Not so long ago, Bitcoin and other cryptocurrencies were a novelty. Today, they offer the perfect combination of decentralised Forex-style trading and the stock market. If you are considering buying into cryptocurrencies, knowing the difference between IEOs (Initial Exchange Offerings), and ICOs (Initial Coin Offerings) is very important.
ICOs are Offered Directly to Investors and the Public
When you buy an ICO offering, the management of the coin determines the selling price. This is different from an IEO, where a neutral exchange agency, such as Binance, sets the price after comparing the offering to other similar offers available on the market. Unless you are well versed in cryptocurrencies and the fluctuations in the industry, it can be difficult to determine whether or not you are making a good investment when buying into an ICO.
IEOs are Pre-Screened By a Neutral Intermediate Agency
Anyone, including individuals, banks, and venture capitalists, can invest in ICOs. By contrast, a cryptocurrency available through an IEO must be registered and vetted by the IEO agency before it can be offered to its members. In theory, this decentralised, or non-government oversight is supposed to make cryptocurrencies safer because the currency is monitored for signs of fraud, bad business practices, and other problems that pose more than the routine risk for investors.
Unfortunately, there remains an enormous lack of oversight of IEOs. For example, South Korea[i] is the only country in the world at this time that has specific guidelines for IEOs. Regardless of government regulations, even an established IEO agency that is very popular with investors may not be able to weed out all bad cryptocurrencies. An IEO itself may be a fraudulent operation that acts as a harbour for a fleet of cryptocurrencies that can easily be “pumped and dumped” to the detriment of the investors.
IEOs Have Buying Caps for Tokens
Consider a situation where you have $10,000 to invest in cryptocurrencies. Now let’s also assume that you happen to have a friend that has a new offering in this industry. If your friend offers tokens through an IEO, the agency might put a cap of only $5,000 per investor. On the other hand, if your friend is trading via an ICO structure, you can invest the whole $10,000 with no issues whatsoever.
Caps can work to your advantage because:
- You will be protected from bigger losses if the cryptocurrency tanks or the company goes out of business.
- Anyone that intent on pump and dump manipulations of the cryptocurrency will need to use a larger number of accounts to create a massive loss.
That said, caps can still work against you if the currency does very well for a long period, as the caps curtail your total investment.
If you feel confident of your ability to evaluate cryptocurrencies, you might make better investments by focusing on ICO offerings. On the other hand, if you are looking to reduce your risks and embrace stock or FOREX style trading, it will be best to work with IEOs. Regardless of which form of cryptocurrency you decide to invest in, it is very important to pay attention to how governments are viewing cryptocurrencies, and how legislation may change the way these currencies operate and traded to date.
And remember, with any investment, you should always be doing your due diligence and seeking independent financial advice.