This morning it was leaked that the crypto exchange Bgogo was planning to conduct an Initial Exchange Offering for Proof-of-Stake protocol Algorand. IEO’s have been the topic de juer in 2019 as the low float offerings allow projects and exchanges to claim high return multiples on the first days of trading. The reasoning behind this short term speculative enterprise is claimed to drive hype towards projects, but in reality it’s a cheap ploy to drive higher exchange volumes for nascent tokens.
Exchanges gain much and risk little from the IEO. Because of the instant liquidity post-raise, small float and smaller allocation sizes, there is a high probability that prices for the tokens will open higher than what they were sold for. In the resulting trading, exchange volumes rise dramatically, bringing more fees in. This is the reasoning behind Bgogo’s announcement.
The typical exchange listing process usually involves projects reaching out and applying, followed by a review process and fee payment. At the end, the exchange opens deposits and token holders can flood the exchange with their assets for trade. The bilateral agreement allows companies to curate the exchanges their token is listed on.
Bgogo is discharging all pretense and conducting an IEO which is not only a unilateral event, they aren’t even selling the tokens themselves. Instead, they are selling what is essentially a futures contract. They are selling the token at private sale price and have a total hard cap of $500,000.
The size of the sale implies that the person or entity who is providing the tokens is an early investor who wants to use Bgogo to conduct what amounts to a crowdsourced OTC deal. It’s really genius and terrible what Bgogo is doing, but I’ll get to that in a minute.
Also note: Algorand circulating supply does not even EXIST, there is no TGE, there is no premine. That is why the private sale has 2 year vesting, because the nodes are literally mining your tokens.— Charles Read (@btcread) April 8, 2019
How can they do an IEO?
They can't really..
The response from Algorand was to be expected. They categorically denied any involvement into what Bgogo was planning and left no further information about the launch of the protocol.
To be clear: The @Algorand Network has not yet launched and there are no token sales. Any information to the contrary is false. We will be sure to keep our channels updated as soon as there are important announcements.— Algorand (@Algorand) April 8, 2019
Bgogo defended their actions and released several statements on the issue. No matter what Algorand does, they are going ahead with the IEO.
This isn’t the first time that an exchange has listed a token for trading before launch. In 2017, HitBTC released a futures product for Bitcoin Cash before the network was launched. It traded until the actually coin was forked from Bitcoin. The difference between that event and this one is that Bgogo does not control any assets that they are selling yet.
The future/IOU is a promise by the exchange to deliver tokens when the protocol launches. Users are not able to deposit or withdrawal during this time and they can only realize gains and losses into Bitcoin. It’s a pure derivatives contract that will transition into spot trading at some point in the future.
This is unbelievable. @BgogoExchange is running an IEO without the project's permission. But that's not the best part - Algorand (the project in question) won't launch for the next couple of months and there is no ERC20 token. So Bgogo is literally preselling an IOU. Dump 2.0 pic.twitter.com/2XZod8A2gM— Larry Cermak (@lawmaster) April 8, 2019
What’ Bgogo has done is a master of marketing genius. They are leeching off the brand recognition of Algorand to promote trading of a non-existent token in their exchange. Using IEO hype, they are enabling a new type of pump and dump, where early investors use the exchange as a means to dump their holdings.
My belief is that either the exchange or a private investor reached out to each other and pitched the idea of the IEO as a means for the private investor to realize profits on their tokens before launch. Algorand raised 62 million USD during their ICO, based on this, the price of the token is probably going suffer greatly. This OTC deal allows the seller to offload part or all of his allocation at private sale price and effectively return funds without a loss. The IEO participants are funding this and acting the greater fools.
$BGG AMA by @max_bgogo— Just Stop Being Poor (@stopbeingp0or) April 9, 2019
Regarding the Algorand event :
Solving the problem by trading futures, tokens doesn't come from investors anymore but will be bought by the @BgogoExchange team directly.
If they fail to deliver thoses tokens, they will buy back at 2x the offering. pic.twitter.com/ocLWBXI0yQ
The bear market has been tough. Most people have lost significant amounts of capital during this time, especially from ICO’s with long lock-ups. Companies that raised millions of dollars in ICO funds are now trading at a fraction of what they took in. The most recent example of this is Rootstock, which raised close to $100 million in assets, yet is trading at a market cap of around 20-30 million as of writing.
Bgogo has devised a genius way for one bag holder to offload funds onto another before proper price discovery can occur. More so, the high demand to take part in the ICO ensures that the private investor will recover their capital and the exchange gets its fees. I would expect to see more of these terrible types of deals in the future if there is any success in this offering.