Where To Look When Investing in ICO: 8 Consideration To Make When Evaluating ICO Investments
The investment field changed significantly with the arrival of blockchain-powered crowd investing events called Initial Coin Offerings, or ICOs. By offering tokens, or coins, that could be used in the future product and exchanged or sold on crypto exchanges, rather than shares of a company, digital entrepreneurs get access to startup capital which they can use to build their product and bring it to the market. Here’s a short guide to outline the main considerations you should be making while assessing the ICO to participate in.
As a type of investment, ICOs are considered alternative investments and therefore are high-risk, high-yielding investments. Some ICOs were successful to meet their investment goals but failed to deliver profits to their investors because their solution wasn’t built properly. And some famous ICOs such as Tezos which didn’t have a properly researched technology behind the ICO still demonstrated ROI exceeding 1000%.
The unique thing about ICOs and investing in them is that cryptocurrencies market is powered by sentiment, not data research, and the direction that it takes is determined by what investors think, not by what market data is showing.
Cryptocurrencies are often called a currency of a new cashless economy without borders but with profits that may exceed those in FX trading. Here’s seven points that you should consider when making a decision to invest in crypto ICO and other alternative assets.
Consideration 1: ICO Team
This is the first step in your due diligence. You want to examine the team published on the ICO website. While blockchain technology is still in its infancy, you have to be looking for a skilled team with several years of experience in financial technologies, distributed computing, blockchain development, and of course designing and developing web applications. Other important members of the team are marketing and project management managers, also ideally with years of experience managing blockchain project and/or fintech.
Advisors are a vitally important element of the ICO team. You should be looking for key industry players with decades of experience, founders of successful ICOs, or members of industry organizations. Advisors should not just lend their faces to the project but they should also lend their brains and expertise, that is, they should be actively involved in spreading the word and improving the reputation of the project.
Having serious backing right from the start is a sign of a promising ICO. Look if the project is supported at this early stage like other angel investors, VCs, investment funds getting involved in the project set the ICO in the right direction.
Consideration 2. The Great ICO Idea
Don’t let the solid-looking team fool you. If the main idea behind the product is unsustainable, the project will fail no matter how ambitious the goals are or how intensive is the marketing. If you can explain the idea of the future product to your non-technical friend in one sentence and it still makes sense, then it may be a good idea. The problem which the product will address should be urgent, real and applied across industries which ensure scalability. Many times the ICO tries to develop a solution for a problem that doesn’t even exist.
When looking at a product idea, try to forecast the possible market or the market share. You are looking for a product that has the biggest market possible, such as Bitcoin or Ethereum. You should also consider the competition and if there are any similar solutions on the market. In case of the technology that underpins the idea, find out about possible uses outside of the proposed target market so the project can be applied to other industries or use cases. Your source of information on this matter is the white paper. Make sure to read through technical details and see whether the team has done their homework when preparing for an ICO. If the idea is brilliant and the white paper quality is not so good, don’t panic: great developers don’t always are equally great writers, and over-polished, fancy-formatted white paper could be an attempt to mask a week project underneath.
Having a great team is still more important than a great idea. Talented people will always figure out ways to improve the subpar idea while the weaker team may ruin even the greatest idea out there.
Consideration 3. Idea into Reality
In the business world execution is everything. You should make a preference to ICOs that have a working prototype ready, even in experimental stages. ICOs that have nothing to show to support their ideas except a white paper has little chances of survival. Too many ICOs there simply raise funds for a prototype that may never deliver its promises to the crowd of small investors.
Consideration 4. Jurisdiction
Every day there is news on governments making progress with cryptocurrency regulations. Some countries relax their approach to ICOs and others make it even cruder. Malta, for example, announced its plans to become a “cryptocurrency haven” while the USA continues to restrict the access to ICOs to small and medium investors. That’s why it’s important to check where exactly is the jurisdiction of the ICO, where the headquarters are based, and then make yourself familiar with the applicable laws in that destination. You should pay specific attention to any laws that regulate securities, KYC policies and risks for investors. While the uniform regulation for cryptocurrency economy is still far away to be discussed in this guide, you still want to be sure that your investment is not putting you in any jeopardy.
Consideration 5. ICO Token
The relatively short history of ICOs knows many examples that a perfectly functioning web application could be easily created without the need of tokens and blockchain in general. Check if the token actually has any value on the market and will it be used in the application. The amount of value traveling via blockchain is so significant, no wonder some clever entrepreneurs try to get their hands on free money without creating any value in return, simply because everyone else is doing it. Again, if you can explain what the token does to a 5-year-old, consider this token worth a closer look. Seeking a real value in the token and trying to forecast a tangible market for it is crucial to the success of your investment.
Consideration 6. Value
Even if you found a great team with a solid business idea and a token that holds a certain promise, this doesn’t automatically mean that this token will remain valuable forever. There must be something that will ensure that token stays high in price for a long time the ICO is over. If a token doesn’t have any mechanisms for keeping the price high and yet remains available with unlimited supply, then investors will prefer to avoid price fluctuations by using fiat or other cryptocurrencies.
One of the factors that keep token valuable is the number of transactions on the blockchain. The higher is demand in eth, the more stable its price is. Another value “guarantee” is some kind of a unique technology that the token embodies. The token shouldn’t be designed only as a medium of exchange. Another value driver is the presence of the token on all major cryptocurrency exchanges.
Consideration 7. Business Structure
As in any business, the structure of the company and its fundraising efforts is paramountly important. You should pay attention to whether the hard cap is low or high, because the lower the cap the better chances the ICO has for success, as well as timeline (should not be restrictive for investors) and bonus structure which should encourage early supporters to join in at pre-sale stage yet remain attractive for those who join the ICO at the main event.
Consideration 8. Media Footprint
While this is not feasible to make investment decisions solely on media sentiment, there are exceptions, and this is online presence of the ICO team. BitcoinTalk activity and GitHub contributions (most ICO creators send their code to open source repository) are the first places to check. Reputation and trust are paramount in ICO world because at this stage the company asks the public to buy a share of something that doesn’t exist. The way the team addresses investors’ queries and the way the company communicates with the public tells a lot about their general business attitude. At the same time, a brilliant idea executed by a talented team can get little traction in the social media space because the developers are not too savvy in marketing. Or a lower-grade product receives top media mentions simply because they were willing to pay good money for business media mentions. As any investor knows, sometimes you just have to trust your instincts.
When looking at the history of recent ICOs it’s obvious that returns on some of them have been extremely high, with ROI often exceeding 2000%. And despite any government bans or restrictions, it’s quite clear that ICOs are going to become an integral part of a financial scene. The risks are similar to those who engage in Forex and in the same way, there is no “get rich quick” scheme.
Any investor worth of his portfolio or just a regular gambler will remind you that you should not bet more than you are prepared to lose. The key to successful investments is not to do put all your eggs in one basket and to do your background checks diligently.
With this in mind, you can start looking for an attractive ICO that resonates with your values. There are many online platforms that aggregate announcements of all upcoming ICOs. Now it’s time for you to open your own private wallet because you cannot participate in an ICO with a wallet you have opened at an exchange, so you must actually own your private key. Myetherwallet is a good option to take a closer look but of course, there are lots of wallets available. Own wallet account is necessary for a token transaction.
Now you can start applying your fresh knowledge right away.