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A Deep Dive into the IEO Scene

Since the introduction of Bittorent(BTT) by Binance in January, the IEO trend has been going on for more than four months. Some people say, IEOs are another way of ripping the retail investors, which is no different than ICOs. Some others say IEOs have failed to get traction and the IEO trend has been fading away. Most of the IEO project tokens have depreciated in price after they got listed on the exchanges, leaving some people with the sense that IEOs are just a game for the rich people. However, the data suggests that IEO trend might stay here for longer and top exchanges with successful IEO projects are still getting traction.


In many ways, IEOs are similar to ICOs. However, there are significant differences between the two fundraising mechanisms. There have been some articles pointing to these differences and you can find the one written by Derek Hsue from Blockchain Capital here. Most of the other articles out there are mainly based on case analysis, lacking overall and objective in-depth research. Rather than focusing on the differences between IEOs and ICOs, in this research, we are providing a deep dive in the IEOs and focus on the data that we have aggregated from the beginning of 2019.


Main takeaways from our research are as followed:


- IEOs are not dying: IEOs might prove themselves to be long lasting than other short-lived trends such as Transaction Mining Exchanges which was very popular during last year in China. Majority of IEOs on top exchanges such as Binance, Huobi, Okex and Kucoin are still profitable. However, it is likely that there will be a concentration in the exchanges which provide better services and better projects.


- The IEO platform matters more than the IEO project: Currently, when assessing the success of the IEOs, the quality of the IEO projects doesn’t matter as much as the quality and token distribution method of the exchanges.


- Seed and IEO rounds are the most profitable: Comparing the Seed/Private Sale/IEO ROIs, the private sale round is the least profitable while Seed and IEO round are the most profitable ones. This means that, either through deal sourcing, investors will be able to participate in the seed round of the project at an early stage; or wait for the IEO round of this project to see some traction and participate in that round to make profits. On the contrary, rushing to invest in private-sale round of these projects, even if the project proves itself to be successful in its IEO, may not be profitable.


- Exchanges and exchange tokens are the most important elements of the IEO setup: The cryptoasset exchanges have once again proved their core position in the blockchain ecosystem. Since the IEO setup in most of the exchanges require investors to use the platform currency of the exchange to participate, the continuous development of IEO plays an important role in the value appreciation of exchange tokens. Exchange tokens of the top exchanges have clear investment opportunities at the time of IEO announcement, IEO completion, etc. The specific pattern has been decsribed below.


Overview


Initial Exchange Offerings(IEOs) have emerged as a recent phenomenon in Asia as a way of raising funds from the public and private investors. Even though this kind of mechanism is commonly referred as 'Initial Exchange Offering', in reality, each exchange is using different set of rules to list the tokens on their platform. Huobi Global, for example, uses Huobi Prime and refers to this whole process as Direct Premium Offering(DPO) in which mainly the projects of their choice who have not done any public offerings before will be listed on their platform and the project tokens will be exchanged in return for exchange tokens. Binance uses “Binance Launchpad” and Okex uses “Jumpstart” to do the IEOs and Kucoin uses 'Spotlight' for the same purposes.


IEOs were born from China originated exchanges at the beginning of 2019 and have quickly expanded within the region. Currently, the majority of the IEOs are happening on the 2nd-tier exchanges in China such as Kucoin, Bibox and Gate.IO and top exchanges such as Binance, Huobi, Okex only count for 9% of all the IEOs. Probit and Bittrex are the only exchanges doing IEOs that operate outside China.


When we look at the amounts raised in the IEOs, we see that Binance has raised the largest amount in IEOs with around $22 million being raised in a total of 4 IEOs. Even though top exchanges in China (Binance, Huobi, Okex) account only for a small number of IEO projects, they have raised more than 44% of all the money on their IEOs platforms. On the other hand, 2nd-tier exchanges such as Gate.IO and Coineal have also raised a considerable amount of money on their IEO platforms totaling to an amount of $25 Million.


