An Amateur Investor’s Guide to ICOs
Including 8 things to know + 2 anti-scam tips
This article was first published in January 2018, and then re-published in October 2018. As everyone with an Internet connection knows, the cryptocurrency markets have been struggling a lot since January this year.
When I first wrote this guide, the marketcap had just reached $850 billion, Bitcoin’s price has been cut in 3, and most altcoins are now worth 10 or, in some case, 50 times less today.
I’m republishing this now 10 months later to prove that this “guide” indeed has some merit to it, because even though I didn’t make money in 2018, I also didn’t lose any. To reiterate what I wrote in January, I started out with $2,000 which grew to $50,000 (25x) in 4 months. I have only moved 5% of my portfolio since then, and it is now sitting at approximately $2,000 again (not counting the ~$1,500 in tokens that haven’t gone on an exchange yet).
Everything before “Here we go!” was written in Otcober.
So, to start I will briefly mention some of the things I did right:
- Diversifying into 20–25 different tokens
Not at once, but over the course of 4 months.
- Using the momentum of one token to invest in others
i.e. when a coin would go up 10 or even 100x I often took half and put into a few other projects. One example is POLL which went from 10 cents to 10 dollars. I had only put in $30, but at its height this $30 investmnt became $3,000 which allowed me to put $1,000 into two different ICOs while still holding 1/3 of my POLL tokens.
- Hodling instead of daytrading
Yes, it’s possible to spend 8 hours a day every day trading AND making money, but that’s not the kind of life I want. Instead I’ve spent that time learning about and researching this space to make better, more scalable investment decisions.
…and some of the things I did wrong:
Most of my bad decisions were to invest when an ICO was sold out and then was listed on an exchange. In 90% of cases the token would double or triple in price on the first day (and I was stupid enough to buy), only to drizzle down to below the orignal ICO price.
- Not researching the team enough
For every ICO I spent perhaps 10–20 minutes looking into the team. I should have spent at least 2 hours tracking every key team member’s past activities. Now that I actually work for a company doing an ICO, I realize that big investors (the successful ones) don’t necessarily invest in ideas or tech — they invest in people.
- Investing in application layers instead of protocol layers
Watch this video to learn the difference.
Now, I could easily point to some examples where diversifying is negative, in hindsight. If I had put $2,000 in TRON, Cardano, or Bitcoin back then, I would have $10,000, $4,000, or $3,000 today, respectively.
But I’m a firm believer of “safety over risk”, meaning that I would rather invest $100 in 10 good projects than $1,000 in a very hyped one, because on average I think the public will be wrong about what is and what isn’t a justifiable coin.
And besides, discovering cool companies and investing in them is also a hobby for me, so I wouldn’t enjoy holding just 1–3 coins.
The curiosity, learning, and discovery process is what drives me in the end.
This marks the end of the “looking back” part of this guide. From now on all text will be as it were, but with some added comments in italic.
Here we go!
These are the 8 factors I personally take into consideration. They are in no particular order and are not necessarily of equal importance, but they should balance each other out fairly well. For instance, if a company has no history but an excellent team, that would be OK in my book. Or if they have no beta product but an excellent history or a great solution to a problem, that would also be fine.
There’s really no step-by-step recipe for success and in the end you’ll have to rely mostly on your gut feeling after considering all the facts that are laid out before you.
A “good team” can be hard to define and it often comes down to your personal knowledge of the given industry. Having a sense of how many people and what kind of skills it will take to pull off a certain vision is a major benefit when assessing the quality of a team.
I always check out the CEO, CTO, COO, and CMO on LinkedIn if they have a profile there (or I just Google them).
If I’m not satisfied with the managers of a company I might check out some other key people in a company like the individual developers, engineers, marketing team and so on.
Having some good advisors to supplement the team also goes a long way to convince me but isn’t necessary.
So, as mentioned I should have spent more time on researching the team. Instead of spending 10 minutes on the whole team, I should have spent at least 10 minutes on each indiviual team member.
