You may wonder why the research and the project have already been Okayed by the exchange platform that has better experts than you. But remember, the Exchange does not look too much at the end result of the project. The exchange is only concerned with whether the project is genuine and whether its users will be attracted to the IEO token sale. The exchange is in business and it has to find something that will be well received by its customers. Therefore, it is paramount that you do in-depth research about the project itself to find out if it is a viable investment opportunity.
As you do the research, you could try to find answers to the following questions:
- Does the project seem to attract the interest of the general public?
- Is the project a new concept or just a copy-paste?
- Who are the people behind the project offering the IEO?
- How experienced are the members of the development team?
- Is the exchange listing the IEO reputable?
- Is the exchange secure?
- Has the exchange been involved in any malpractices?
- What is the history of the exchange in line with IEOs?
Always remember that the exchange is also looking for profits from the IEO token sale. Therefore, don’t just rush to buy the tokens, do a background check on the project first.
- The work that the development team has done so far
You have to look at what the team behind the project has done so far. You can’t just invest your money into a project that is not yet started; it might end up not starting at all. The software should be completed. You should be able to look at the program to verify if it will indeed be applicable.
You should invest in a project that has already started and the team can show some commitment to the project. This shows that the team behind the project is serious about the entire project.
Things like a whitepaper, well-designed websites, and the development team must be there.
- The exchange that offers the IEO
Once you are convinced that the project behind the IEO is viable and looks to be profitable, you have to consider the platform where the IEO is launched. For security reasons, you have to look at the reputation of the exchange platform.
In addition, you have to consider the onboarding processing that the platform requires for you to participate in the IEO. Remember, different exchanges have different requirements for you to become an investor in an IEO. But most importantly, you have to be a registered member with the exchange for you to participate. You have to go through the entire registration process, including the KYC/AML process.
Since it may take some time depending on the exchange that you choose, it is important to do this some days before the actual IEO.
The common exchanges with IEO Launchpads are Binance, Huobi Global and Gate.io.
- How the payments are made
This is a very important factor. You cannot participate or invest in an IEO unless it allows you to buy tokens through a means that is accessible to you. Again, you have to consider the asset that the development team together with the exchange sets as the accepted currencies to buy the project tokens. Some of the most used currencies include Bitcoin (BTC), US Dollar (USD), Great British Pound (GBP) Euro and Ethereum (ETH).
You should also look at the processing time. How long does the processing take after making a purchase?
- The IEO tokenomics
You have to closely examine how the tokens are distributed. You have to clearly understand the number of tokens available. You also have to see what percentage is assigned to what.
One of the things that you should carefully look at is the percentage of tokens given to the development team. If the development team is given the majority share of the tokens, then that is a red flag. Most of the tokens should go to the investors so as raise sufficient funds for the project.
You should also closely look at the distribution of the funds that are raised through the IEO. How does the development team intend to distribute the funds? The development team should not be the one taking the lion’s share of the funds. Most of the funds should go to the project development.
Initial Exchange Offerings (IEOs) may be headed for a more complicated scenario than the ICOs. ICOs got banned in a number of countries, including China and South Korea for poor regulations. When IEOs were invented, they proved to be the tie-breaker, especially in these countries.
However, the fact that the exchanges offering the IEOs act like brokers by bringing the development team and investors together, these exchanges could be headed for a legal confrontation with the US Securities and Exchange Commission (SEC).
Lately, a senior official indicated that the crypto exchanges that are offering IEOs could be violating the U.S. securities laws. The official argues that if an exchange has a set fee for listing an IEO and either the issuer of the token or any of the investors is from the US, the exchange can best be classified as Security Dealer (better referred to as a broker-dealer) under the US securities laws.
And according to the Law, security dealers engaging in broker-dealer activities should be registered and licensed as broker-dealers, national securities exchanges or alternative trading systems (ATS). But unfortunately, none of the exchanges that have listed IEOs in the past have met with these requirements despite the fact that a significant amount of IEO investors come from the United States.
