Lessons of the Newbie 5: IEOs and hype

With the recent recovery of bitcoin prices, interest in the crypto market has heated up once again. Though the mania pales in comparison to the FOMO of the last bubble, old and new investors are on the hunt again for exponential returns.

In the last bull market, initial coin offerings (ICOs) were a significant source of these exciting returns. Everyone was fighting to get their hands on the next ICO in the hopes of making a quick fortune. But in the aftermath of the 2018 bitcoin crash, ICOs have almost evaporated. Investors have woken up to the reality that many ICOs were scams out to cheat them of their hard-earned money.

The rise of IEOs

With the rise of centralised exchanges, the initial exchange offering (IEO) has emerged as the ICO’s successor. Prospective crypto start-ups apply to have their coins listed on big exchanges in order to attract investors funds. The key difference here is that exchanges vet the start-up before approving the listing. This provides some assurance on the underlying business that ICOs did not.*

A chance to enter

Having recently bought my first altcoin, I was eager to look for the next big thing. As luck would have it, the small local exchange I was using had just launched an IEO platform. I decided to find out more about one of the projects that interested me.

Following the altcoin analysis checklist in the Armour series, I went about researching the company and coin. Aside from the official website, an analyst’s article and some reports in mainstream media, it was difficult to find any social media traction of the project.

A sham?

I was suspicious: how can a proven business idea with positive analyst opinion and big-name clients be under the radar? With their ambitious expansion plans, why list on a small exchange instead of an established platform like Binance? These questions held me back from putting in my money.

Unexpectedly, I was invited to an IEO preview organised by the exchange where both IEOs would be presenting their projects. Since entrance was free, I decided to attend to see what I could learn.

The IEO event

On arriving at the venue, I was surprised to find it set-up more like a luxury lounge than a seminar hall. Surprise soon turned to shock when I was personally greeted by the exchange’s founder on stepping in. Turns out this was an exclusive event, open only to high volume traders. I was pretty sure I didn’t meet the threshold and was only invited by mistake.

All in, only 10-15 others attended, with one of them an industry player himself. I felt way out of my league. Nevertheless, I was determined to stay on to hear the presentations and hopefully ask some of my burning questions.

The IEOs delivered their presentations like a sales pitch to angel investors. Even the feedback form asked how much you were willing to invest in ranges that were multiples of my net worth. It was a little intimidating, but still an eye-opening experience that I wouldn’t want to miss. After all, where else do you get a presentation done to you by the company’s CEO?

Later, the event broke up for networking and I got a chance to ask the CEO some of my questions. He was friendly and answered my questions seriously, providing convincing and measured responses that gave me confidence in the business. I left the event satisfied and thankful, wasting no time in putting a small amount of capital into the IEO.

What did I learn?

Information asymmetry is real. As small-time retail investors, your only source of information is the internet. Unlike equities, there is no annual shareholder’s meeting where the management fields questions about the business. If not for the IEO preview, I would not have been able to find out more about the project.
Always do your due diligence. During the same event, another company had also presented. I found their presentation vague and unsubstantial, lacking in concrete plans and mostly padded with projections. Although the exchange had approved their IEO, I remained unconvinced of their business proposition and refrained from investing.
Act prudently. Without the information I learnt at the event, I would have avoided investing. In crypto, it pays to be conservative and disciplined. Don’t let FOMO overtake you just because IEOs are heating up. After all, there is always another chance to invest after the IEO is listed and has built up its track record.

*It should be noted that the IEO vetting process are not without flaws or loopholes. It is always important to do your own research.

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