Most of the ICOs I’ve invested in have had some kind of alpha or early beta version to show off, and some of them have even had working products with a smaller userbase already. I tend to not invest in an ICO if the company can’t at least show some “real” use case for what they are trying to do, but there are probably a lot of seemingly successful ICOs out there with absolutely no product but a lot of hype around it — and they might seem trustworthy and profitable when the token first gets listed on exchanges, but later fall apart for different reasons.
Yep, that totally happened in 2018.
Having a product in place before the ICO is almost always a sign that the company is indeed going to finish the development and not just pull the plug and run away with millions of dollars in Ethereum or Bitcoin.
“Look! We’ve created the world’s most advanced something-algorithm-something ever!” — Yes, but.. how big is the market?
Most ideas that are 100 years ahead of their time will either flop or they simply won’t get you any decent return because, well, the market is not there yet. It doesn’t matter if a company claims to have invented a devce that can track the heart pulse of every adult polar bear on the North Pole — if the market isn’t ready for it or doesn’t need it, there’s no point for me to invest in it. I personally tend to go for those companies that are targeting mainstream markets for mass adoption HERE and NOW like the Divi Project, Enjin Coin, Electroneum, Simple Token, Cybermiles, Substratum, PowerLedger, etc.
I put the “ing” on “market(ing)” because those two go hand in hand, in my opinion. If a company has invented a mainstream product like, let’s say Electroneum’s mobile *miner, well, they better go berzerk on their marketing because otherwise we end up with an amazing app that everybody can use but nobody knows about.
It’s only simulating the experience of mining but still rewards real tokens that people can sell for real money.
What I’ve noticed this year is that most projects that fail do so due to lack of marketing. They build all this hype and buzz and a huge community leading up to the ICO, but then completely or partially stop their marketing efforts afterwards. This, again, can be avoided if you spend more time researching the marketing people in the team and their past companies.
Reading up on a company’s history is a great opportunity to perhaps get an insight into what to expect for the future. This point alone could potentially be 80–90% of the information people need before deciding, in my opinion. Don’t believe me? Well, think about this: if Apple or Microsoft launched an ICO, would you invest? Or Facebook or Telegram? Most would say yes without looking into anything else about the project.
But the opposite isn’t necessarily true if a company has NO history. A new company can accomplish just as much as an established one if the individual players — the team — are suberb.
There’s a saying that history tends to repeat itself and, well, sometimes it does and sometimes it doesn’t. It’s up to you to assess whether or not the company’s other qualities make up for a lacking proof of success.
Something interesting happened this year. Many of the established companies doing new things in crypto-space actually failed to deliver, proobably because they were very used to one way of thinking. But projects with no prior history whatsoever generally performed much better.
This ties into the market somewhat but I would still put the company’s vision as a point on its own; what real-life problem are they tackling and what kind of solution are they offering?
Are they focused on business-to-business or business-to-customer? Is it an application or a protocol? What does the company stand for in terms of ethics (if relevant), and what do they bring to the market that no one else is currently offering?
An idea that can make some aspect of life just a little bit easier for a big group of people is almost always a sure win. Just look at companies like Uber, JustEat, Netflix, and so on. They are all up against enormous industries but they’ve managed to succeed incredibly fast simply because what they are offering is easier and faster than the services that existed at that time.
Having a good looking and detailed roadmap goes a long way to compel investors but isn’t that necessary. Most of the time there are delays or additions as a company progresses anyway, so I wouldn’t put too much of an emphasis on the roadmap. If it looks like they’ve thought ahead and also have a nice history of development, that is perfectly fine.
If I find that the roadmap is somewhat lacking in future plans or details I might try to ask the developers directly (usually via Telegram) and in most cases it is easy to get a good answer. Sometimes they simply haven’t gotten around to making a detailed roadmap yet because it isn’t really a priority and the team would rather spend their time working on the product.
Remember to ask politely and do your research before asking the team to spend their precious time on you! ;)
The token economy or token architecture is the way in which the economy of the token is built.
This mainly includes the total supply of the coin and the ICO price at which it is offered (including bonuses), plus the utility of the token itself (if any).
