ICOs — a fad? Where is the Wheat and Where is the Chaff?
Without a decentralized means to raise funds for decentralized projects blockchain’s accession to prominence will be an arduous trudge. The ICO bonanza will undoubtedly come to an ignominious end as soon as numerous projects that raised crypto funding by making baseless promises see their tokens trade down to zero. Real world solution would’ve been regulation with legal consequences for skirting it. But in a market that scorns regulation and centralized authority as a matter of principle, regulation may very well put an end to ICOs faster than the wave of busts from scams and swindles.
In the meanwhile, to keep expanding the possibilities of blockchian technology, the investors need to become savvy in investment fundamentals and token issuers need to self-regulate to maximize transparency.
When investing in ICOs there are a number of prudent questions for investors to entertain.
- Am I investing into security tokens, purchasing utility tokens or converting my Bitcoins into a new currency?
- Is there a business behind the ICO? What do the financials look like? How many clients does the business have? What is the distribution like to get clients to use their products?
- Are the advisors on the project there because they got paid or because they know something about the relevant industry and intend to stay with the company long term and help develop the business that the ICO is intended to fund?
- What are the fundamental drivers behind the value of tokens that I am purchasing? What will drive long-term appreciation?
The list of such due diligence questions can be very extensive. However, four categories listed above can act as a litmus test for separating scam from investments that you can ultimately be very proud of. Here are some red flags that investors need to be cognizant of with respect to these four categories:
- If you are buying a token that is giving you a right to a real asset, a security paper, a royalty stream, a portion of profits or a number of other exposures to the economic performance of a company or an asset, then you are investing into a security token. There is virtually no chance that security tokens will escape regulation. Therefore, you are taking on regulatory risk, which can work against you and turn your tokens into nothing more than worthless lines of code.
- In an overwhelming majority of ICOs there are no existing operations behind the projects that sell tokens. Why would you trust someone that has not demonstrated at the very least “proof of concept” in the real world or has actual performance indicators that gauge the team’s execution capabilities? A wave of busts will be largely driven by too many teams with too little business experience raising too much money with too little accountability. A fundamentally functioning business staking its reputation on the ICO of its tokens is a sign that the team has downside from a failed token in addition to the upside from the token’s success.
- Advisors are a dime a dozen. Pay anybody enough money and that person will advise you on anything. There is a troublesome trend where individuals turn into “professional advisors” and can be seen promoting projects (often simultaneously) with little to no understanding of their substance. After all, $100,000 worth of Ether is a decent chunk of change for allowing your picture to be posted on a landing page. Legitimacy of advisors comes from affirmative answers to any of the following questions: i) Does the advisor represent a business or an institution that stands to gain from the success of the token issuer? ii) Does the advisor bring substantial practical knowledge to the subject matter behind the project? iii) Will the advisor be involved in helping execute the project or will he or she have another practical long-term role?
- Finally, does the blockchain powered by the token that you are buying create more value for the blockchian users than the price that you are paying? Is that value marginal or does it represent an order of magnitude over the price that you are buying the tokens at? If speculative price fluctuations driven by supply and demand for tokens is the only force that you are counting on to underpin the potential appreciation of your tokens, then you are playing the game of musical chairs. Music of hype will stop. Bubbles will burst. Only tokens underpinned by long-term value fundamentals will emerge from the carnage.
CarFix, the developer of Vehicle Lifecycle Blockchain, is announcing an ICO of utility tokens: VLB Tokens. Over the last 18 months, while gearing up for the ICO, CarFix has established a vast ecosystem or vehicle lifecycle industry players and runs a growing well performing business that is funded by marquee VC investors.
Advisors to CarFix in developing the Vehicle Lifecycle Blockchain are industry insiders. Companies that they represent will be users of the blockchain. Two of the advisors are thought leaders in blockchain development and will be intricately involved in building the Vehicle Lifecycle Blockchain. VLB Tokens at the ICO are priced at an equivalent of approximately $0.50 per token. Some industry players that will use these tokens will be able to achieve savings up to $100 in per unit costs.