Initial Exchange Offerings are Providing Big Returns, But Why?

Christopher Brookins is the founder of Valiendero Digital Assets, a quantitative crypto fund founded out of Carnegie Mellon.


2019 has not only seen a resurgence of the crypto bull, but also capital raising.

In particular, IEOs or “Initial Exchange Offerings” have been highly visible for both good and bad reasons. Positively, IEOs have produced large returns to-date. Negatively, to quote Jeff Dorman at Arca, “Many argue (correctly) that IEOs are illegal (in the US) since the tokens are clearly securities, & unregulated exchanges are acting as broker/dealers.

Thus, U.S. investors can’t participate.” However, despite legality issues for US investors, many global participants are still actively investing in these offerings due to their return potential. So, what is driving prices?

Driving Forces

New and small-cap (less than $100M in market cap) digital assets are highly reflexive and driven by two key variables, exchange volume (ExVol) and market cap (MCAP). The logic being that the greater the buying volume in relation to the asset’s overall market cap, the greater the potency of its reflexivity cycle (see below).

The aforementioned speculative demand can be quantified by the ratio of ExVol to MCAP, which may offer investors a better tool to gauge risk and reward in these speculative assets.

Quantitative Analysis

The chart below displays the correlation of the speculative demand ratio (ExVol to MCAP) to in price of several IEOs. The chart is broken down into distinct time periods, which shows the efficacy of the ratio as the asset matures, e.g. first 60 days, first 180 days, first 360 days, and historical (since inception).

Please note, reliable MCAP data for newer IEOs like MATIC, FET, and CELR does not span 60 days, thus only historical is calculated.

*blocktap.io, coinmetrics.io, and coinmarketcap.com

This time, the chart below displays the correlation of the speculative demand ratio (ExVol to MCAP) to in price of several small-cap…

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