If there was a cutting edge in the tech space, ICOs would be one of the things on it. It’s almost disconcerting how fast the concept of crowdfunding with cryptocurrencies has grown in popularity (and in demand). Since the first ICO in 2013, which raised about US$500,000, the progress has been immense -- the top ten token sales have collectively raised more than US$3 billion in 2017 alone.
With our own ICO fast-approaching and the momentum building up, we want to share some insights into the core elements that make up successful ICOs and promise a robust return on your investment.
Do you know how to pick out the best ICO? Put your knowledge to a test and learn how to spot the dark horse of the blockchain world.
Evaluate the product demand and market fit
Blockchain enthusiasts can often get carried away by the potential of the technology and its possible applications, forgetting to apply the general investment principles before participating in an ICO. The explosion in ICOs has attracted hundreds of startups and entrepreneurs, not all of which are going to be successful. Like with any investment, you want to make sure that there is a clear and pronounced demand for the proposed product. It doesn’t necessarily have to be a unique business offering -- more often than not, successful products are just better versions of existing market players -- but it has to have that extra wow factor, which will spur the startup into success.
Beware of vague or overly excited language. It’s not uncommon for developers to stuff the whitepaper or landing page with hot buzzwords, trying to be all things to everyone. The root cause is often lack of direction and is bad news for investors. A good example of this is the use of the word “smart”. Many ICOs use it multiple times without actually clarifying what “smart” means in their case. Are they talking about smart contracts or just smart technology, like smartphones and smart TVs? If you cannot follow what they’re proposing, how the product is going to work or why it is unique, you should approach the project with caution.
The thorough explanation of the product-market fit, as well as all other relevant information, should be in the ICO whitepaper. If the whitepaper is poorly written and the arguments don’t add up, you should give it a pass and look for something else.
Understand the value of the token
It’s of paramount importance to check what you will get in exchange for your investment. It’s natural to assume that the issued tokens will grant a return on investment, but it’s not always the case. Typically, a company holding an ICO will issue its own tokens, so the rights and benefits of ICO tokens will vary from project to project. The value of a crypto token usually comes from three sources: dividends, buybacks, and price appreciation. But different crypto tokens lend themselves to different valuation methods.
Examine the terms and conditions of an ICO, the company’s whitepaper and the business plan to get a better insight into how they’re planning to increase the value of the token. Frequently, ICO tokens do not grant investors any ownership rights, which means token holders have no voting power, influence on the company or how its funds are used. In addition, you should keep in mind the liquidity issues that come with ICOs. If the product fails to build a wide network of users and supporters, there might be no market to sell or exchange your ICO tokens. ICOs with a scheduled pre-sales often escape this problem by attracting a large number of early adopters who instil confidence in investors and create a market for token trading.
Assess the founding team and partners
A strong team is the engine of any company. Checking the founding team behind an ICO should be one of your first actions. Whether you want to take it to Google, examine their website, check the team members’ LinkedIn or other social media profiles -- it’s up to you. Are they active? What do they post about? Do they seem to be passionate about the project? And what’s their network like? Everyone has a personal brand; the question is whether they cultivate it and shape it themselves, or let it take its own course. You will often find that those who are truly into their craft, don’t hide their passion.
The team should also have experience with blockchain technology to be able to engineer a superb product as laid out in their offering. An ICO that offers no insight into the team is a huge red flag. Most likely, the team is unqualified.
Nitpick the whitepaper
The whitepaper is a company’s chance to pitch you as a potential investor. It should be well-written, have answers to all the possible questions, and provide compelling arguments on why you should put your money and your trust in the company.
In addition, the whitepaper gives the team a unique chance to showcase their knowledge and expertise in the field as well as inspire confidence by proving the founding team has done its homework. Drilling into the details and questioning the core claims will allow you to see through the smoke and mirrors. Make sure you check the citations and figures used to support the ICO’s case -- what you’re looking for is academic sources and subject-matter experts, not sensational media!
Quartz media have recently reported that some ICOs started outsourcing the writing of the whitepaper to freelancers. If after reading the whitepaper you feel that something is off, don’t put that feeling to one side -- it might be written by someone without any real understanding of the product, market or even the technology!
Weigh up the interest this ICO has drawn
Think about it like a big movie premiere. The buzz in the media, forums and social media can help you gauge the momentum behind the ICO. While the hype isn’t always a correct indication of future success, it does illustrate the general interest and excitement about the launch. A project that got no publicity, no mentions on forums or chat groups and hasn’t been published on the listing platforms, should raise red flags. There must be a serious reason why a project wouldn’t want to attract media attention, and that reason is usually not good news for investors.
For a project to generate great interest, it has to have mass appeal. Generally, mass appeal leads to mass adoption, which is essentially what an investor wants. Mass appeal helps ICOs generate demand for their products and pump up the value of their tokens. So don’t take the media coverage or the community’s interest in an ICO too lightly - it can be the sign you’re looking for.
Know how you will get your money back
This refers to a couple of different scenarios: what happens if an ICO fails, what if you want to resell your tokens on a secondary market, and what other restrictions should you be aware of?
Let’s begin with the ICOs that fail. A lot of reputable ICOs have a minimum amount that they’re looking to raise. If they don’t achieve that, they will refund all participants. However, you should certainly look into the terms and conditions of a chosen ICO to understand the company’s refund policy. Since the cryptocurrency and ICO space is largely unregulated, the company has no legal obligations to return the money to you. That’s why the advice to invest only as much as you can lose is so popular in the blockchain community.
Another thing you need to uncover is whether you’re allowed to resell your ICO tokens on a secondary market. All this should be outlined in the ICO’s terms and conditions. It is also worth checking whether there is (or potentially will be) a secondary market for the tokens because it’s not always the case. However, remember that not all ICOs can become overnight successes and you should give the team enough time to develop a product that serves a real market need and delivers on all expectations. Always check the company’s roadmap and development plan to get an idea of how long it will take from the ICO to a working product.
There’s no denying -- picking out a great ICO is a gamble. No one can reassure you that you’re making the right decision or point you in the right direction; you have to do your due diligence and trust your gut. However, one sound advice that we’ve offered in the past is to give priority to projects that have an established proof of concept. A good track record goes a long way when investing in a completely new technology. If it’s been proven to work, then it’s only a matter of time for it to adapt and take off in the new space.