Initial Coin Offerings can be a promising investment opportunity. You can easily find an idea you believe in and contribute to its fruition. However, this doesn’t necessarily mean that ICOs are a smooth ride all the way to the bank. Just like any other fundraising tool, there is always risk involved.
Firstly, there are plenty of scams that play on new investors entering the blockchain market. Secondly, it’s very difficult to accurately predict the chances of a startup to succeed. Often times, startups present lofty goals without the necessary infrastructure to complete their product, or worse, without the expectation to develop the project in the first place.
So, what makes an ICO good? How can you assess the credibility of a token sale? These are the questions every investor should ask before putting money on the table.
Here are 5 tips to filter out the new class of ICOs:
Use Cases
To begin, let’s go over a few questions that one should ask themselves when evaluating a token, coin or dApp:
- Does it need monetization?
- What problem does it solve?
- Is there a working product or MVP?
- Does it have a centralized counterpart?
- How effective is the decentralized concept compared to the centralized version?
If you went through each question you may have realized the majority of past and even current ICOs have loopholes in their presented use cases. It’s a massive issue that still gets overlooked.
There are huge amounts of projects that aim to be the “cryptocurrency of the future” or a “killer dApp”, boasting a high ROI without bringing anything new (or viable) to the table.
Team & History
Digital identities can be easily forged in the modern day era, credibility can be purchased via LinkedIn connections and no worries, we’re not forgetting the “unbiased” pay-per-review ICO rating platforms. Over the past year, we’ve even seen celebrities stock photos used for some fraudulent crowd sales. Ideal candidates should have the following traits to resemble a trustable entity:
- Completely transparent identity
- A verifiable LinkedIn account
- Conclusive biography
There have been huge repercussions in terms of trust for allowing the core team to run under an anonymous identity. It has been debated that projects may have anonymous members if they’re not part of the executive team. While this works for decentralized dApps (where the product is built first), it doesn’t work for ICOs. When you launch a token sale, you ask the public to trust you with their funds.
Compliance & Legal
From a legal standpoint, ICOs are still in a grey area. The lack of clear regulations in most countries makes investing in an ICO a double-edged sword.
It is much easier to contribute to a project, but the rights of the ICO investors are unclearly defined if the project disappears into thin air. This combination of risk and reward attracted many new players in the blockchain field.
Not every state or country will allow token sales to run in their region. Generally, the region will “ban ICOs”, not ban users from buying into ICOs.
This fundamental difference deserves further clarification:
Citizens of countries where ICOs are banned may still be able to participate in a token offering provided they comply with the KYC/AML procedures and have the status of an accredited investor (in the case of US citizens).
Regulators are forced to adapt to the pace at which ICOs are growing, which means that in the following years, ICOs will be subjected to several regulatory waves that may affect their course
For example, China took the decision to outrightly ban ICOs on their territory in mid-2017, which led to several ICOs ending their activity and refunding the investors or relocating. A more comprehensive list of ICO regulations by country can be accessed here.
One should also consider the regulatory framework of the country in which the ICO is located, as a negative stance can stop the ICO dead in its tracks.
Before and after investing in an ICO, keep an eye on where their headquarters are located. The authorities can take an open stance towards ICOs or restrict them as we saw with China.
Investment Procedure
There’s 2 major ways to contribute in a token sale, each option has its inherent differences, but quality differences also come into play based on the specific software you use.
Smart Contracts
One reason the Ethereum platform is used for ICOs is that its smart contracts can be programmed for many things, one of them is organizing a crowdsale.
This makes launching an ICO simple, with one big caveat: since the crowdsale runs on the Ethereum blockchain, you can’t send BTC, XMR, USDT or tokens of any other blockchains to it, which limits the payment methods considerably for your investors.
Besides that, smart contracts have quite a few numbers of limitations: integrating KYC/AML is considerably harder, features like referral bonuses and vouchers are not possible and most importantly, it’s a worse experience for the user.
Developing a secure smart contract is pivotal for the ICO, every mistake can lead to a loss of funds and loopholes that can be exploited by hackers. If you’re participating in a smart contract based sale, make sure the code has been audited at least once by a reputable third-party.
Investor Dashboard
An ICO dashboard is a piece of software created with the intention of enabling a secure and seamless participation in a token sale.
ICOs that use dashboards have more freedom to incorporate a plethora of features including referral programs, KYC/AML procedures as well as accepting more types of cryptocurrencies (compared to smart contracts that allow only investments in ETH).
Learn from VCs
Venture capital investors make their living on investments, which makes them the pickiest contributors, they have very clear and strict requirements in terms of monetary returns and profits from the projects they might be interested in. They won’t even consider investing in projects which don’t meet those requirements.
Even if you’re a casual investor and you aren’t planning to contribute big amounts of money, there are a lot of useful lessons to be learned from venture capital investors. Know what you’re investing in, do your research, know your risks and never take part in an ICO held by a company which isn’t up to your standards.
Know what type of investor you want to be:
Are you looking to flip tokens, to make a quick buck or to help the ecosystem and the promising projects, no matter the outcome?
Coinhatch is a state of the art token sale investor dashboard, whose goal is to make sure your investors benefit from a fully compliant solution that just works, with battle-tested security and uncompromising flexibility.
We post thoughtful pieces each month about the most interesting aspects of ICOs, token sales and blockchain startups.