So if an ICO sets the price of 1 ETH per 4,000 XYZ plus a 25% bonus (1,000 extra coins) and the price of Ethereum is currently $1,000, the USD value of that coin would be $0.20.
I usually tend to stay away from coins that cost more than $0.50 even if they have a lower total supply. Technically, if a coin costs let’s say $1, and there are only 10 million of them, the actual value would be the same as a coin that costs $0.01 but has a 1 billion supply because the coin is 100x cheaper but also has a 100x higher supply.
($1 x 10,000,000 = $10,000,000 marketcap while $0.01 x 1,000,000,000 = $10,000,000 marketcap as well).
But the reality is that your average buyer doesn’t know or care about these mechanics, so if he sees a coin that costs $0.01 he is much more likely to buy it instead of the one that costs $1, because he instinctively thinks it is cheaper even though there are a 100x less of the “expensive” coin on the market and therefore has the exact same value as the $0.01 coin!
Sometimes an ICO like ClearPoll comes along with a total supply of 9 million and an initial price of just $0.10 — it gave me a 9,000% return in just 2 months, mainly due to the crazy low supply and ICO price (because the starting point was a marketcap of around $1 million).
And even after taking all these considerations into account, it still comes down to the actual demand for the coin.
The token economy can also include certain benefits for hodling the coin like masternodes and staking, airdrops after meeting certain criteria, discounts on the product itself, and so on.
One word: Telegram.
The vast majority of (legit) ICOs are active on Telegram and you’ll notice that I’ve referred to the platform several times in the article.
I use Telegram as a kind of backdoor into a company’s support system.
One of the things that I find myself always doing is compile a small list — usually 2–3 critical questions — that I can’t find the answer to in the whitepaper, and ask an admin of the group directly. Usually the admins are also the developers or even the Chiefs of that company, and I’ve had the pleasure of speaking directly with several of the CEOs of the ICOs I’m planning to invest in before I actually put my money in.
Most big ICOs usually have a public Telegram group with lots of people chatting every minute of the day plus another Announcement Channel with no chat. I find it manageable to always turn off notifications on the public group but keep them on for the Announcement Channel to make sure I don’t miss any important updates.
I personally wouldn’t trust Twitter and Facebook numbers too much since those can easily be bought and manipulated with. This is also true in some Telegram groups, so keep an eye out for the user-number-to-user-activity ratio.
Alright, so Telegram is by no way an indicator of success. I’ve now seen plenty of ICOs with fake Telegram followers to know that pretty much any social media following can’t be trusted.
One thing that always works, though, is to see how many members are active. If a group has 10k members but you only see the same 3–4 names in the chat, stay away! I have much greater trust in Telegram channels with only a few thousand members, but dozens or even hundreds of individuals chatting in any given day.
Github & Clearify
- Github is a great platform where you can look up a company’s code depositories. This allows you to check the code that’s being developed or just see if there is any activity at all if you’re not a programmer. Some companies choose not to upload their progress here, though, so don’t shrug it off as a scam just because you can’t find them on Github.
- Clearify is a service that launched in January 2018 where companies can register their ICO contribution address to help prevent scams. In the case of many popular ICOs, scammers will create lookalike websites with a fake contribution address, or they can even hack into the real website’s backend and replace the official address with a fake one — potentially running away with hundreds of thousands if not millions of dollars worth of crypto.
Always use Clearify to look up an ICO contribution address before you send your money, but keep in mind that far from all legit ICOs know about this service yet. If they don’t have it, please ask them to get it! It’s a great help to everyone in the ecosystem.
And that’s pretty much it!
Remember to take responsibility for your own actions and never take anyone’s word for the truth when investing — no matter how excited they may seem.
Always do your own research.
Thanks for reading!
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The purpose of ALTCOIN MAGAZINE is to post and repost stories, announcements, and tech explanations from projects within the topics of cryptocurrency and blockchain. This article was written and composed by Andreas Hauser on ALTCOIN MAGAZINE.
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