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Why is IEO generating big returns?

Maya Mandzikasvili | Jul. 24, 2019
Why is IEO generating big returns?

July 24, 2019, | AtoZ Markets - 2019 has marked the flourishing of fundraising practice through Initial Exchange Offerings (IEO), which overshadowed, the Initial Coin Offering (ICO) projects, that likely might never recover. However, it is still a mystery in what made IEO so popular and why this kind of crowdfunding is generating such big returns? 

About IEO in a brief 

IEO as fundraising practice emerged in 2018. It has evolved from ICO as another option of crowdfunding, where Initial Exchange Offering (IEO) serving as an intermediary between contributors and projects.

The IEO is administered by a cryptocurrency exchange on behalf of a token issuer. A token issuer in his turn is a new venture that is creating a cryptocurrency as an asset class to raise much-needed capital.

At the moment, the crypto community is getting ready for the IEO gold rush. Excited investors are looking to make a quick profit; willing to invest money, sometimes, however, without understanding the IEO fundamentals.  Despite that, it continues attracting more enthusiast due to its ability to bring high profits. This is a result of a few factors. 

The overwhelming success of the first IEOs

The global crypto exchange Binance held the first successful IEO in 2019. Back then the San Francisco-based internet technology company BitTorrent Inc.had raised around $ 7.1 million when selling 50 billion of its tokens on the Binance Launchpad platform.

As per media reports, in just 14 minutes, BitTorrent managed to raise $ 7.12 million. Since the beginning of 2019, at least 5 crypto exchanges have decided to conduct IEOs on their platforms. The success of Binance has encouraged many crypto companies to follow Launchpad footsteps, and this trend can certainly be observed in the foreseeable future.

Driving forces of the IEOs and their profits 

New digital assets with small capitalization (market capitalization of less than $ 100 million) are highly reflective and are due to two key variables: the volume of the exchange (ExVol) and market capitalization (MCAP).

Reflexivity refers to circular relationships between cause and effect. Within economics, it shows the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. This is an instance of a positive feedback loop.

The greater the volume of purchases in relation to the total market capitalization of an asset, the higher the efficiency of its cycle of reflexivity.

The aforementioned speculative demand can be quantified using the ExVol to MCAP ratio, which can offer investors the best tool for assessing risk and return on these speculative assets.

Quantitative analysis 

The effectiveness of the ratio of speculative demand (ExVol to MCAP) to the price of IEO may change as the asset is redeemed, for example, the first 60 days, the first 180 days, the first 360 days, and historical (since inception). Reliable MCAP data for newer IEOs typically do not cover 60 days, so only historical data is calculated.

The speculative demand ratio is a very valuable signal for investors who are looking at IEO or new digital assets, especially during the first 180 days of existence. After 180 days, the ratio is still useful for predicting prices, but its signal is decreasing. Presumably, as the asset matures, the fundamental factors affect the price more.

For example, the historical correlation of bitcoin with the price is only 0.02. However, for newer IEOs, the correlation of the ratio of speculative demand is likely to increase in the coming months. Therefore, current or potential investors should closely monitor the tendency of the relationship as a directional indicator of risk and reward.

Will IEO stay forever? 

Crypto exchanges have become the main driving force for IEO, making them so popular that for those who want to invest funds various restrictions have to be imposed.

For example, Binance LaunchPad introduced a system for selling tokens, according to which investors should participate in the lottery using Binance Coin, which periodically led to price spikes on the native token. Some users are convinced that we are dealing with another speculative history. For this reason, it is believed that this form of raising funds will not last long.

However, a study by CRC Capital, a Chinese cryptocurrency investment bank suggested that IEO's are in for a long-term. IEOs are less time-bound, unlike ICOs that remained static in the fast-evolving cryptomarket. It also stated that the IEO mechanism more closely resembles the traditional market IPOs than ICOs.

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Disclaimer: The views and opinions expressed in this article are solely those of the author and do not reflect the official policy or position of AtoZ, nor should they be attributed to AtoZMarkets.