Cryptocurrency investors are raising a fast-growing volume of money by using a new vehicle called Initial Exchange Offerings. Replacing Initial Coin Offerings, the formerly popular means of raising money, IEOs are designed to circumvent regulatory pressure and continue to meet the seemingly insatiable demand for digital gold. About $180 million has been raised in 23 offerings in recent months, according to crypto data tracker CoinSchedule.com, as reported in a detailed story in Bloomberg.
Initial Exchange Offerings
- $180 million raised
- 23 offerings
- Big demand from users and token teams
ICOs Bubble Bursts
As opposed to ICOs, which offer digital tokens directly to investors, IEOs involve a crypto exchange, which serves as a middle man. Crypto exchanges act as underwriters, and take as much as 10% of the total sales proceeds. “It has the potential to be larger than the ICOs of 2017,” said Bill Shihara, chief executive officer of Seattle-based exchange Bittrex, which recently held its first IEO, per Bloomberg. “We are seeing significant demand both from our users and token teams.” By contrast, proceeds from ICO offerings have fallen from $5.8 billion in June of last year to $208.6 million last month, per Bloomberg.
IEOs have helped support a resurgence in the digital coin space, which has experienced significant volatility over the years and especially with the crash of bitcoin in 2018. But IEOs also possess a significant amount of risk due to factors such as an inability to standardize vetting across exchanges, as well as continued regulatory uncertainty, per several industry experts.
Zach Fallon, a former securities lawyer with the SEC, warns that the newly popular way of raising funds in the digital asset space takes “everything from an ICO and makes it worse.” He told Bloomberg that the nature of IEOs, in which many exchanges force issuers to raise funds via exchange-specific tokens, make the funding type more vulnerable to regulatory scrutiny. Other issues, including fraud and lack of due diligence, also put IEO investors at risk.
Nonetheless, tokens issued by exchanges themselves are skyrocketing. Jeff Dorman, partner and portfolio manager at Arca Funds, says tokens issued in IEOs are up an average of 200%.
A surge in IEOs comes as crypto prices are looking overbought, once again, according to the Bloomberg Galaxy Crypto Index, which tracks many of the largest digital currencies. The index is still down nearly 80% from its record high even though it has risen around 25% since the beginning fo this month, per Bloomberg.