Initial Coin Offerings (ICOs) has become one of the best and easiest ways for blockchain-based businesses to raise funds for the projects. ICOs provide immediate liquid asset (cash) in exchange for future crypto tokens. Think of it like buying the shares of a company with the expectation that you receive regular dividends, and that the valuation of the company would increase. The company would usually give a percentage of the tokens to the general public, while the rest are reserved for the company’s need.
The fact that ICOs are available to both big and small investors have made them more popular. You can participate in an ICO with as low $100. Over the last year, a lot of investors have told their success stories of how their investments doubled or even increased by up to 10 times. The motivation for both blockchain-based companies is obvious. While blockchain startups benefit from a cheaper, easier, and faster way to raise funds, investors hold on to the possibility that the price of a token will be cheaper during its ICO, before it hits an exchange.
Before proceeding to examine some of the things to look out for before investing in an ICO, it is important to note that not all ICO investments end in a success story. As a matter of fact, investing in ICOs are quite risky. Hdac and Filecoin, for example, had successful fundraising programs. They raised $258 and $275 million, respectively. Mycelium ICO on the other was a total scam. The team behind the fundraising vanished days after raising money, and it is rumored that they used the funds to pay for their vacation.
Like I always say, it’s a wild west out there. You have to be careful or you may get eaten. The lack of strict regulations is not helping matters too.
What to Look Out For
One of the first things I scrutinize before investing in a cryptocurrency project or ICO is the team behind the project. Because of how lax regulations are, anybody can easily put up a team, outsource their whitepaper (heads up, I have been asked to write whitepapers for some ICOs in the past), and hype their project, with the intent of scamming unsuspecting investors. So, here’s what you need to do.
Take out some time to find out all you can about those pioneering the project and ICO. It’s best to back out of any project that doesn’t have a strong development or advisory team. If the details of who they are, as well as their past experience, appears sketchy, that’s a red flag, you need to exit.
I must advise you, you need to look beyond what you see if you are a serious investor. Some of the scammers can go the extra mile to create fake online profiles and garnish it with all the necessary experience. Be sure to Google their names, check their social media profiles – Facebook, Twitter, and LinkedIn. When were they created? How active have they been? Are there any famous names on the advisory board? What’s their level of experience on the blockchain, as well as previous work experience? Answering these questions is the first pointer to whether the team can pull off the project or not. After all, talk is cheap, an action is all that matters.
Bitcointalk is a meeting place for crypto enthusiasts and investors from different works of life and experience. One thing I like about the site is that its real users giving real opinions and feedback. If a project appears fishy, then a user will most likely point it out.
There’s no arguing the fact that Bitcoin talk is the biggest online forum for crypto-related issues. For this reason, any serious ICO should have a project’s announcement (ANN) thread on the site. While this is not a must, it is a good starting point.
Take some time to read through the comments on the platform. If the team has an active thread on Bitcointalk, then there’s every likelihood that any questions you may have had, would have been answered. When developers begin to avoid certain questions or become quite defensive, then you should know that something may be wrong somewhere. You could also send the developers a personal message to see how responsive they are.
Finally, look out for new and low-ranking accounts flooding a particular thread. Every message posted on Bitcointalk carries the rank and number of past messages of the sender. If new users are hyping a project, it is definitely fishy.
Level of Progress
Because of how lax the cryptocurrency space is, untested companies can raise funds for their ideas through ICOs. This is both a good and bad thing in comparison with traditional fundraising through IPOs.
Yes, a company may succeed if given the needed resources, but then again, it becomes riskier if this company has nothing to show for it. You need to evaluate the project and see how far they have gone on their own. Using their own funds to promote the project or have a minimum viable product (MVP) is an added advantage.
To buttress this fact, I had to do a comprehensive ICO review for a cryptocurrency project – QuarkChain. QuarkChain is a blockchain project that is trying to solve the problem of scalability in the bitcoin blockchain. Their target is to reach 1 million transactions per second. This to me is a farfetched number because already established payment processors like Visa and Alipay are able to handle 45,000 and 250,000, respectively. Despite this rather impossible target, QuarkChain has a minimum viable product. During their testnet, the blockchain was able to handle up to 2,000 transactions per second. This is a huge success in comparison with Bitcoin and Ethereum that can handle only 7 and 15 transactions per second, respectively.
In evaluating the project, check their whitepaper (I have seen projects that don’t have a whitepaper – yeah, that’s ridiculous). Do they have a beta version? Although I have a preference for projects with some form of backing and a product, you wouldn’t want to throw away some gems because they do not have an MVP. The point is that they should look credible enough.
Community and Adoption
Irrespective of how promising a project or idea may seem, it may not do so well if there’s no form of community or buzz around it. Those who engage in organized “pumps and dumps” are able to do so because they have a significant community. So, as an ICO investor, you need to look at the community supporting a project. What’s the size of the community and the level of activity going on within?
You can turn to social media platforms like Facebook, Twitter, and Reddit to seek for answers. Also, here’s a quick tip. Most of these ICOs often give bounties for performing some simple tasks like sharing or retweeting a post. While some investors are simply out for tokens in airdrop programs, more serious investors look out for the buzz around ICO projects.
Does the Project Really Need a Blockchain?
There’s virtually a cryptocurrency for anything you can think about; from medicine to transportation, power distribution, and the rather odd niches like drugs, FUD, and even president Trump (yes, there is Trump Coin).
A lot of these projects are useless and are mere avenues to swindle investors. I mean, what is the purpose of Trump Coin? Some ideas do not need the blockchain or dedicated tokens.
By my standards, blockchain is a disruptive tech and if an ICO project is trying to decentralize an already stable industry, then I don’t expect it to succeed. For example, I did a review of an ICO (I won’t reveal their name) some days back and they are trying to decentralize the communication industry, by enabling you to rent a human body. While this may seem like a novel idea, I have my reservations on whether they need to be on the blockchain or not and having to raise funds via an ICO.
Maximum Number of Tokens
The price of a cryptocurrency is linked to its total number of supply. Ripple XRP, is a very promising project in a very productive niche. They have recorded significant strides in recent time. However, irrespective of how Ripple grows and becomes popular, I don’t expect the value of 1 XRP to be worth as much a 1 bitcoin or even 1 Litecoin. Ripple has a maximum supply of 100 billion tokens, while bitcoin has a cap of 21 million tokens.
So, when investing in an ICO, do a mental or even physical calculating on the number of tokens the project will be releasing, as well as a realistic value the price can rise to. It is a wise thing to stay away from projects that do not have a cap because, at a certain point in their growth, the tokens will begin to lose value. Don’t get carried away by all the hype.
In conclusion, I won’t fail to drop the most valuable tip. Cryptocurrencies and ICOs are highly unstable. Do not invest more than you can afford to lose.