(ICOs) have become an enormously popular method to raise capital for new tokens. But listing ICO tokens on platforms can cost a pretty packet.
According to a new blogpost by Autonomous Research, listing an ICO token on a cryptocurrency exchange can cost promoters anywhere between $1 million and $3 million. The wide disparity in their ranges is dependent on reputation and access to quick liquidity. The lower end of that estimate is for a “reasonably regarded token” while the higher end ensures easy access to quick liquidity through exchanges that offer fiat conversion services. An example of the latter type of exchange is Coinbase. The exchanges have a pecking order, with those that offer easy conversion to and from fiat cryptocurrencies being the most expensive. (See also: The Rise Of Initial Coin Offerings).
The post’s numbers come after reports claiming that Ripple tried to list its cryptocurrency XRP on Gemini for $1 million. The report also stated that Ripple dangled the prospect of lending $100 million worth of XRP to Coinbase last fall in exchange a listing.
Apart from exchange fees, there are a number of other expenses built into the ICO listing process. For example, there are the costs associated with advisors, who can be compared to investment bankers in an IPO. Advisor activity spans a broad range, from establishing connections with large investors to generating positive press for the tokens and structuring the ICO process. Typically, they charge 5% of the overall ICO amount. Bounty programs, which reward social media influencers and marketing folk with tokens, are another cost associated with the program. (See also: How Companies Use Initial Coin Offerings).
But there are three premiums – illiquidity premium, block conversion premium, and regulatory premium – attached to listing on cryptocurrency exchanges. The first premium relates to the absence of a bank that will process cryptocurrency transactions. The second one is about the difficulty in finding banks or financial institutions that will enable conversions of large blocks of cryptocurrencies to fiat money. The third premium is the uncertainty inherent in cryptocurrency transactions due to government regulation.
The premiums have inflated costs and introduced significant risks to investing in tokens. According to the post, this dynamic has resulted in a “bifurcation” of the route to raising funds. There is the Wild West route, which includes paying off marketers and cryptocurrency exchanges. And there is the other, more conventional, route to raising capital through private investors without accessing public markets.