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.
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.
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.
Some years ago, there was a major push for cryptocurrencies to have debit cards just like banks have master cards and Visa cards. But was it really a viable idea?
When they first hit the market back in 2017, crypto debit cards were the talk of the town and every crypto investor was dying to own one. Probably at that time, it was all for identity purposes especially given the fact that cryptocurrencies had just been invented and anything to do with them was a source of prestige.
Two years down the line, the same cards that were once a hot cake have almost become extinct with the companies that had invested in manufacturing them almost becoming ‘endangered species’.
Shift Card for an instant, that had been issuing cryptocurrency visa cards with Coinbase, have stopped producing the cards due to low demand.
But why did the demand for these tools become obsolete while the bank cards never lose taste? Is there anything that cryptocurrencies could borrow from bank cards?
At the moment No! The fact that cryptocurrencies are decentralized makes everything quite complicated for debit cards. In addition, in case crypto users want to withdraw their crypto coins, they can easily convert them for fiat money and use the normal bank cards to transact.
Also, most of the cryptocurrency transactions are done online and there are very limited cases where cards would apply.
Sourcing for funds is always a hard task for entrepreneurs, especially when starting a new business. Most of the times, as an entrepreneur, you will be forced to spend quite a considerable amount of time meeting with prospective investors instead of using that time to concentrate on your business.
The time squandered by meeting with potential investors could be used in developing the business while still informing the investors about the business. To do so, you could consider using tokenization instead.
Currently, the most commonly used methods used method for funding startups is Initial coin offering (ICOs), Initial Exchange Offering (IEOs) and Security Token Offering (STOs). Despite there being a number of handles, ICOs have proven quite resourceful when it comes to crowdfunding. You are able to access funds from a wide base within a very short time while at the same time saving the time of meeting with the investors in person to concentrate on your business.
There are also other methods like Security Token Offering (STOs) which is better regulated compared to ICOs. Unlike ICOs, STOs are vetted by the SEC.
How does it work?
We all know that blockchain is decentralized and that is stored distributed ledgers. At the same time, blockchains come up with tokens/cryptocurrency coins to be used for transactions within the networks.
As an entrepreneur, you can tap into the benefits of using tokens to fund your next business.
With tokenization, you create digital securities for your business/company. The tokens or digital securities are backed by the assets of the business. You then let investors buy the digital assets once they know what your business is all about.
In the process, you are able to get funds in exchange for the digital assets while at the same time the investors have a claim of the company just as in the traditional shares.
However, even with the lucrative opportunities that tokenization offers for entrepreneurs in this era, there are still handles, most of which have to do with regulations that still hinder the full-scale adoption of this technology. We have seen countries like China and South Korea put a ban on such forms of raising fund.
Benefits of using tokenization in funding your business
- It increases the enterprise value of your business
The tokens reflect the value of the assets of your company and they can also be traded on exchange platforms.
Also, since the tokens have a value of their own, they also add up to the overall value of the enterprise.
- It offers better liquidity to investors
Compared to traditional stock markets, tokenization offers a more liquid form of investment. With tokens, there are lots of exchange platforms where investors can trade their tokens and there are always ready buyers.
- You can raise capital without diluting your ownership of the assets behind the token
Since tokenization involves the creation of tokens that are sold to fund your business, the created tokens/ digital assets add an extra layer of enterprise value in addition to the company’s capital stock and assets.
In addition, it gives you the opportunity to fund the business without compromising on the ownership of the assets.
In addition to price speculation, cryptocurrencies have opened a whole lot of opportunity for entrepreneurs through their open financial system.
From being decentralized, there have been major strides towards making blockchain a better open financial system. From the adoption of identity protocols for now, your customer (KYC) and anti-money laundering (AML), compliance to modular, and open-source tools, blockchain has been able to align with the traditional economic structures.
The sheer innovation opportunities that blockchain has offered for entrepreneurs is exciting. Also, there is the monetary sovereignty that comes with cryptocurrencies that also includes data privacy within the unbanked world.
Adoption of open finance
‘Open finance’ simply refers to the decentralized nature of cryptocurrencies/blockchain networks. It is increasingly becoming a darling for many entrepreneurs due to its interoperable nature of the system. Its core belief includes transparency, accessibility, financial inclusion, and standardization.
World Bank’s Global Findex report showed that more than 2 billion people around the world still have no access to bank services. Blockchain/cryptocurrencies could be a great opportunity for them.
Cryptocurrencies have made it easier for people to access transactions mechanism and data storage channels without involving intermediaries by creating new financial assets outside the traditional financial system which places banks at the heart of the system.
Bitcoin was the first cryptocurrency to be developed and since then other cryptocurrencies have been developed with emphasis to open financial tools. Cryptocurrencies are now being developed on open protocols and hybrid services offered commercial bodies.
Some of the open financial tools that are quickly gaining traction are blockchain lending services, security tokens, and decentralized trading markets.
It is normally difficult to employ a wholesale adoption of the open finance blockchain system. Rather, developers choose to develop hybrid blockchain ecosystems on the already existing business and financial models.
At the same time for open finance to prosper, the right infrastructure has to be provided. Financial institutions and regulators around the world are toiling very hard to ensure that the right infrastructure is in place as cryptocurrencies adoption gathers momentum.
For example, startups have found a new way to fund their projects through ICOs, IEOs, and STOs. However, without the right infrastructure, there can be a lot of fraud.
Standardization of the open financial ecosystem
The future of open financial system landscape is pegged on open protocols and hybrid financial services. For entrepreneurs, the adoption of open financial across the world which is rapidly replacing the traditional financial systems like banks presents exceptional opportunities. The whole system of the open financial system is completely reshaping the old financial model.
Countries are slowly transiting to cashless societies and cryptocurrencies provide the perfect solution.
The current rush by countries to come up with crypto regulations is a clear sign that governments have realized that cryptocurrencies are unstoppable and that they better do something before they are caught up in the shakeup. Almost every country is currently working on coming up with laws to regulate the use of cryptocurrencies.
With standardization across the board, the open financial ecosystem will be more applicable across countries.