Source: Exchange Websites, CRC Database

The Effects of IEOs on Exchanges and Exchange Tokens


In this graph, we take a look at the exchange token performances since the beginning of the IEO trend. Exchanges in China operate in a highly competitive environment, more than anywhere else in the world. Exchange tokens react to certain major events in the blockchain industry in a collective manner and they are quick to adopt the innovations made by other platforms. As it is clear from the graph below, after the success of the second IEO of Binance, the IEO trend gets approved ant it is reflected on the price appreciation of other exchanges tokens.


Overall, BNB has the highest return with 3,75x since January 2019, followed by OKB with 2,9x, HT with 2,21x and BIX with 2,17x. All the exchange tokens have outperformed the BTC (1,55x) since January 2019.



Source: Coingecko

To analyze the collective behavior of the exchange tokens, we look at their token price correlation between 01/01/2019 and today. It is safe to say that, exchange tokens have a higher correlation among each other, compared to BTC/ETH. The highest correlation is between HT/OKB and BIX tokens. This high correlation confirms the competitive environment in which Chinese exchanges are operating.


Source: Coingecko, CRC Database

When we compare the price movements and the announcements made by the exchanges, specifically Binance, we see that BNB prices usually increases with the announcement of IEO projects and decrease right after the IEO is finished. We see a similar trend between all of the exchange tokens and announcements made by these exchanges.



Source: Coingecko, Exchange Websites


IEO Returns and Performances


While IEOs and Seed Rounds are the most profitable rounds in fundraising, private sale rounds of the IEO projects have resulted in a loss. Binance, Okex and Huobi IEO platforms have returned the highest profit to the investors and Huobi and Binance IEO platforms have returned the highest profit to Seed Round Investors. Smaller exchanges are performing worse compared to 1st-tier exchanges in all rounds.


Source: Exchange Websites, CRC Database

Within the first 3 days after getting listed, most of the IEO tokens first appreciate in price and then depreciate, which is related to the market making activities of these exchanges. While Huobi, Binance, OKEX and Kucoin have returned the highest profit in the first 10 days, Bibox, Bittrex, Gate.IO and Bitmax IEO tokens have either lost value or kept their initial value after the listing based on their secondary market strategies.



Source: Exchange Websites


Finally, looking at the number of participants and the percentage of lucky draw, Binance has kept the number of investors stable in the IEO projects while the chance of participating has increased for individual investors. On the other hand, the number of participants in Gate.IO IEO projects are steadily decreasing and increase the chances of participating are little. This data is important as it is consistent with the returns from the IEO platforms of respective exchanges. Binance has one of the highest returns on the IEO tokens and they have fixed the participation rules in their IEO projects to provide an equal access for each participant and a higher chance of winning the lottery. As a result, Binance has managed to increase the number of participants as well as the distribution ratio. On the other hand, Gate.IO has lower returns (negative retuns in some cases) from their IEO project tokens and a very low distribution ratio for the participants of their IEO projects.


Source: Exchange Websites

At CRC Capital, we believe that IEO trend is still strong and it will continue to fill the gap of Investment Banks in the blockchain industry. Exchanges are one of the strongest players in the industry and they find a way to monetize their large user base, liquidity and international reach. With the IEOs, they are more inclined to take an Investment Bank role within the industry. As IEOs evolve, we will probably witness some changes in their nature, for example, project tokens are currently offered to public with a fixed price, and due to high demand from the participants, there is no need to make a change on the supply side or the price. However, as the IEOs mature and become more common, exchanges will try to change their IEO mechanisms in order to balance the supply and demand. Having a price range instead of a fixed price could be one of them as we see this in the traditional fundraisings. Another method of balancing the supply and demand would be to be more selective with the projects and have a wider partipator base. With the recent announcement of Huobi Prime III, we see that higher-level projects like Reserve will also use IEO platforms to raise money and the quality is likely to increase in the top IEO platforms as there will be 2nd/3rd tier exchanges which will provide IEO opportunities to smaller projects.


IEOs will continue to evolve and we, at CRC capital, will provide more deep dives into the IEO platforms.

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