In an ecosystem of seemingly endless ICOs, it’s becoming increasingly hard for investors to discern the good from the bad. What should an investor look for when considering investing in an ICO? Here are a few key signs:
When looking at the concept from an investor standpoint, ask yourself these questions:
- Does this business model require the blockchain to function, or was it simply an opportune moment for the business to conduct an ICO?
- Even if the blockchain can be used in the business model, is it necessary for them to have a token attached to the model / run a token sale? What is the utility of the token?
- Has this problem been addressed in the crypto space before? (Looking at you, decentralised banking ICOs) Is there still space for this ICO and concept?
- Does this concept seem feasible in the time that the whitepaper has outlined?
Tokenization and utility
It is important to consider the utility of the token, as it will be a very good indicator of the longevity of the token. If an ICO simply states that their token is used to facilitate platform usage and can be traded on the crypto exchanges, the long term feasibility of the token in the crypto space is diminished.
William Mougayar has written an excellent write-up on this idea, stating there are four use categories of tokens: 1) a right, 2) a reward, 3) an ownership, and 4) a toll.
The team is a huge factor to consider when looking at investing in an ICO. The team must consist of a combination of a traditional start-up team members along with specialists in the crypto industry.
A red flag that investors should look out for is when a company’s technical specifications regarding the blockchain are purely conceptual and “developers are being hired post-ICO funding”. This shows the initiative is not trustworthy from a blockchain developer standpoint.
If teams are predominately packed with business-related team members, but lack technical knowledge both on and off blockchain, it can be a sign they don’t fully understand how to utilize the blockchain in their business and would plausibly run better under a traditional capital raising method.
The financial and legal officer roles are also important as ICOs are currently in a grey area of the law. The financial officer’s role is to not only remain compliant, but also avoid the tokens-as-securities fiasco. In a similar sense, the legal officer must also ensure their project is running a legally-compliant ICO.
Fascinating talk on legality of ICOs at the Cornell Blockchain Workshop. pic.twitter.com/xhdTtIdZGH
— Emin Gün Sirer (@el33th4xor) October 6, 2017
The technical specifications
When looking at an ICO, it is important to consider how far in development the concept the team is floating to the public is. If they have announced to the public with a purely conceptual whitepaper, but haven’t written a single line of code, what proof-of-concept does the team provide?
Look for information such as a publicly available github repository, a whitepaper with a specific technical specification section (which at least shows some technical prowess beyond “we will utilise the ethereum platform to do x”), or even better, a technical whitepaper alongside the original whitepaper.
You’ll want to also look for some form of Minimum Viable Product (MVP) which can illustrate what an end product would look like. Desirable are the projects with a MVP that can do the absolute basics and shows potential to scale if developed more.
The advisory board/influencers
Investors’ judgments are often clouded in this category. When looking at the advisory board, a lot of companies bring in advisors that are seemingly unrelated to the industry, but who have big names behind them.
Be wary of ICOs using their advisors to market for them as well. After all, these people were brought on board to advise the team during the ICO, so they’re supposed to be educated individuals providing advice—not serving as human billboards for the project.
Look for a realistic timeline when investing in an ICO. Has an ICO just launched their announcement thread, but it has the dreaded “whitepaper coming soon” on it? This shows that concept was rushed and not properly validated privately before going live.
I usually advise ICOs for a minimum of 3 months from the start of a project idea to help properly build out the team, validate the idea, build an MVP, start a github repository, and have the whitepaper done before announcing to the public. Not having these but going public shows the team perhaps rushed to market and intended to pitch, raise funds, and hopefully build up once money starts rolling in.
And what about the gap between announcement and ICO? If a team announces and gives themselves less than 1 month until ICO, it shows the endeavor’s been extremely rushed and thrown together without full consideration. Once again, 3 months is a good amount of time between announcement and pre-ICO to at least allow the wider community have enough time to let your concept sink in, letting your concept be validated—or not—by the space.
The smart contract & escrow
Once the sale has been announced with token specifics listed, check to see if the project has an escrow service with an underwritten smart contract in place to facilitate the sale. This smart contract should have been written, audited, tested, and deployed all before the token sale.
This ensures that there is another party that will handle funds, making sure the project’s team doesn’t just have a wallet in which everyone will send money to and that the team would handle personally. The contract should only pay out to the team when the correct requirements have been met (e.g softcap reached by X), which is verified either by an oracle or an intermediary party.
Once again, this dynamic allows for users to claim back investments if conditions are not met.
Social media and announcements
Is the team regularly announcing updates to the project, or did they go silent? A big announcement thread and lots of big name press but no regular updates on project intricacies suggests that a team is only making announcements to make waves—not to keep everyone in the loop.
Regular posts about repository updates, new team members, advisors, roadshow updates, anything to show that the project is not only moving forward, but community feedback is being assessed and taken into consideration is good.
Does the team interact with the community and answer questions on Slack or Telegram? Are the concerns raised being addressed and is the community generally positive about the project itself?
This is very much a contentious topic, especially from an advisory standpoint. Without a doubt, a good PR/marketing campaign can take an ICO to the next level in terms of funding. But from an investor standpoint, it can unfortunately blind people.
Keep in mind that these campaigns are intentionally designed to persuade you to agree and support the company. Keep seeing them everywhere you go on the internet? Chances are you’re being re-targeted on Facebook and Google platforms. Look for the signs of “sponsored articles” ending up in big-name news sites, as companies with a large enough bank roll can simply pay to play.
There are many more factors to consider when looking into an ICO, but the ones listed out in this article are definitely fundamental when considering whether or not to put money into one. Always do proper due diligence, and remember: if it sounds too good to be true, it probably is.
*About the author: Heremaia is a crypto strategist who works with business leaders looking to launch ICOs. A typical meeting with him would consist of addressing the needs of business leader, laying the groundwork for integrating their concepts into the blockchain and then advising a roadmap step-by-step from concept through tokenization and beyond. He can be reached at email@example.com or on Telegram @heremaia.