At the look of things, this could be signaling the wake of a SEC crypto-crackdown targeted towards IEOs. However, we are yet to see if the exchanges interested in offei8rng the IEO and targeting US citizens shall choose to comply with the SEC regulations or choose to leave the US market.
Cryptocurrency startups have found a number of ways for raising capital. ICOs was the first method to be invented. However, ICOs have ended up being shrouded by lots of scams due to lack of proper regulations.
IPOs and STOs were among the first methods to be invented alongside ICOs. However, these two (STOs and IPOs) have not become as successful as the ICOs due to the strict regulations set by the regulatory authorities like SEC.
The ease with which ICOs are operated attracts a lot of investors and inventors were forced to come up with a way to make the ICOs scam proof. They had to come up with a formula to make the ICOs crowdfunding possible, even in countries like China, where ICOs are banned due to lack of proper regulation formulas. This is basically what led to the invention of IEOs.
IEOs employ the same working principles as the ICOs and thus maintains the simplicity with which they are carried out. However, by using the crypto exchange Launchpad, they make them safer compared to the ICOs since the development team has to meet a number of requirements for their project’s token sale to be listed on the exchange. Therefore, the issue of scams in IEOs is greatly minimized since they would keep the reputation of the crypto exchanges at risk.
Nevertheless, although the IEOs make it more interesting and safer for investors, the investors still carry the bulk of the risks; the project may pick or fail. The fact that a project gets funded through a crypto exchange Launchpad does not mean that the project will automatically become a success.
However, we cannot refute the fact that projects that have done their crowdfunding through IEOs have ended up hitting their target within a very short timeframe compared to the ICOs which take months and at times even end up missing their targets. We have seen projects hit their targets even in minutes.
In IEOs, the target investors seem to be guaranteed. The exchange users, of course, trust their exchange platform and tend to take up every opportunity that comes up on the exchange. Therefore, if the exchange lists an IEO, the users will be fighting to invest in it. But the question is; how sure are the investors that the project they invest in will succeed and become profitable.
IEOs are still not very reassuring just like the ICOs. Investors can only hope and pray that the project team does its best to ensure that the project picks to give the tokens more value than the value at which they purchased it. In a way, they cannot be compared to the STOs, where the investor gets a share of ownership of the project.
At the moment IEOs seem to be carrying the day and developers can depend on them for raising funds. However, for investors, the rise and fall of ICOs should serve as a lesson. Investors should always ensure due diligence whenever they are choosing which project to invest in.
It is true that scamming is greatly reduced in IEOs, but even genuine projects flop if they were not well planned. Investors should do thorough research about the projects before investing their money.
What does the future hold for IEOs?
One thing is for sure; cryptocurrency exchanges are here to stay. In an actual sense, we should expect to see more and more exchanges entering the market.
Blockchain and cryptocurrency startups have gathered momentum and the easiest way for them to raise capital is by depending on the general public for funding. The banking sector is too costly for them. Blockchain startups cannot afford bank loans since the projects may not thrive as anticipated since they wholly depend on how the general public receives them.
From an expert view, IEOs will most definitely outstay the ICOs. Also, more countries are set to embrace IEOs compared to ICOs since they are offered through exchanges which are easily regulated by the regulatory bodies.
IEOs, therefore, have no problem with complying with the set laws and governments won’t have to come up with new rules to regulate them.
Another giant is coming up in the cryptocurrency arena; by the name of Initial Exchange Offering (IEO). Following the unprecedented rise of fame of ICOs in 2017 and the subsequent turmoil surrounding their regulations and scamming incidences, developers seem to have found another better way of raising funds for their blockchain and cryptocurrency projects through Initial Exchange Offering (IEO).
What is IEO?
Initial Exchange Offering is an ICO that is run through a Cryptocurrency Exchange Launchpad. Therefore, the Launchpad act as the intermediary that conducts the token sale.
