For the past several years in the world of digital assets, one of the best strategies a project could adopt was to launch an initial coin offering (ICO). The project team simply needed to come up with an idea, create a smart contract, define the terms of the coin, publish a whitepaper, then make the coin available to the market.
This was very successful for a while. Billions of dollars were injected into the world of altcoins through ICOs.
However, over time specific drawbacks began to rear their ugly heads. Fake and fraudulent ICOs left investors in the lurch, which meant genuine projects were soon facing more difficulties during the funding and marketing stages.
As a result of these challenges, the initial exchange offering (IEO) was born, offering a significant improvement over the ICO model.
Now that IEOs have hit the scene, it makes sense for investors to learn how they work and, more to the point, how to rate, analyze, and review these offerings.
What Is an IEO and How Does It Work?
Similar to ICOs, IEOs offer a way to raise funds for blockchain projects. Usually, these are in the form of altcoins. These projects introduce their fundraising plans to a single exchange or several exchanges. The exchange, in this scenario, behaves as the counterparty.
With an IEO, there has to be a developer who requires funds for a project and contributors, or investors, willing to invest in said project. Finally, an exchange is needed to serve as the go-between for the developer of the blockchain project and the investors.
When the developers have their tokens ready to go, they make them available on the exchange. Investors and contributors create accounts on the exchange, which gives them access to the coins when they become available.
The Role of the Exchange
Investors then purchase the coins by trading reliable altcoins (or bitcoin) for the offering in which they’re interested. This is done in place of fiat currency. So, for example, bitcoin or Ethereum is deposited into the exchange account. The exchange acts as the middle man in this scenario, sending bitcoin or Ethereum to the developer and providing tokens to the investors.
This helps to reduce fraud since the exchange itself has vetted the project to ensure it’s a legitimate offering. The exchange does this prior to distributing the tokens to validate both the project and the investors interested in purchasing tokens.
This type of verification also creates confidence among other users as the project receives the support of a major exchange. Additionally, the listing fee and marketing costs are drastically reduced in an IEO, at least for the developer. This is due to the exchange using their own marketing and social media strengths to reach investors and users.
Now let’s take a look at how you can analyze and review an IEO before jumping into the investment fray.
How to Review and Analyze an IEO
Before you decide whether or not to participate in an IEO, you want to do your due diligence. Here are some ways you can determine whether or not the project is worth your time and money.
Take a few moments and learn what you can about the project. Check out the social media websites of both the exchange(s) and the project to learn more about them. What is the project? What problem does it plan to solve? Is the exchange legitimate?
Additionally, it’s wise to learn as much about the project team as possible. Have they had previous successes or failures? What have they gleaned from previous opportunities? How familiar are they with the blockchain world? A project team that doesn’t have much experience or knowledge might require deeper vetting.
Documentation and Development
How far into the development process is the team prior to the IEO? While it isn’t necessary for a team to have a product prior to launching, it does help build confidence among its users and investors. Along the same lines, it’s imperative that the project has a clean website along with a detailed whitepaper to show investors that it should be taken seriously and has taken the necessary steps to be successful.
Which exchanges are going to offer this IEO? There may be more than one, depending on the project team. Investors need to create an account on the exchange if they don’t already have one. Typically, this requires full registration and completing the site’s Know Your Customer and Anti-Money Laundering process.
Form of Payment
Another item to consider is how the project receives payment. There are many digital currencies available and it makes sense to use a project that accepts bitcoin or popular altcoins like Ethereum or Litecoin.
Of course, it always helps to use an exchange that makes it easy to access these forms of payment. It can be frustrating if an IEO will only accept a certain type of digital asset and the process for getting the coin is convoluted and confusing.
Can You Participate?
Lastly, you need to make sure you’re from a country that can participate in the IEO. Oftentimes, certain countries are prohibited from joining the IEO due to restrictions and regulations. Do you reside in one of these countries? If so, you may not be able to invest in an upcoming IEO.
If you take these items into consideration, you should have no trouble finding a reliable and trustworthy IEO in which you can invest.
Final Thoughts on IEOs
The emergence of the initial exchange offering has been welcomed with open arms by those in the world of digital currencies. They offer a more affordable and reliable method for projects to raise funds. At the same time, investors are protected from fraudulent projects since reputable exchanges will investigate the team prior to distributing tokens.
It’s in the best interest of the exchange to launch a successful project since doing so can either improve or damage its reputation. To stay apprised of investment opportunities and strategies in the world of digital finance, subscribe to the Bitcoin Market Journal newsletter and have the information you need delivered right to your inbox every week.