• CRC

A Recap of the IEO Scene

Updated: Jun 26, 2019

In our first deep dive on Initial Exchange Offerings(IEOs), we have covered the birth of IEOs and argued that IEOs are not going away and they are here to stay longer than other short-lived trends such as transaction mining. In this report, we are focusing on the participation rules on IEOs on different exchanges and provide further information on the return on investment (ROI) on IEO projects.


Main takeaways from our report are as followed:


- Exchanges keep innovating in the IEO participation rules to maximize profits for individual investors: Exchanges have been experimenting with their IEO participation rules. Many exchanges have changed the participation rules in favor of lottery-based participation in which more investors get to participate in the IEOs with lower individual caps. Better participation rules increase the participation ratio which might result in higher/sustained participation in the next IEO projects for that particular exchange.


- IEO participants can benefit from high IEO returns as well as holding exchange tokens: As a result of the requirement by the exchanges to hold certain amount of exchange tokens for a certain period of time to participate in the IEO, IEO participants are taking both the risk of holding exchange tokens and participating in the IEO. Nonetheless, with higher risk, return increasesas well. It is revealed that exchange tokens tend to appreciate during the holding period, and returns on IEO are also attractive.


- Price movement of most IEO projects are different from that of ICOs: Those who miss the chance to participate in the IEOs can still make considerable amount of profit by following the IEO projects and buying when the prices hit relatively lower levels. On the other hand, buying an IEO token right after it gets listed on an exchange might be risky, as there many projects who are currently trading below their opening prices.


- IEO mechanism resembles IPOs in traditional security market: Currently, IEO prices of projects are at similar levels or lower than the private sale prices, just like down round IPO in traditional security market. Meanwhile, allocation amount of IEOs is increasing, getting closer to the amount in traditional IPOs.


From First-Come-First-Served to Lottery Based IEO Participation


One of the striking characteristics of IEOs is that each exchange has different style of doing it.When we look at the specific IEO participation rules by exchanges, we see that many of them have adopted the first-come-first-served rule in their first IEO projects. This has resulted in little distribution ratio in those IEOs in which a little number of participants were allowed to buy huge amount of tokens. Binance, for example, had only 8% distribution ratio in their first IEO, Celer, where they had the highest number of participants, Huobi shares a similar story in its first IEO, Top Network, in which the distribution ratio was only 3% for more than 135,000 participants. A few participants are using of bugs, plug-ins and other unfair means so they can get lucky draws. Such phenomenon is rare, but can still be quite disturbing.


Responding to the feedback from the community, many exchanges have changed their IEO participation rules to lottery style and they are continuing to adopt the rules. Huobi for example, in its latest IEO, required the participants to hold 1000<x<5000 Huobi Tokens(HT) for at least 7 days in order for them to participate in the IEOs. On the other hand, Binance requires a minimum 7-day average of 50BNB token holdings for particants. Three similar patterns in IEO participation rules are as followed:


- Requirement of holding a certain amount of exchange token for a certain period of time(7 Days to 15 Days)

- Capping the individual partcipation amount($250 to $1500)

- Selecting the participants through lottery ticket mechanism or system matching


Even though many exchanges have come to accept the lottery-based IEO participation, there are still significant differences on the IEO participation rules that affect the distribution ratio on each exchange. Gate.IO is using a distribution method in which, until a certain time, participants claim a certain amount of investment amount and after the IEO deadline, the system allocates the IEO tokens based on a distribution ratio, which is calculated according to individual investment claim/total investment claim.


Huobi has managed to increase the distribution ratio to 100% because they are holding at least two IEO sessions for each IEO project. After the participants are pooled according to token holding requirements, in the first session, the first-come-first-served model applies. On the other hand, in the second session, the system allocates the IEO tokens based on a distribution ratio, which is calculated according to individual investment claim/total investment claim.


