The Fundamentals of ICO: How to Set Yourself up for Success

Billions have been poured into ICOs already and the market continues to soar. The market cap for the top 20 cryptocurrencies combined exceeds an astounding $200 billion. Analysts are calling the ICO-mania the gold rush of our era, but many still find the concept too confusing to explore further.

We put together a concise step-by-step guide to investing in ICOs for those who want to try it for themselves.

How to pick the right ICO?

The explosive growth in ICOs is signalling the beginning of a new financial era that completely changes the fundamentals of how businesses source capital. Scores of promising, forward-looking startups are using ICOs as a quick and lucrative way to raise funds and build amazing products.

On the one hand, you have the ballooning market and colossal returns that can go as high as 1,320%, and on the other, you have investment mega-brains like JPMorgan’s CEO, Jamie Dimon, calling out bitcoin as “a fraud”. And while critics continue to debate the future of digital currencies, ambitious investors are cashing in on the crypto mania.

Let’s be honest for a second — not all ICOs will deliver high returns. In fact, many of them will fail. But looking at some of the success stories, such as eye-watering Stratis token sale that generated a 63,500% ROI for early investors within the first year or Ethereum that saw a 60,000% increase in value since its ICO, it certainly is possible to win it big.

What do investors need to know about ICOs to spot and pick the one with a real potential to yield substantial returns? Here are the key factors to consider.

Do you know the people behind the ICO?

A seasoned team with a proven track record and expertise in a respective field is what you’re looking for. It’s true that many companies opting to hold an ICO are newly incorporated, and it’s almost impossible to check their past performance. However, you can easily research the key members of the team individually and find out what positions they held in the past or what results they were able to deliver.

You should always keep your eyes open for ICOs held by established companies that are looking for a cost-effective way to expand or accelerate their growth. Companies with an established track record and a robust growth strategy are naturally a less risky investment option.

Is the concept disruptive enough?

There are too many clone concepts on the market, seeking to piggyback on the momentum of successful ICOs. Be wary of investing in products that don’t offer anything new or unique. If it’s just another me-too type of startup, they’ll be up against a healthy competition and therefore, are most likely to use up all of their resources trying to compete rather than innovate.

For a company to disrupt the status quo and deliver truly revolutionary solutions, it must address a real market need and have a completely fresh approach to unsolved industry problems. When picking your next ICO, look for products that leverage the strengths of blockchain technology to shake up the old ways.

Have you evaluated the technology?

ICOs that are largely based on untested ideas pose significantly higher risks compared to those that have a solid proof of concept. You are looking for big ideas, but not so big that they would turn out to be unachievable in the end. Always evaluate the viability of a venture through its proof of concept and try to assess whether it would appeal to the intended target audience.

A team that’s launching an ICO without any practical experience to vouch for the viability of the idea could also be a sign that they don’t know what they’re doing. If there’s no proof of concept, pay extra attention to the people behind the venture — are you positive they are capable of delivering a potent product?

Are you nitpicking the white paper?

A white paper is essentially a company’s pitch to investors. Combing through the details and looking at all the facts and figures closely will give you a better sense of how seriously the team is taking this task. Are the arguments compelling? Is the white paper well researched? Are the sources trustworthy? After reading it, you should feel confident that the team is knowledgeable, there are no obvious thinking flaws, and that everything will come together as planned in the end.

There’s nothing wrong with nitpicking. You are going to invest your money into someone else’s idea — they must be prepared to answer all your questions.

Practical tips on how to invest

If you are tempted to dip your toes into an ICO, ensure you use these practicals tips to avoid any beginner’s mistakes.

Understand the financial risks

ICOs is an uncharted digital territory. Because they are unregulated, the financial risks are very real. Not only is the market volatile and the value of cryptocurrencies goes up and down all the time, no regulations means no protection for investors who risk putting their money into fraudulent ICOs.

The Financial Conduct Authority has cautioned investors, “You should only invest in an ICO project if you are an experienced investor, confident in the quality of the ICO project itself (e.g., business plan, technology, people involved) and prepared to lose your entire stake.”

Know the technological risks

Even the leading investors like Olaf Carlson-Wee, the founder and chief executive officer of a $200 million crypto hedge fund Polychain Capital, are reminding investors that blockchain is still an unproven technology. “If you don’t know what you’re doing, you shouldn’t interact with tokens — from an investor and security perspective,” said Carlson-Wee.

Taking the time to research the market and think about how and where you’ll be storing your digital currency is of paramount importance. Hackers often prey on new blood, so don’t give them the opportunity to get their hands on your crypto assets — secure your tokens.

Do a thorough research

There are many things on your to-do research list. To get a comprehensive view of the project you want to invest in and objectively evaluate its potential, you should:

• Study the white paper;
• Join the company’s Slack community;
• Review available information on ICO calendars like ICOAlert that also offer reports and interviews with the founding team;
• Research the development team;
• Participate in the discussions on the bitcointalk forum.

Doing your own research will allow you to determine whether the investment is the right decision for you. Don’t buy just because your neighbour is buying, make sure it’s worth the risk!

How to buy during an ICO

Ready to make your first investment? This is how to get your hands on tokens.

1. Get bitcoin or ether

Pick a credible cryptocurrency exchange and wallet like Coinbase, connect your bank account or credit card and purchase your digital currency of choice — either bitcoin or ether. Keep in mind that you will be charged a higher fee if you’re using a credit card.

Since most of the cryptocurrency exchange platforms have to use the traditional banking system to transact with banks, it usually takes several days for the operations to go through. Purchase your tokens at least a week in advance of the ICO you want to participate in to stay on the safe side.

If you’re not planning to spend all your tokens in one go, make sure you move them into the vault to keep them secure.

2. Transfer your tokens to a user-controlled wallet

Using a centralized service like Coinbase is convenient but what you might not know is that you don’t own the private keys to your ether or bitcoin address. The mechanics of how ICOs work require you to send them your ether or bitcoin and the smart contract automatically sends tokens back to your address. However, since you don’t own the private keys in a centralised service account, if you participate in an ICO from a Coinbase or a similar type of account, you won’t own the tokens that will be sent in return.

Avoid the disappointment by moving your crypto currency to a user-controlled wallet before engaging in any investments.

3. Participate in a token sale by sending your crypto to the company’s address

Take extra caution when noting down the address to which you are sending your coins. The company holding the ICO will post when and where you need to send crypto to participate, and the token sale will be active during that window of time only.

If the ICO you want to participate in is happening at an inconvenient time and you think you might miss the sale, you can use a smart contract to make the bid on your behalf.

4. Think about where you’re going to store your tokens

The industry advice is to store your digital money either in a cold wallet (an offline wallet) or on a hardware wallet, a device specifically designed to keep any crypto assets safe. Have a look at Trezor and Ledger — these are the two most popular choices.

Once you have it, simply plug the device into a USB port, transfer your coins and disconnect when the transfer is complete. This way, your coins will be protected from viruses that might infect your computer.