Alex Mashinsky, CEO of Celcius Network, claims that Initial Coin Offering (ICOs) listings have become lucrative business for cryptocurrency exchanges. He told CCN in an op-ed that the cost of listing new coins and tokens as “trivial and frivolous“.
Essentially, a company makes a new coin or token, which can be as easy as a few clicks of a button via Ethereum’s ERC-20 protocol. The new cryptocurrency is then sold in a pre-sale, where the developers collect funds in exchange for the new crypto. These funds are supposed to be used to develop the platform around the new crypto but often they end up being used for getting the new coin or token listed on a major exchange.
After the ICO pre-sale is done and the new crypto is live, investors are anxious to get a return on their investment. Theoretically, waiting for the crypto to mature on its own and eventually get listed on all the major exchanges due to its popularity is the best method but investors are now anxious to have the new crypto listed immediately on a major exchange so they can cash out.
The investors put a tremendous amount of pressure on the company behind the ICO to buy a spot on a major exchange. According to many reports, this can cost between USD 2-6 million. For small to medium ICOs, this could be all of the money they raised, leaving them nothing to develop their platform and technology. Binance is at the upper end of the fee scale for getting a new crypto listed; it is speculated that its USD 1 billion of profits in the past year is mostly from ICOs paying to list their new crypto.
Some industry experts also say that exchanges not only demand money but ask for a large fraction of the new crypto’s supply to be used as reserves to maintain proper liquidity. Some even claim that exchanges ask that the company behind the ICO pay for a market maker, which is a person or program that puts 10-20 orders on both the buy and sell sides to give the appearance of activity. This induces other traders to buy and sell the crypto as it appears there is plenty of activity and liquidity.
According to Mashinsky, the most common result is a pump and dump, where the new crypto’s price rises for a small period of time after listing, followed by the whale ICO investors selling their coins for a quick profit. On top of that, it is common for the exchange to short the new crypto with their massive reserve of coins from the ICO, making profits on these short positions as the price crashes.
The end result is new cryptos from ICOs are left in a dumped position, with some of the whales and the exchange making tremendous profits, while the ICO project itself and the smaller investors are left holding devalued coins.
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