Initial Coin Offering (ICO) is a method of fundraising that trades new crypto tokens for valuable cryptocurrencies, usually bitcoin or ether. In 2017, ICOs have raised more than $1.2 billion and have now surpassed early-stage VC funding.
The growing traction has led many investors to consider putting their money into a token sale. But it can be an intimidating experience if you don’t have any framework to use. If you need a little guidance on choosing the right crowdsale, use our ICO checklist to filter through your options quickly.
Who’s behind the ICO?
A great team is what will make or break the project. Take your time to look into each member of the team and especially, the development team. The way you choose to conduct your research is up to you, but it’s a good idea to visit their LinkedIn profile and personal site if they have one. Ideally, you want to see that at least the leading team members have relevant experience as well as blockchain experience. It’s always a bonus to discover that it’s not their first ICO or blockchain-based product. On the other hand, if their names are somehow linked to scammy ICOs or token sales that carry a bad reputation, then you’ll want to stay as far away from that ICO as possible.
Additionally, it’s also worth looking at the advisory board. Are there any famous names you can trust? Do your due diligence and be sceptical of hyped up ICOs that are trying to keep the team behind the curtain. Secrets so early in the game may indicate dishonest shenanigans.
What does the Bitcointalk.org community think about it?
One of the best places to start when hunting for the next ICO to invest in is the announcement thread on Bitcointalk.org. As the biggest bitcoin forum for crypto investors and blockchain news, it will help you gather the general sentiment and expectation surrounding your chosen token sale.
Many of the forum members are seasoned cryptocurrency investors and traders, with extensive knowledge about the technology, its limitations and potential. Pay attention to the questions they ask and how the company responds. You should be wary of a project whose developers are unable to answer important technical questions or are actively avoiding certain topics.
If a project attracts lots of negative comments with accusations like ‘scam’, ‘MLM’ and ‘con’ cropping up more frequently than expected, it could be a warning sign not to be taken lightly.
What’s the stage of the project?
Look at the project’s roadmap to understand what has been done already. If the team is starting from scratch, it’s always trickier to evaluate whether they’ll be able to pull it off. However, if you think about venture capitalists, they often invest in early-stage projects that have solid foundations -- strong team, great idea, and the product-market fit.
With ICO token sales, you often get two completely different scenarios - a project that only exists in a whitepaper or an established company raising funds for further development. It’s up to you to decide which projects match your criteria better, as there have been success stories with both types of ICOs.
What’s the media coverage like?
Beware of ICOs that attract no media coverage or community support. As an investor, you are looking for an idea that will command mass appeal, as mass appeal naturally progresses to mass adoption. To gain liquidity and for your investment to grow in value, the demand for the ICO token has to shoot up, and this is unlikely to happen if there is no buzz surrounding the project.
Another thing to consider here is whether the lack of publicity is an orchestrated situation. ICO token sales that have links to past scams might wish to keep a low profile and remain shielded by the opaqueness of their media presence.
Is it really a blockchain project? And what is the token for?
It’s almost a given that every ICO will create a new, dedicated token for the project. For investors, it is vital to understand how the token will be used -- does it have a purpose or is it there because there should be one? This token is what you’ll get in exchange for your investment, so make sure you know whether it’s useful before betting on it.
The same question should be asked about the blockchain. While many believe the blockchain is the future of the internet, the ICO project should have a better explanation of why they’re building the new product on a decentralized technology.
Does it have a cap?
First of all, what is the difference between the soft cap and the hard cap? The soft cap is the minimum amount collected at which your crowdsale will be considered a success. Failing to reach the soft cap would usually require the company to return all the capital to ICO participants. The hard cap is defined as the maximum amount an ICO can receive. It’s typically a very high cap that is unlikely to happen.
As an investor, you should be worried if an ICO token sale doesn’t have a cap. This means that your chances, as an early investor, to incur losses increase drastically. In his article about ICO’s best practices, Chris Housser also talks about the hacking issue, “The lack of cap creates a very strong incentive for a hacker or group of hackers to try to game the system for a great return.”
How and when is the token distribution happening?
Founders’ greed is not uncommon on the crypto scene. If the team behind the ICO wants to retain control of 50% (or more) of the tokens, it is suspicious. Let’s say that linking its token distribution to the roadmap is a sign of a competent team. You should see a clear funding structure of where the money will go and when because every milestone and stage will require a certain amount of capital.
Before investing, check when the token distribution is planned for. Don’t assume that the tokens will be distributed immediately after the sale closes - it’s common, but it’s not a rule. Some projects don’t even have a token and need to take time to develop it. Surprisingly, as past experiences show, delaying the token distribution might have a positive impact on the token’s value. For instance, ether has gained around 500% in the period between its ICO and token distribution, Augur added 1500% in over a year, while in three months Decent’s token value increased by 350%.
Have you looked at the whitepaper?
Here’s a simple yet effective advice -- take it apart. The ICO’s whitepaper is the company’s pitch, vision and promise to you. There’s so much the whitepaper can tell you about the company’s level of professionalism and capabilities and the project’s potential for success. There are several aspects you must pay attention to: the structure of the whitepaper, the quality of writing, the sources and figures, the legal stuff, the roadmap, and the purpose and distribution of their tokens. There’s a lot to cover. But you should take the research phase seriously because it is the only thing that can save you from making a huge investment mistake.
A mish-mash of ideas and a messy presentation can indicate lack of direction and experience. If it doesn’t feel right, it probably isn’t. Citing sensational media or using outdated research and figures should be taken as a red flag, too. You want substance and data-driven decisions, not an idea wrapped in the hype and sprinkled with biased stats. Then, of course, there is the question of how the company is distributing the tokens, what their purpose and the expected value are, when you should expect to be able to cash out your tokens and how the project is hoping to gain mass appeal. Nitpick the whitepaper, dig deep and ask lots and lots of questions. The effort will pay off.
Is the code clean?
This is a slightly trickier aspect to examine if you have no coding experience. However, there are several simple hacks you should use to get to the bottom of this. If the project has an open-source code, which is a common practice among blockchain startups, then you can head to GitHub and use the high-level overview, community insights and commit logs (developer slang for pushing a piece of code to the Github code repository) to gather some intel.
Good code is always a sign that the team is in the game for the tech and to build something genuinely useful, not to make a quick buck.
Have you spoken to the founders directly?
You should always seek the opportunity to speak to the project founders directly, whether on a dedicated Slack or Telegram channel or in a forum thread. The recent “exit scam” pulled off by Confido founders who disappeared with $375,000, raised through an ICO, is a good example of what can happen if you don’t vet your investment choices. The cached version of the company’s Medium post has alluded to legal problems, “Right now, we are in a tight spot, as we are having legal trouble caused by a contract we signed.” And later added, “I, Joost van Doorn, want to personally apologise for any financial damages this announcement will cause to people. It was never our intention to hurt investors; we didn’t see this coming.”
A team that doesn’t understand the legal complexities and technical requirements of blockchain technology cannot be trusted with your money.