It’s fair to say there’s been a huge swell of investor interest in Initial Coin Offerings (ICOs) – from crypto enthusiasts and retail investors, increasingly through even to institutions. These ‘token sales’, involving the sale of newly minted coins based on Ethereum, saw businesses raise $6.3 billion in the first three months of 2018 – more than in the whole of 2017 – according to industry data.
Unfortunately, this rapid growth came at a cost. Like any new industries, early problems with transparency and scams gave the ICO process a bad name, and made it hard for investors to really know whether their money was safe. As volumes of funding keep rising, now is the time for investors to get savvier, look beyond the glitzy marketing and start asking the right questions.
As we build out our own methodology for helping evaluate ICOs, here are the hard facts and key criteria that prospective investors need to know before participating in an ICO.
[clickToTweet tweet=”… this rapid growth came at a cost. Like any new industries, early problems with transparency and scams gave the #ICO process a bad name, and made it hard for investors to really know whether their money was safe” quote=”… this rapid growth came at a cost. Like any new industries, early problems with transparency and scams gave the #ICO process a bad name, and made it hard for investors to really know whether their money was safe”]
1) Does this ICO really need the blockchain?
Investors must look beyond the promotional hype and take a close look at the startup’s business model. The blockchain is viewed by some as a fundamental society altering structure as democracy or the computer processing chip.
Nevertheless, the excitement surrounding the new possibilities that this technology brings has created a window for startups to jump on the bandwagon with business models that at best offer a superfluous use case for the blockchain.
It is essential for investors to carefully study an ICO’s whitepaper and evaluate the platform offered by the startup to assess if it adds value or has a real use case. Investors who are still left puzzled about how the project actually works after reading the white paper should remember that Albert Einstein famously said: “If you can’t explain it to a six year old, you don’t understand it yourself.” Those who are still unsure if the startup offers a genuine use case for the blockchain can obtain a second opinion from experts that share their views on sources such as Reddit.
[clickToTweet tweet=”the excitement surrounding the new possibilities that this technology brings has created a window for startups to jump on the bandwagon with business models that at best offer a superfluous use case for the #blockchain” quote=”the excitement surrounding the new possibilities that this technology brings has created a window for startups to jump on the bandwagon with business models that at best offer a superfluous use case for the #blockchain”]
2) Check the structure: capped or uncapped, soft cap or hard cap
It is important to check up on how an ICO is structured. To get this right, retail investors must familiarise themselves with the terminology. For example, in a capped ICO there is a budget plan set by the development team while an uncapped ICO has an unquantifiable budget and goals. A hard cap ICO outlines the maximum amount a crowd sale will obtain while soft cap sets a target amount of funding by which the project will be deemed a success. If this target isn’t reached, prospective investors will be able to withdraw from participating.
Retail investors should also take a close look at the mining structure of the ICO that they are interested in participating in. If an ICO includes a pre-mine, tokens will be allocated to a group of developers before the public launch.
3) Do some research on the project team
We live in an age where information is ubiquitous. Investors should never blindly put their cash into an ICO without doing their homework on the project’s team. A careful examination of the biographies displayed on the startup’s website is essential. Look for signs that the venture is mimicking an established outfit by giving the false impression that the team is working together under one roof when in fact the team is composed of people working remotely.
Digging further may reveal that some of the team are at best loosely connected with the venture and may have other professional priorities. Prospective investors should also do a LinkedIn search on the project’s team and check their social media feeds such as Facebook and Twitter. Any signs that the project’s team members or founders have a questionable history should be a clear red flag.
4) Keep track of announcements
Investors should closely monitor the various channels where annoucements about an ICO are made. Bitcoin forums such as Bitcointalk.org and BitcoinGarden.org host active discussions about forthcoming ICOs. These forums offer a valuable insight into the sentiment of the cryptocurrency community towards the venture.
5) Consult independent sources
It’s hard to come across – but try to find genuinely independent, unbiased sources of expertise and advice. That means objective sources that offer no on-the-side consulting, no trading, no advisory and no ICO-as-a-service – the classic add-ons that many ‘ratings’ and advice service providers offer, as extra ways to make a quick buck. That means you should be particularly careful with the latest wave of ‘ratings providers’ who claim to categorise and rate ICOs, but are often being paid to give some projects improved ratings or coverage.
Having been involved in the cryptocurrency and ICO market since 2015, I have observed and experienced so much fraud and scam – that I cannot overstate the importance of backing up your investment decisions with reliable third-party advice. It may be a democratised, brave new world of investing – but it’s still your money, so take your time and invest in the right projects for the right reasons.
Pascal Marco Caversaccio is co-founder & CEO of Alethena – the first truly independent blockchain asset-rating agency. Based in Switzerland, it is aiming to bridge the gap between blockchain and traditional investors. Pascal is both a seasoned researcher, having conducted financial market research at the University of Zurich and ETH Zurich, and a strategist, gaining valuable experience as a consultant for PwC. He is an early adopter of cryptocurrencies and blockchain technology; he believes that the long-term success of the latter hinges on mainstream adaption.