Compared to ICOs, IEOs have succeeded in raising staggering amounts of funds in very short time spans. For instance, BitTorrent was able to raise $7.2 million in just 18 minutes through an IEO conducted via Binance Launchpad. Fetch.AI also raised $6 million in just 22 seconds via Binance Launchpad.
From statistics like in the examples highlighted above, investors seem to be more confident buying tokens via exchange platforms like Binance because they are certain that the exchanges are regulated and any activity that the exchanges are involved in must be legal and well analyzed by experts.
But how does the Launchpads work?
Launchpads are basically platforms that cryptocurrency exchanges have fostered to enable blockchain projects to offer their tokens for sale directly to the exchanges’’ customers. In the process, the buyers (Investors) of the tokens end up buying tokens from projects they are sure they are not scams.
To be allowed to use the exchanges’ launchpads, the blockchain developers have to enter an agreement with the exchanges so that their tokens can be initially placed on the exchanges.
Then, before any token sale is done on an exchange, the exchange performs a thorough audit on the project to find out its viability and potential of the token. The exchanges also directly manage the token sale.
The main participants of IEOs are the project developers, Exchanges and investors.
Through the IEOs, the exchange platforms get revenue from a listing fee for the token placement and also attract more customers since people will join the exchanges to participate in the IEOs and eventually stick in the exchange for other trading activities.
For investors, they get a reliable investment opportunity. It is hard to get a scam token sale being conducted via an exchange platform. Therefore, the investors can rest assured that they are investing in a genuine project that is well vetted.
Benefits of investing in an IEO
For the project developers, they are assured of a more legitimized token sale since they get the backing of the crypto exchanges who investors are sure to have done their due diligence on the integrity of the project. On the same hand, projects have their tokens exposed to a larger customer base since exchanges already have a wide customer base. The large customer base makes it possible for the projects to raise very large sums of money within a short timeframe.
Investors, on the other hand, get an opportunity of investing in a token that has immediate liquidity. They can also pay for the token through a variety of methods that are already established in the exchange platform.
Despite the fact that IEOs are not scams, it is good to remember that the investors are the ones left with the short end of the stick. They are the once that face the most risk in IEO. They can only trust the exchanges to be good at what they do.
The IEO policies also differ from one exchange to the other and the problems faced in one exchange may not be similar to those faced on another exchange platform.
By the look of things, one may argue that this is true. Initial Coin Offering (ICOs) were doing very well in 2017 and early 2018 and many startups were able to collect billions of funds as capital to get their projects started. However, to date, no proper regulations have been put in place to monitor how the ICOs are carried out.
ICOs lack a third-party overseer. Therefore, scammers have found it to be a great opportunity to reap from the uninformed investors. As it stands, basically anyone can launch and run an ICO provided they are able to convince people that they have something they want to do and money is the hindrance.
Some governments like those of China and South Korea have banned ICO completely making it very hard for the genuine startups to fundraise through the ICOs.
The introduction of Initial Exchange Offering (IEO) was a game-changer. Startups even in those countries that had banned ICOs can now easily raise funds through crowdfunding since they shall not be breaking any laws.
In addition, though both ICOs and IEOs share some degree of rationales, in IEO, there is an overseer who is normally the exchange platform through which the IEO is being run.
For a development team to run any IEO, they have to meet and comply with the requirements set by the exchange. Therefore, the exchange acts as a cushion for investors. Investors are guaranteed that whatever the exchange is offering is well cross-examined and that it is not a scam. As a matter of fact, if the IEO was to be a scam, it would ruin the reputation of the exchange which still needs to continue with its activities after the IEO.
It is always important to factor in the cost before undertaking any project. Otherwise, you may get stuck along the way due to a lack of funds. A clear picture of the cost will enable you to financially plan in advance to ensure that you have enough funds to run all the necessary activities for the success of any project.
For a STO, the cost depends on a number of things throughout the various phases of the STO, which include:
- The concept phase: this includes the development and drafting of the project concept and it entails the selection of the token standard and the whitepaper.
