12 Questions to Ask Yourself Before Investing in an ICO
In the cryptocurrency world, 2017 was arguably the year of the initial coin offering. In the twelve-month period, over USD 4.6 billion of funds were raised during the 400+ token sales that were held. However, the quality of the blockchain projects that conducted initial coin offerings has varied tremendously ranging from highly innovative game-changing projects to mediocre ventures whose tokens became next to worthless, all the way to outright scams that simply stole investors’ funds.
Therefore, it is important to look thoroughly at each initial coin offering (ICO) that you intend to invest in. One way of doing that is to ask yourself the following twelve questions to determine the quality and potential future success of a blockchain project and its digital token.
Is the ICO legitimate?
It is an unfortunate reality that the ICO market is plagued with scams. The instances of Confido and, more recently, Prodeum have demonstrated just how common fraudulent token sales have become. Hence, it is important to “fraud check” any ICO first before conducting any further research on the project.
The first aspect of that is the check whether the company behind the token sales is a legitimate company. If no information about the issuing entity can be found that is a major red flag.
Secondly, is there information about the company directors and are they actually real people? If you cannot find the names of the operators of the project anywhere else than on their LinkedIn profiles that should be a sign of concern as anyone who has been successful as an entrepreneur or as a developer will have a digital footprint. If that is not the case, there is a chance that these people do not actually exist.
Thirdly, is the idea and whitepaper simply copied from a previous initial coin offering or is the ICO original? If there is too much similarly to past successful token sales this could be another sign that this ICO is a scam.
Is the team behind the project experienced enough to deliver?
Once you have established that the ICO is legitimate you should look at the team behind the project and ask yourself how likely they are to be able to deliver. If the team is composed of experienced entrepreneurs and developers with past experiences of successfully executing blockchain projects then they will likely be able to make due on their mission statement.
If, however, the team has no prior relevant experience in the market that they intend to enter, this should be a concern for investors as it will decrease the likelihood of success for the project. Additionally, it could also be a sign that the individuals behind the project are only conducting a token sale to receive “easy money” as opposed to actually wanting to develop a value-adding blockchain platform.
Does the project’s whitepaper clearly detail all aspects of the project?
A project’s whitepaper is as important as the team behind it. A whitepaper must clearly outline both the technological and the business aspects of the project and should leave no important questions unanswered.
If instead, you find that the whitepaper is only a few pages long, contains spelling and grammar mistakes, and is missing vital information relevant to investors, then it is a clear sign that the project’s team is lacking professionalism and the token sales should be avoided.
Does the project have a clear and realistic road map?
Furthermore, the project launching a token sale should also have a clear road map that the team can realistically execute with the funds they will raise during the token sale. If the road map is too ambitious and makes too many big promises, chances are that the team will not be able to fulfill them and the value of its token will suffer once it starts to trade on exchanges.
Is the code open-source and has it been audited?
Traditionally, most decentralized blockchain projects such as bitcoin have open-source code - usually found on GitHub - that can be audited by third parties. If the startup whose token you are intending on buying has open-sourced its code and it has been audited by trusted community members, that is a very good sign for the project.
Having said that, many blockchain projects conducting ICO’s today want to keep their code private as they do not want competitors replicating their business models. Hence, non-public code does not automatically dismiss an ICO either. The more transparency about the project, however, the better.
Is it being made clear what the raised funds will be used for?
The project’s team needs to clearly outline how the funds that will be raised during the token sale will be used. This should be stated in the whitepaper or on the project’s website. The more detailed the breakdown of funds the better.
If the founders of the project are not being clear about how they intend to use the funds, this should be considered as a red flag as it lacks professionalism and transparency. Also, if too many of the issued tokens will be held by the project’s operators this could also be a sign of concern as it could be an indication of possible a pump and dump scheme.
What function will the token have?
There are several different types of digital tokens including currency tokens, tokenized securities, utility tokens, and reward tokens, among others. Hence, it is important to understand what function this newly issued token will have.
Will it be a tokenized security that will act as a digital share in the issuing company? Will it be a utility token that provides holders with access to or specific benefits within the project’s platform?
It is important that the functionality of the token makes sense and has the potential to drive demand. For example if a token is needed to access a particular network and this network goes in popularity, the value of the digital token will likely rise.
Could the token be replaced by an existing token instead?
Additionally, you need to ask yourself whether the token that is being issued is really necessary or whether the same platform, product or service could also function using an existing token such as ether (ETH).
If the token could easily be replaced with an existing token, then this may point to an underperformance of the new token in the secondary market.
What will the money supply of the new token look like?
One of the main reasons why the price of bitcoin has rallied so much in the nine-year existence of the digital currency is that the supply of bitcoin is fixed to 21 million coins. This creates a scenario where increased demand meets a fixed supply, which drives up the price. Hence, the money supply of a digital token is a very important aspect to look at when deciding to potentially invest in a token sales.
How will the money supply of the new token be managed? How much will be sold during the token sale and how many will be kept by the team/company? How many tokens will be introduced into the market and during what time intervals? These are all very important questions about a token’s money supply that the project’s team needs to answer in its whitepaper and if not, then on other channels such as social media.
Is there a market for the project’s product and service?
Additionally, you need to look at the market that the new project is aiming to penetrate and ask yourself whether there actually is a market for the product or service that this company is launching.
If there is no market for a product there a chance of creating an entirely new market in the way that Ethereum has done for smart contracts, for example. However, in most cases, if there is no market for the platform or app that a startup intends to launch, that might mean that there will also be no demand for it, which would mean that the issued digital token would eventually become worthless.
Who are the competitors and can they be outcompeted?
When looking at the market that a new blockchain startup is looking to enter, you also need to look at the company’s competitors in that space. It is important to ask yourself: Who are the competitors? And, can this startup outcompete these competitors?
For example, many new blockchain mobile banking ventures targeted at the world’s underbanked population have held token sales in the past twelve months. While several of these have managed to raise a substantial amount of money, the market that they have entered is highly competitive and includes the likes of international banks, local banks, and large telecom operators with mobile money business as competitors. Hence, small blockchain startups that have only managed to raise a few million dollars will find it difficult to compete in such a competitive environment even if their technology is potentially superior.
If, however, the project whose token you intend to buy is entering into a growing market with only a few competitors that would be a good sign for the company to potentially establish itself as a market leader due to the first-mover advantage. This, of course, would be positively reflected in the price of the company’s digital token.
Does it make sense?
Finally, you need to ask yourself whether the project and its token actually make sense. Does the product or service actually need a blockchain to operate or are these startup founders simply jumping on the blockchain bandwagon to cash in on a booming market?
In the light of the lack of barriers to entry for launching token sales, there has been a wave of mediocre “blockchain” projects that have gone the ICO route to raise easy money in a hyped up market. If the platform, product or service that the team wants to develop does not really need to run on a blockchain or does not really need its own digital token, then it is best to stay away from this ICO as the value of the token will likely end up becoming worthless sooner than later.