Examining the reality behind the mouth-watering returns of IDOs
Whilst many of us are busy searching for crypto moonshots the more astute among us have uncovered what could be described as the crypto goose. The returns that this goose has been laying are something a Silicon Valley VC would give his right testical for.
Most of us have heard of the term ICO (initial coin offering). They were all the rage back in 2018. But in reality most of these were the brainchild of a scammer or an over ambitious under researched computer programmer. Saying that many of the successful cryptos of today were funded via ICO including Ethereum, Filecoin, Cardano and Ripple. We wrote an article recently where we claimed, ‘The ICO is dead, long live the ICO.’ And we were right, the ICO is not dead, it has just reinvented itself into something called an IDO.
What is an IDO?
These are tokens that represent any type of asset hosted on a decentralized exchange (DEX).
This is how they work
A project looking to raise money through an IDO is most likely one step away from listing on a platform such as Uniswap. Users of an IDO platform contribute either USDC, ETH or a native currency of the platform. The offerings are limited and are on a first come first served basis.
The good news for the investor is that many of the platforms vet the project including its team before the project is able to tap investors. Some don’t — it is our job, as investors, to select the responsible platforms. As is always the case when the demand for anything hits the ceiling, the quality deteriorates rapidly, we are close to that point now.
Many IDOs are massively oversubscribed. They are more popular than buying a ticket for a Britney Spears concert — some are sold out in 10 seconds. And talking about tickets, some platforms allocate tokens by virtual lottery ticket in an attempt to level the playing field.
We recently launched the only dedicated IDO community on Reddit. You can discuss current and upcoming IDOs and other related topics here: r/IDOs
Eye watering returns
This IDO phenomenon is a recent one. Polkastarter is a leading DEX platform in this space which only launched in December 2020. Since then the platform has amassed 200,000 investors, funded 40 projects and has one of the best track records in the business. That’s not to mention the $280 million its native token POLS is now valued at — all in the space of a few months — only in crypto!
The great thing about investing through these platforms is that you don’t have to wait long for your return. Within a few days of the IDO closing projects are quickly listed on Uniswap and or other exchanges at a substantial premium to the IDO price.
Some examples of recent returns achieved by a few notable projects include:
Bridge Mutual up 19 times (Polkastarter)
Blind Boxes up 29 times (Ignition)
Shyft up 15 times (Polkastarter)
ExeedMe up 37 times (Polkastarter)
Advantage of IDOs
The IDO has many advantages. The project’s token gains access to immediate liquidity. We all know that insufficient liquidity can be the downfall for any project. In the case of an IDO, as soon as a project launches investors can start trading its token. If we are lucky enough to get in early we are able to buy a new token and later sell it at a higher price during the IDO.
It is also far cheaper to list a project on an IDO compared to a major central exchange. That and the speed at which the process can be completed is a major advantage for the project owner. An IDO exposes a project to a large community of investors allowing it to build both a following and credibility. Finally some IDO platforms provide an incubator service which will assist the project with both its development and marketing. That is helpful to both the project owner and the investor, the investor being assured a pipeline of better quality projects.
Disadvantages of IDOs
The advantage of being able to trade a token as soon as it launches is also a disadvantage. Investors late to the game can end up paying multiples of the original listing price. In reality there are very few investors who are lucky enough to get in at the issue price because the token price starts to climb as soon as the allocation of tokens begins to fill.
Rug pulls are another problem, although some platforms have put in place certain controls to prevent this. A rug pull is when a dubious project pulls its token’s liquidity from the decentralized exchange thereby rendering the token worthless due to lack of liquidity.
US investors are also prevented from buying on certain platforms and participating in certain IDOs.