It’s the biggest worry for all investors: is my money safe? How can you tell in advance that a) you haven’t put your cash into the hands of scammers, and b) when you’ve found a genuine business to invest in, it’s not just going to fade away in a cloud of unfulfilled promises? Investors working within the traditional banking and investment fields have always faced the same concerns, but with ICOs and other crypto investments, you have an added layer of complication, in that it’s fairly simple to produce a scam ICO, which on the surface appears to be authentic.
ICOs can present an incredibly attractive investment opportunity, with the potential to generate a substantial return in the long-term. To build a successful portfolio isn’t actually all that difficult, but you do need to be savvy, and learn how to identify the legitimate opportunities amongst the fly-by-nights and well-intentioned, but poorly structured failures-in-the-making.
Avoiding Scam ICOs
Ask anyone who has experienced it, and they will all say that the feeling of having been duped is almost as bad as the loss of investment. There comes a terrible feeling of ignorance for not having seen that the person you were dealing with was scamming you. The thing is that scammers these days are good, they’re plausible. And most of us are inherently trusting. So, unless something is obviously wrong we tend to just go with it. It’s nothing to be embarrassed about; but unfortunately, it does mean that you need to employ a healthy degree of cynicism before committing to any investment.
Now, starting a fake ICO is easy. The guys over at Steemit have shown just how ridiculously easy it can be. You come up with a quirky name, a funky logo, rip faces from the internet and create a team with unsearchable, common names; Mohammed Ali, Emma Jones, John Smith, and give them a ridiculous set of mouth-watering qualifications, then stick it all on a website. Create a white paper so overloaded with technical jargon that no one has a hope of understanding what you’re talking about, but sounds impressive because of it. Bombard the chatrooms with staged whispers; have you heard about..?’
So, now you know how they do it. Let’s talk about how to avoid them.
The scammer relies on investors not looking too closely, so that’s what you need to do. Research everything. And keep in mind the following:
- The vast majority of genuine businesses actually want people to know what they do – how else are they ever going to find customers? – so if a white paper relies too heavily on buzzwords and jargon, it’s probably a sign that you’re now entering Scamville.
- Likewise, people with common names do enter into business, but for a whole team to be made up of unsearchable, common monikers smells a little bit fishy.
- Finally, if the presented goals seem unrealistic – we will have offices on every continent in the next four weeks and will have replaced Facebook as the leading social media platform within six – then you can be reasonably confident that these figures have been plucked from the ether to tempt unwary investors.
In short, if you can’t find out enough about a company behind an ICO to add veracity to its claims, steer well clear.
How to Evaluate a Genuine ICO Opportunity
OK, so that’s the scammers dealt with, now we get down to the difficult bit: sifting the strong investment wheat from the nice-idea-but-you-don’t-know-what-you’re-doing chaff. The process is broadly similar, but now you’re looking for different things; not whether a business proposition is genuine, but whether it’s likely to succeed.
To start with, then, it’s time for a bit of analysis: read the white paper thoroughly, all the while thinking about the business model, the proposed product, and the future plan. Ask these questions:
- Have all of these things – model, product, plan – been thought through properly?
- Is there a market for the product?
- Does the plan seem feasible – is there research to back up the projections, or have the numbers been cobbled together on a hope and a prayer?
- Is there a precedent for this kind of venture?
- And here’s a real clincher for a positive outcome – is this ICO tailored towards the launch of a new business, or the furtherment of an established one? If the former, it’s not necessarily a reason to abandon your investment– all businesses have to start somewhere – but it is a reason to look more closely at the model, plans, and product. If the latter, then it’s not necessarily the time to jump in with both feet, but it is a positive start, providing you with a solid foundation to build your research upon – if a company is already performing well and has a strong track record of sensible management, then there’s no reason to think that anything is going to change for the worse any time soon, so it makes a safer proposition for your investment.
- If the company isn’t already in operation, do they have a prototype of the product they’re planning to launch? If not, then this should probably be where you leave them; if they want your money, then they need to show you that it’s going to be used well. If the team aren’t capable of putting together a demo app or product for investors to view, what hope do they have when it comes to working to scale?
Next, you need to think about the token structure. Now, this can be quite tricky; here you need to work out whether the token structure offers good value for money, and that is a question which is open to some subjectivity – there is no one-size-fits-all formula available. Your main concern is whether your investment will enable you to turn a future profit, so in theory the more units you can get for your money, the better. However, you also need to be aware of companies underselling themselves; it smacks of a hasty money-grab and doesn't speak of much confidence for the future, so while everyone loves a bargain, the onus should be on ‘buyer beware'. If you want to make the most of an investment opportunity, the best bet is to try to be an early investor; many companies offer a discount structure for either the first investors on board, or the investors who purchase the highest volume of tokens.
Once you’re happy that the token structure provides the potential to turn a profit, turn your attention to the team behind the business. You can’t knock the optimism of the serial entrepreneur, but if someone has a string of failed projects behind them – and the internet is a wonderful place which never lets anyone completely hide their past – you probably don’t want to make them responsible for looking after your life savings. If the business you’re investing in isn’t already demonstrably and successfully up and running, it’s a very good idea to look into the key players involved in the project; who have they worked for/with; what are their credentials; do they have the experience necessary to pull this venture off. Yes, everyone has to start somewhere, but ideally not when your money is at risk.
Finally, take a look at the company valuation and the fundraising period. If the business is already in operation, then you can be pretty confident that both the company value and the ICO value are within the bounds of reality. With a startup, you need to find out what the ICO valuation is based upon; can the company really hope to be worth the money asked for within a sensible timeframe?
As for the fundraising period, unless you’re an Apple, Instagram or Walmart, then you can’t expect to find all of the investors you need overnight, BUT you also can’t allow your ICO to go on indefinitely. Why? Because it’s only after the ICO closes that your investors can hope to start selling on your tokens, and even then, it will take some little time for your tokens to reach the open exchange centres. And, of course, it’s not until you’ve got your hands on the investments that you can start putting them to work. So, as an investor, ideally, you’re looking for an ICO that will last no less than one month, but no more than three; this allows plenty of time for word to get around, and yet doesn’t keep you hanging while the company twiddles its virtual funds.
To give you an idea, the FastInvest ICO to further develop the company’s existing P2P lending investment platform will be running for two months: from December 4th, 2017 until January 31st, 2018. 777 000 000 FIT (FastInvest Tokens) will be generated, with 50% open to crowd sale purchase. The tokens will be issued at a ratio of 1,000 FIT for 1 ETH (Ethereum), implemented on the public Ethereum blockchain technology as an ERC20 token, with a smart contract created using the openZeppelin framework. A bonus token scheme will be available for early investors. More in-depth information can be found in the FastInvest white paper, but that’s the nutshell to begin with.
Making the move to invest in something new is always daunting, especially where you know that there are likely to be scam-artists around. The reason people do it is because new forms of investment have the potential to generate the best returns. With ICOs estimated to deliver a typical 1,320% return, there are few investment opportunities that can currently rival them, and that’s why it’s worth taking a risk. But, there are risks and there are unnecessary risks, and if you’re careful you’ll manage to stay within the bounds of the former category.