Get Rich Quick?
In the new and expanding world of cryptocurrency, opportunities are being created and opened up to a whole new market of retail investors. An Initial Coin Offering, or ICO, is a form of crowdfunding that businesses have adopted to raise capital for the implementation of a business plan. And rather than investment levels beginning in the tens of thousands of dollars, often people can invest as little as fifty or a hundred. This opens the door to a whole new demographic of would-be angel investors who can buy digital assets in return for the hope that they will become more valuable when the issuing companies fulfil their obligations to develop their businesses.
Does this sound familiar at all?
Well, there is certainly an obvious parallel with the so-called dot-com bubble of the late 1990s, in which retail investors could buy stocks in start-up companies with ambitious business propositions, but as we know with hindsight, that never quite turned out as great as the euphoric proclamations at the time had many people believe, and most –although it should be noted not all – of these ventures ultimately failed.
So, what is different about ICOs?
The major difference here in the ICO world is that there is no real regulatory framework to protect investors. This leads to what is commonly referred to as a “Wild West” situation where, along with the occasional gems – see the likes of NEO, NXT, and Stratis, whose ICO returns on investment rate by orders of magnitude – rogues and villains alike are free to con people out of their money.
Risky as that may be, though, with the odd 1.5 million times return on your investment, had you bought into NXT at their ICO, or the 382 thousand-fold gains you would currently be sitting on from your NEO purchase, there are certainly some fantastic opportunities abound for everyone to take advantage of.
So, with that in mind, let’s look at this definitive guide to smartly choosing an ICO as an investment.
Now, this won’t be easy, and you will have to do a lot of digging if you want to be confident in your investment; and even then, a perfectly good idea, with a great team bringing an outstanding track record, can easily fail – the majority will – that’s life. But if we’re prepared to do our due diligence, we can reduce our risk, and turn small amounts of money into life changing windfalls.
Who is asking for my money?
Firstly, I always look at who I’m investing in. There’s nothing easier to avoid than a company with either a shady background, or a faceless image. It’s imperative that we find out everything we can about the founders, and those who work for them. Start by looking at their Linkedin page – they ought to have one. If they don’t, then it’s a red flag right away. If they do, scrutinise their history.
How successful and how public are the team?
We really want to see founders with a proven track record in the sector they are venturing into, although it doesn’t need to be in blockchain per se, as this is going to be tough to find, given the age of the industry; so, make sure you look through their work and education history, checking for all relevant positions, and what success have they achieved in the past. Find out as much as you can about them. Look for them on Twitter, and check how active they are, and who they are connected to. If you have trouble doing this – if the information is sparse, or unclear – then it’s probably time to look elsewhere.
Once you have studiously gone through each member of the team, and you have taken some notes on their credentials, you should then look for any significant partnerships they have. Take, for example, a fairly recent ICO in the insurance sector, IXledger. One of their partners – General Re – is an A++ rated, 172-year-old insurance company. This is clearly the kind of information that should make you continue your investigations. Backing from established entities like this implies your ICO has something worth investing in.
What about the business?
After we’ve exhausted our inquiry into the people and their partners, we can then start to look at the project in more detail.
Product or idea?
Of course, we want to know what the product is. Is it already working, or is it just an idea? What real world problem is it solving, if any? Some don’t, and can seem quite redundant, but a good ICO should aim to create a solution to something in the real world. Moreover, I see a lot of commentary about ICOs that just amount to ideas, and how they are probably bad investments, but I don’t think this is sound advice. There are probably countless brilliant ideas that have come and gone, killed by a lack of finances. Ideas can be good or bad, so it’s down to your own judgement how you appraise any such proposition, and if you wish to support it.
Goals and objectives – where have we been and where are we going?
Next, we want to look at their roadmap. What stage of development are we at, and where is it going? It’s important to understand the efforts expended on the project thus far. If you are considering a project that is fresh, with no work having been done, then maybe they aren’t ready to source funds from you. However, if there is evidence of significant progress, with previous targets achieved, and a clear set of future goals – usually linked to funding levels – then this can give us a sense of why exactly funding is being sourced, and what the money will be used for.
Credibility – diverse contributors, or closed clique?
One way we might verify this is if there is a Github for the project. Blockchain technology is often built on open-source code, and Github is a platform where developer communities share ideas, and make changes to the code. You want to look at what repositories there are, how many contributors there are, and how often the code is updated. Now, you don’t necessarily need to be a programmer to get a sense of whether or not it’s a good or bad project: we are really just checking for more credibility on the basis of activity. Having an active community of developers working on the project is a good sign that there is a lot of interest, and progress will be made. Here you can see the Github page of a random ICO I selected, called Parkgene. I have highlighted the area with the information that we are looking for.
Fair distribution, or cash grab?
We also need to know how their ICO will work, in terms of how many tokens there will be, and what kind of bonuses are available for investing. It’s important that we make sure we’re buying into a sound token model, with a known supply, and one that hasn’t reserved the majority of tokens for the founders. It’s no good investing in a company that plans to hold massive amounts of its own tokens, as your investment could well be crushed if, or when, they decide to start dumping large chunks of the change they have created.
MySpace or Facebook?
Other factors to consider include potential markets and competition. Is it a niche product? Or is it one with a global potential market? A first mover in any field is often a good bet for success, but remember that that also comes with the assumption that the advantage will be taken, which is not always the case.
The traditional SWOT analysis is certainly worth thinking about. Once you have a feel for the project, and know its whitepaper inside out, you can take a step back and consider its strengths, weaknesses, opportunities, and threats.
What about the law?
If you are a U.S. based investor, you also need to consider whether or not the project meets S.E.C. regulations, as some do and others don’t. This is perhaps less of an issue, though, as you will find most of the projects that are not S.E.C. compliant do not allow investment from the United States. But be careful, and ensure they are not breaking any rules in your own jurisdiction.
Can this thing work?
And finally, it might seem obvious, but do take the time to consider if the idea is even feasible. Look at the roadmap, and think about whether or not it seems likely they can indeed meet their objectives.
Collate your research in a spreadsheet.
Once you’ve done this, and for serious ICO investors – there are some people who have created a full-time hobby out of investing in ICOs – you will probably want to create yourself a handy spreadsheet, with everything listed here, and anything else you may want to add. It really is crucial that, in the Wild Wild West, you take every precaution you possibly can to ensure your safety, and longevity in the game.