- Choosing the token standards
For the token standard selection, you will need to choose the best standard to build your token on. The most commonly used standards are the ECR20 though there is a large list of standards ranging from the ERC20 to ERC1450.
The selection of the right token standard can be easy with the right standard consultant. Ideally, it is better to engage a consultancy that provides the full suite of STO services including legal instead of looking for a consultant for every task.
As the founder or owner of the STO, you could have the best description of the project, but you require a professional to draft the whitepaper nicely and professionally.
- The development phase: This is the bulk of the entire project. It includes the creation of the smart contract, deploying the smart contract, and creation of an investor panel.
You will need to hire a development team depending on qualifications. Most importantly, you will need UI and UX experts, blockchain engineer (s) and product experts. All these professionals come at different costs depending on their level of expertise.
At this phase, it is wise to go for the highest experienced individuals to ensure that you get the best. You can always negotiate your way out with the professionals to charge you fairly instead of going for novices who may compromise your entire project.
- Security and legal audit: You will have to test your blockchain project for bugs before launching the STO. The testing requires an internal auditor and a third-party auditor who can also be a community auditor.
Above the security, you should also ensure that the tokens are checked for compatibility with the available crypto exchange platforms.
Most people ignore this phase due to the added cost, but it is an important phase which would prevent future problems with your STO.
- Legal and marketing: Contrary to ICOs, STOs have rules that they must adhere to. Therefore, you will require a good legal team to follow up on the issue of KYC, AML in addition to the other rules and regulations touching on STOs.
You also need to market the STO so as to attract as many investors as possible. However, you will need to involve the legal team to ensure that marketing is GDPR compliant. Most importantly, you will require website developers to create an attractive landing page.
You will also have to explore all the marketing avenues, especially through digital platforms. However, you have to strike a balance to avoid overspending on marketing.
Localcoin, a crypto exchange, has been receiving a backlash from the online community as well as investors for possible whitepaper plagiarism.
It is so embarrassing for a company or startup to be caught up in a plagiarism scandal! It throws the entire ICO project into jeopardy. It becomes extremely difficult to convince investors that it was just a mistake since a whitepaper should be a very original document explaining a project that should be original. Otherwise, any similarity in whitepapers shows that the project could also be a “Copy Paste” or a scam. It becomes extremely hard for investors to believe that the project is real.
This is what is happening to Localcoin exchange. People, especially on Bitcointalk, have concluded that the whole project is a scam.
Localcoin blames the whitepaper author, whom they say they had outsourced, for the misfortunes but it will be hard to persuade investors into buying into this narrative. The back still stopped with them even if they outsourced the author. An author can only write depending on the information he/she gets from the project developers. And further still, the development team out to have gone through the whitepaper before publishing it.
But what could have made the author make such grave mistakes? Was it deliberate?
From a closer look at things, the author could have made deliberate plagiarism possibly from a misunderstanding with the development team. There are allegations that Localcoin owes marketers over $15,000 and this could be the reason behind the plagiarism.
However, all in all, it shows that the team behind the whole project isn’t serious.
Tokenomics simply refers to a detailed outline of how your token works within the blockchain ecosystem, its viability and also how you plan on attracting investors.
Due to the lack of proper regulations, scammers are taking advantage of ignorant crypto investors who just invest their money in projects without first scrutinizing them thoroughly. In 2017 alone over 70% of ICOs were frauds mostly because at the time not many investors knew much about ICOs.
However, over a period of 2 years, investors have gained more knowledge making it is hard for scammers to con them. Investors are now more educated about what a trustworthy token entails and you will have to include all that in your whitepaper to convince them that you are not just another scammer.
The whitepaper informs the world about your project
The whitepaper is a very crucial aspect of an ICO/STO. It tells potential investors all about your project. Therefore, you will have to make it as much detailed as possible.