Some important patterns about the IEO participation are as followed:


- Huobi and Kucoin had the highest number of participants on average with 47,000 and 34,000

- Binance and Gate.IO on average had 25,000 participants

- Many exchanges still have a considerable amount of participants on IEO projects, confirmingour previous take that IEOs are not going away

- Gate.IO is the only exchange with significantly lower participants compared to its previous IEOs


Source: Exchange Websites


Despite the specific patterns, lottery-based IEO participation is fairer for participants than First-Come-First-Served rule. Taking the excessive demand into consideration, lottery-based rules increase the participation ratio which might result in higher/sustained participation in the next IEO projects for that particular exchange. Besides, this mechanism helps in stabilizing the prices of exchange tokens. Thus, exchanges benefit the most from the improvements in the IEO participation.


IEO participants are also taking the risk of holding the exchange token


Because of the requirement by the exchanges to hold certain amount of exchange tokens to participate in the IEO, IEO participants are taking both the risk of holding exchange tokens and participating in the IEO. However, higher risk also brings higher return. Based on our data, past IEO participants have benefited from both the appreciation of their exchange tokens and IEO tokens.


In the table below, we calculated the total USD value of staked exchange tokens in order to participate in the IEO projects in each exchange. Participants have staked $74 Million worth of Binance token(BNB) in order to participate in the Harmony IEO. The number of staked BNBs are equal to 1% of all the BNB circulating supply. Even though the number of staked tokens are certain for Binance, when it comes to Huobi and Kucoin, these numbers constitute the minimum amount of staked tokens as those exchanges haven’t shared the exact details(One participant might hold 1000<x<5000 amount of Huobi Tokens).

Total Staked Tokens(USD Value)/Total IEO Investment Ratio gives us the total USD value of the exchange tokens that are staked by all the participants divided by the total USD amount raised in that IEO. This ratio is interesting as when we look at Harmony IEO, we see that 31% of all the participants had the luck draw, meaning that they were selected to participate in the IEO. However, only 6% of all the staked tokens have been invested in IEOs, leaving the rest of the tokens in the exchange token. That suggests that even those who got the lucky draw can only invest a small percentage of their total staked tokens in terms of USD Value.


You can see the Exchange Token ROI on total invested amount during holding period. This percentage gives us the return on investment on the total staked amount of exchange tokens during the holding period for that specific IEO based on the price changes in exchange token. Almost all of the exchange token holders have profited from the appreciation of the exchange token during the holding period.


IEO ROI on total invested amount gives us the return of IEO tokens if the investors sold them at the highest price after IEO, divided by the total USD value of staked exchange tokens. Here we see that, even though IEO tokens provide up to 7-8 times return on the invested amount, their return on the total USD value of staked exchange tokens is rather lower. For example, even though Harmony project has provided 7,38 return on the invested amount, when we look at the return on the total USD value of staked exchange tokens, return is 51%.


Finally, the last column gives us how much would be the return on initial capital (Total Staked Exchange Tokens). Again, for Harmony project,the combined return on investment from holding the exchange token and selling the IEO token at its highest price would be 71%. This is important because, holding BNB tokens would provide 20% return on the total staked amount while participating in the IEO would provide 51% on the total staked amount.


Source: Exchange Websites/CRC Database


Majority of IEOs still trade above their IEO prices


Opening price of IEOs depends on the demand and the market making strategies of IEO project. In traditional finance, when companies do IPO and get listed on stock markets(Nasdaq, NYSE,etc.), one of the important criterion for success is how the stock price of that company floats after getting listed. Usually, increase in the price of shares after getting listed is considered as a successful IPO as it means that the pricing of the investment bank was good enough when it comes to balancing the supply and demand for that stock and leaving a further upside for the public who couldn’t participate in the IPO. This kind of success criterion is about to emerge in the IEO market as well. While the pricing of the IEO project has been done by the exchanges, the float of that token in the market has been strategized by the market makers.


Looking at the graph below:


- Bittorent, Matic Network and Harmony have provided the best return on their IEO prices

- All of the IEO projects are trading above their IEO.

