ICOs: What to Consider Before Buying
Questions to assess legitimacy
The buzz around Initial Coin Offerings has steadily increased as ICOs have seemingly gone mainstream. Go to any crypto meetup and you will hear a lot of strong, diverse opinions on various tokens. Of note recently is the description under Laura Shin’s upcoming Forbes cover story: “How smart people are making stupid money off greedy fools.”
There are great projects where an ICO makes sense, and it is an exciting new way for a startup to gain funding. However, less legitimate ICOs are flooding the market, and it is imperative to conduct due diligence before buying into it. While I understand crypto FOMO — I’ve known about Bitcoin since 2011 yet I did not invest until years later — ICOs should not be viewed as a way to get rich quick. Whether a specific token value will increase due to demand or decrease due to future regulations is still unknown.
The following is a non-comprehensive list of questions to ask before buying into an ICO (I do not call it “investing” because that will be for the SEC to sort out). While not every question can be answered for every ICO, the more you know about the ICO before spending crypto on it, the better.
For simplicity, my use of the term “application” henceforth can refer to a product, service, platform, or tool, depending on what the ICO is about.
Assess the market:
- Will the application solve a problem that actually exists?
- Will the application benefit a significant number of people (or companies) who will pay to have the problem solved?
- Are any large companies already working on a better solution to the problem?
Understand the business model:
- Is there a realistic, comprehensive plan for the application — such as a legitimate whitepaper?
- Does the token have utility in the network?¹
- Is there valid reason to believe the application will be successful?
- Is there a plan to build a community or network around the token?¹
Research the founders:
- Do they have relevant experience to the projects they’re trying to build?¹
- Do you trust them with your money, and with fulfilling potentially non-enforceable fiduciary responsibilities?
- Are they receiving counsel from lawyers and other important advisors? Do these advisors actually know that they’re on their website?¹
- Are they fully committed to ensuring success, or is this a just a new side project because ICOs are trendy?
Check the finances:
- Does the company receive funding from other sources, and if so, how might that affect company obligations?
- Who owns what amount of stake in the company?
- Are there any conflicts of interest?
Check the tech:
- Are capable engineers in place to build and maintain the application?
- How’s their GitHub repository — impressive, lacking, private?
- Can the application be completed with established technology, not just in theory?
- Is the application prone to outside hacking or nefarious user misuse?
- What is a worst-case-scenario for the application, and could the company survive it?
- Is the application in legal compliance with relevant laws and regulations?
- Is the application susceptible to special attention from regulatory bodies, and could the company survive potential new regulations?
- Can you personally afford to lose the money you put into the ICO?
¹ Special thanks to Meltem Demirors for her input on some of the questions.