5 Things you must consider before investing in an ICO.
We, at Marginless, believe that everyone should understand the positive and negative sides of an ICO. With so many ICOs happening, it’s good to know which ones have potential, but it’s even more important to know whether investing in this space even makes sense. In many ways the current wave of ICOs (Initial Currency Offerings) looks a lot like the heady days of stock IPOs in the late ’90s. The potential return was so enticing that euphoria overtook common sense in many ways. Today we would like to address 5 key factors on whether the ICO that you would like to invest in is good or not.
It’s great to have a whitepaper and detail out a project, but how detailed has the team really thought through their own project?
Short Whitepaper? No Details? Avoid! The whitepaper contains all of the core information you should need to know about the coin. Once you’ve done that, go to forums to read about some of the holes that may exist within those Whitepapers. See if the developers are actively addressing the concerns or simply ignoring them. The more information available, the greater the debate, and the more transparent a team is about their tech, the better it is for the investor.
No Development Roadmap? Avoid! What is the team’s development and marketing road map? Does it make sense? Is the time frame reasonable? Has the team already proven it can stay on top of its own development schedule from before the ICO? I am wary of any project that doesn’t have a detailed road map and so should you be.
Does the team have real experience in the space they are attempting to coinify? If so, how much experience? What about relationships to industry veterans who can elevate the project further? Ultimately our investment is betting on the people behind the coin, not the coin itself. Our investment is a vote of confidence that the team can pull off the incredible feat they have set their sights on.
Are they full time? The worst thing is to have a part time staff. This means the project isn’t their primary focus and it can mean the project may go slow or, even, no where. We want a full time team dedicated to fleshing out the vision.
How many years of experience do they have? Nothing wrong with the young diving into a killer project, but do they have support from a more experienced team? If not, then navigating the unknown could prove harder than initially anticipated. Nothing stays rosy for long. Having veteran team members can help to brave through turbulent times, which are guaranteed to happen.
Do they have every aspect covered? Architecture? Development? Scale? Business Development? Marketing? A team only comprised of technology developers can also prove to be a poor choice for investment. It’s important to have a balanced team, one that can also get the word out, and build relationships to accelerate growth.
At the same time if a project only has a single developer, it’s a single point of failure. If anything happens to that one person, the entire project can head into a downward spiral. Redundancies are required to ensure that no single person can make or break the project.
How many projects are now raising over $50M or $150M in a single go? Is that a good thing? Depends, but generally speaking, not really. A small team developing a disruptive technology probably needs money in the low millions to begin with, in order to prove their case. From there they should raise further capital once there is a real use case and growth in user-base.
The idea of a paper company raising over $100M should have any investor question on why do they need so much resources? And the answer should have a solid breakdown of where funds will go. Specifying that X% will go to founders and early investors and the rest to the crypto community of investors says nothing. We want to know what will be going into hiring and what would the runway be for those funds. Real planning beyond just the tech is incredibly important.
Keep in mind that this is not a regulated space. We’re in the wild wild west territory so anything put into an ICO should be considered thrown away for all intents and purposes. That is not to say the ICO can’t be successful and the coin can’t thrive, but the risks are high. So consider the facts and only put in what you can afford to lose.
According to Gomes, one of the most important things you need to check out is the token or appcoin. Why? Because you need to make sure that it’s (a) actually useful and (b) that actually it grants a return on investment. Aside from that, it’s also paramount that you check how they’re issued or distributed:
“In some cases, if the founders have no tokens, they would not have the right incentives to grant their value.”
It is also important to know how many tokens are being issued and how are they distributed. In some cases, if the founders have no tokens, they would not have the right incentives to grant their value.
In this sense, it is a good practice to design mechanisms to oversight further sells of the tokens by the founders.
There is no need to reinvent the wheel. Code re-usage grants that it works well and has been previously tested. It is always better to use a well-known code like the Ethereum Foundation’s multi-signature smart contract than trying to implement it by yourself.
The code should also have units tests covering all use cases. This practice usually helps to catch most issues.
We should verify that the code is public and corresponds to the code deployed to the blockchain (i.e. publishing it on Etherscan in case of ICOs launched using Ethereum).
The crowdsale smart contract usually interact with others, and the funds are usually moved to those smart contracts once the capital is raised, for example to a multisignature escrow account. In this sense, we should verify that those smart contracts comply with the same security standards.
You can make a lot of future profit when you invest in an ICO. But ensure that you find out everything you can about the project before investing your cash. There are a lot of scammers on the internet, and with every technology revolution comes a different type of scam. So you need to be really careful when investing in an ICO.
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