Most specifically, you will have to include everything about the tokenomics. You will have to clearly show that your crypto token is just not a way of raising funds but it goes beyond to become a robust alt coin in the near future. Investors must be able to clearly understand how your crypto token interlinks with the whole project and also understand its economic value.
What is included in the tokenomics?
For your crypto token to be proved to be viable, you should include a number of things, which include:
- The function of the token
You should explain how your token shall be used within the blockchain network and how users will benefit from it. You have to paint a clear picture to the investor of why you are creating the crypto token.
For instance, you could outline a number of services that can be paid for using the token or even give a number of goods that the user shall be able to purchase using the token if there are any.
- Token distribution
The token distribution gives a detailed outlook of how you intend to distribute the total amount of the available tokens. You should give the actual number of tokens that shall be available for the Pre-sale and also for the ICO itself.
You should also breakdown the information and show the potential investors out of the available tokens what number of tokens will be used for what. For instance, you could have a project with 1 billion tokens and decide that 60% will go to the token sale, 20% for marketing, and 20% for the team. This way, the investors will be able to get a clear picture of how you intend to fund your project.
You should also give a detailed outlook of how the funds collected through the token sale shall be used and show what percentage will be used for what.
- The token governance
You will also need to stipulate how the tokens shall be used within the blockchain ecosystem of your project. You need to clearly outline the rules on which the token shall operate. For example, you should include the pricing guidelines for transactions and many more.
Blockchain and ICO can best be explained as eccentric. Therefore, you need to look for eccentric ways of getting people to know about your ICO token sale. And one of the unorthodox methods of spreading the word is by using bounty programs.
Bounty programs for ICOs
Bounty programs were initially introduced for gamers where they could get rewarded for reaching a certain level in a game. Later, the idea was adopted by blockchain developers and it is now commonly used in finding loopholes in blockchain programs; and they have turned out to be such great avenues for developers to identify weak points in their programs for correction to prevent future hacking.
In our case, bounty programs for ICOs are programs in which people are rewarded for spreading the word. It is a great marketing strategy since the main theme in ICO marketing is getting the word about your ICO to as many people as possible since the many the people the more the probability of finding interested investors.
As an ICO owner, you simply reward people according to how much they help in spreading the word about your ICO. You can decide to reward them in fiat currency or crypto tokens being used in the ICO.
There are normally two types of ICO bounty programs which are very specific to the tasks they are oriented for. These are:
1. The Pre-ICO bounty
Just as the name suggests, the purpose of this bounty is to drum up as much support as possible for the upcoming ICO. It basically sensitizes people that there is an upcoming ICO they could be ready to invest in.
Some of the activities that individuals can involve in in the pre-ICO bounty programs include but not limited to:
- Social media campaigns: Social media has turned out to be a major tool when it comes to advertisement. Participant help by posting information about the upcoming blockchain project on popular social media platforms like Facebook, WhatsApp, Twitter, LinkedIn, etc. Other means are by participating in discussions in crypto communities through Reddit or Telegram.
The reward, in this case, is normally based on how much the participant has engaged the general population.
- Creating content: In addition to the whitepaper, you may still require bloggers to produce shorter and captivating articles to attract people since not all people find it interesting to go through whitepapers since they appear to be too technical.
The bloggers could also help in producing newsletters and even translate the content into different dialects for different communities around the world to understand.
Also, the reward is determined by how much the participant is able to engage the general crowd.
- Bounties for signatures: These are programs where the ICO owner provides a code embedded signature. Then the participants post this signature and the more they rank the more they get. A good example of this bounty is the Bitcointalk signature bounties.
2. Post-ICO Bounty
The purpose of this bounty is to gather as much feedback as possible and also keep on indicating the progress in accordance with the roadmap. This bounty programs normally involve:
- Bounties to translate: the participants compete in translating the key documents into various languages. Key among the documents is the whitepaper and the website.
- Bounties for reporting bugs: This is normally done to help in identifying and fixing any mistakes that may be present in the blockchain program.