- Currently, majority of IEO projects trade below their historical highest price(All Time High)


Date: 21/06/2019


When we compare the current price of IEO projects to their All Time High(ATH) prices, we see that they are not so different from the ICO projects that got listed last year on the exchanges. Currently, all of the IEO tokens are circulating at prices lower than their ATH prices and majority of them are already down more than 50% from their ATH prices However, certain IEO projects have hit their lowest price before reaching to their current prices. That means those who miss the chance to participate in the IEOs can still make considerable amount of profit by following the IEO projects and buying when the prices hit relatively lower levels. On the other hand, buying an IEO token right after it gets listed on an exchange might be risky, as there many projects who are currently trading below their opening prices.





IEO Issuance mechanisms more and more resemble IPOs in traditional security market.


IEOs by design favor the retail investors over private investors. Exchanges, by using their advantage in terms of user base and pricing power, bargain with the projects to price their IEO token at similar levels or lower than the private sale prices, which is similar to down-round IPO in traditional security market. For many high-tech companies such as Uber, Xiaomi and Meituan, market value of stocks right after IPO is lower than the valuation of the last round of fundraising in the private market, and the stock price keep falling after listing, which, however, has failed to prevent more companies from following this trend. IPOs provide companies with funds for future development. With pessimism and over-expectation, market price of stock tends to rise, reflecting the true value of the company. For example, Uber’s IPO valuation is 7.55 billion USD (and this number fell down to around 6 billion USD after the listing), which is far lower than its valuation of the last round of rfundaisingin private market. This furtherconfirms that those who missed IEO can still make a fair profit by buying tokens at low prices.


Date: 07/06/2019

Some of the similar characteristics of IEO valuations:


- All of the IEO valuations are lower or equal to private-sale valuations

- In some cases, IEO valuations are also lower than the Seed Sale valuations

- Majority of IEO projects allocate 3-6% of their total token supply to be sold at IEOs. However, Binance has recently increased its IEO token sale amount per projects to to 19% for Matic Network and to 13% for Harmony.


Date: 07/06/2019


An interesting fact about the recent Binance IEOs is that, Binance has increased the amount of tokens allocated to IEOs per project. For the first few projects, 6% of the total token supply allocated for the IEOs, however, Binance has increased the IEO allocation amount in its latest 2 IEOs, to 19% for Matic Network and to 13% for Harmony. Although the amount raised in IEOs does not match for IPOs, the percentage of allocated token in IEOs are getting close to equity dilusion proportion of IPOs, which reflects the evolution of IEOs. As the initiator of IEO trend, Binance may lead other exchanges in increasing IEO allocation amount.


Increased token allocationto IEO participants and lower valuations during the IEO combined with potential big upside, helps projects acquire dedicated token holders and hopefully platform users. Returns earned by investors can be seen as a payback from exchanges and projects to their communities.


Conclusion:


At CRC Capital, we are following the Initial Exchange Offerings(IEOs) very closely. We believe that IEOs favor the retail investors over the private investors and they are an important mechanism for token distribution as well as customer acquisition for the projects.

Participation metrics for IEOs seem healthy and exchanges are doing the necessary adoption in their participation rules to makes sure it stays this way. Majority of IEOs still trade at prices above their IEO price and couple of them have provided large profits to their investors.

It is important to note that, through transaction fees and staked exchange tokens, exchanges are the ones who benefit the most from the IEOs. It is then their responsibility to make sure that this trend lives longer and to make sure it is, they leverage their user base and pricing advantage to press the projects for a better IEO deal for the participants.


Important Note:


- Nothing written in this article is legal or investment advice and should not be taken as such.

- CRC does not make any guarantee or other promise as to any results that may be obtained from using our content.


About CRC:


- CRC is a blockchain investment bank founded by senior executives from top investment institutions in China

- We are dedicated to providing professional, international and institutional investment banking services to blockchain entrepreneurs.

- CRC has received a strategic investment from Huobi Global, JLAB, Gobi VC, Cloudwise and U-nobleman, etc.

- For more information, please visit: crc.capital

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