Amid fierce competition over ICOs, elite investors are paying for early, exclusive access

Illustration by Tech in Asia’s Andre Gunawan.

In today’s cryptocurrency market, where valuations can skyrocket and plunge within a day, it has never been easier to make – or lose – a fortune. But behind the scenes, well-connected elites in the blockchain industry are making their own luck by buying virtual currency before the public gains access, often at a cheaper price.

Called presales, these deals and negotiations are a lesser-known part of ‘initial coin offerings’ or ICOs, the new normal for fundraising in the blockchain industry. During an ICO, startups mint and sell their own cryptocurrency to supporters via crowdsale. But before they open the floodgate to retail investors, many projects run a round of presales.

Organized through private chat groups on messaging apps like Telegram and WeChat, these pre-ICOs allow startups to attract influential blockchain figures and institutional investors in exchange for discounted tokens.

For example, a startup selling 100 tokens for 1 ether in its crowdsale may offer early investors 130 tokens instead, or 30 percent more than ICO investors. By the time the token hits the exchanges, presale participants can usually turn these crypto-tokens into a hefty return.

The worse the project, the higher the discount.

“Most of these private groups are free and anonymous,” says William Fan, who co-runs a private investment group on WeChat, where members pay a yearly fee of 500 ether or about US$595,000 to gain exclusive access to token presales.

But groups that feature more high-profile investors will have higher barriers to entry, he explains, such as a higher minimum amount of investment. Participants often need to be institutional investors or own a certain amount of assets as well. This year, Fan estimates that around 1,000 projects will be shared to his group, which is capped at 200 members. Last year, they had one to two projects to choose from every week.

When asked if his group receives discounts on tokens, he exclaims, “Of course there are discounts. Otherwise, why would these people help you promote your project?”

Apart from guaranteeing a number of sold tokens, running presales helps startups boost the value of their cryptocoins once they are sold publicly or traded on exchanges. Early investors, such as those in Fan’s groups, can tap their own networks and advertise the project.

Token discounts range from 5 to 60 percent, depending on the quality of the project, says Fan. “The worse the project, the higher the discount.”

Data from Coinschedule shows that startups raised US$3.7 billion in cryptocurrency from ICOs in 2017.

Information asymmetry

Trust issues

Public backlash