Startups have always had a tough time raising funds. Traditional methods require a lot of paperwork and put a lot of entry barriers to investors. It is definitely difficult for a small investor to participate and it’s even harder to find good projects to invest in.
Cryptocurrencies and the blockchain technology tried to solve this and created ICO’s, similar to the traditional IPO. An ICO (Initial Coin Offering) is a cryptocurrency/token sale that has really low entry barriers and allows even really small investors to participate.
In fact, at first, ICOs were so unregulated that most of them didn’t even ask for KYC procedures. Eventually, ICOs started to crash really hard as most of them were blatant scams or the ideas simply didn’t work.
The Rise and Fall of IEOs
The fall of ICO’s paved the way for better fundraising methods. Initial Exchange Offerings are quite similar to the classic ICOs, however, the sale itself is conducted on a particular exchange. The exchanges are now responsible for the marketing and sale of the tokens and they have to make sure projects are not scams. This should, in theory, reduce fraud as it affects exchanges directly.
The lack of regulations also came with many risks and IEOs seemed like the better alternative. IEOs does seem to be safer in theory and they should reduce the number of scams but keep in mind that most exchanges are not necessarily too trustworthy either. Many cryptocurrency exchanges use wash trading and most couldn’t care less if the token sale offerings are a scam.
In fact, when it comes to regulations, IEOs are even more confusing and there is also another problem, market manipulation. The exchange itself can easily keep a large number of the coins and sell them later, crashing the value.
According to recent studies, IEOs are predicted to increase in 2020 and surpass STOs again. This increase doesn’t necessarily mean that IEOs are better than other fundraising methods. The recent mini bull market has definitely helped IEOs and fundraising methods in general.
A Newer Fundraising Method, The STO
Security Token Offerings are fairly new but they do seem to be the safest when it comes to regulations and restrictions. An STO is like a token sale that offers security tokens backed by real-world assets.
STOs are definitely more complicated to conduct because they are fully regulated, however, this allows investors to be more confident and invest more money. There are plenty of benefits and advantages that STOs bring to the table.
As stated above, all Security Token Offerings have to be compliant with all the regulations in a specific jurisdiction. This allows big investors to spend more money without being concerned about getting scammed.
Traditional IPOs are simply too expensive for startups and STOs are basically the tokenized form of IPOs. STOs can and will raise more funds than IEOs and offer investors the opportunity to have the right to equity and own a small part of the company through the tokens. Additionally, because security tokens are backed by real-world assets, they carry some intrinsic value, something that most cryptocurrencies do not.
One of the most crucial factors when it comes to STOs is their success rate. Currently, STOs have over 90% success rate which is huge considering the ICO market is down around 97% according to BitMEX research. Also right now STO’s are considered safer in crypto space compared with day trading which is addressed mostly to experienced people with prior experience in stocks, forex or other similar types of market.
Better Alternatives In The Future?
While ICOs are still declining, IEOs and STOs, on the other hand, are projected to become even more popular in 2020 but other forms of fundraising are already making their appearance.
An Initial DEX offering (IDO) is basically like an IEO except that it is conducted on decentralized exchanges. Unfortunately, decentralized exchanges have little traction right now and not a lot of volumes. Perhaps, in the near future, more people will start using DEXs which will bring more liquidity. IDOs are actually great in theory but not very practical right now.
No one really knows what the future will hold, there is clearly a huge correlation between the state of the cryptocurrency market and the fundings poured into projects. The 2017-18 bull run clearly helped ICOs tremendously. Let’s see what 2020 will bring us