The ultimate guide to review ICOs v1.0
With ICOs becoming a popular way for people to lose their money, it seems sensible to think about how we can minimize the risk. Therefore, the purpose of this guide is to give you a framework to separate the good from the bad.
Let’s crunch some numbers upfront
As you can see from the chart, the funds raised through ICOs in 2018 already surpassed the entire amount collected in 2017. As the inflow of funds increases, more and more scammers are attracted to get their piece of the cake. According to the article published by news.bitcoin.com, $1.36 billion got stolen in the crypto space in 2018 due to phishing, fraud, theft and hacking. With 30%, fraudulence holds the biggest share of that amount.
To help you not falling for the fraudsters, our guide will show you the key aspects to check before investing into a blockchain project.
1. Team
“Founders should have a history before they start a company — otherwise, they are just rolling the dice.”
– Peter Thiel
The team is the most important factor to consider when evaluating startups. They define its future and will be the ones making the decisions that will lead a company to success or disaster.
1.1 Track Record
We have to get to know the team as best as we can. Check their track record, who are we dealing with? Try to get these questions answered:
- Does the project team has any founding experience?
- Do they have experience within the projects industry?
- Are they trying to solve a problem they previously had?
- Do they complement each other?
- What companies have they worked at before?
- Have they successfully raised money before?
In order to find these information, check their Linkedin profiles, google for relevant mentions in blogs/news outlets and watch interviews with the founders. Get to know the team as good as you can with the information that you can find. A successful founding team is in the spotlight, talking about why their project is the next big thing. Therefore, relevant information should be easy to find.
Let’s take the Medicalchain Project as an example. Medicalchain is putting patients health records on the blockchain.
👍 Their CEO Abdullah Albeyatti is a surgeon and therefore has firsthand experience with patients health records.
👍 A quick google search for “Abdullah Albeyatti Medicalchain” gives us a personal interview on SoundCloud:
⚠️ If you have a hard time finding these kind of information, don’t invest your money even if you like the idea.
⚠️ Be aware if founders are not showing their faces besides a team page.
1.2 Advisor-Check
Find out if there are external people committed to the project. A solid board of advisors is a sign of trust. Search for references / statements from the advisors regarding the project. Check if the project is connected to their LinkedIn profile. Google the advisor`s names and see if they are mentioning the project somehow.
👍 If the project is a decentralized insurance for cancelled flights, we want to see an insurance expert, someone from the booking industry and maybe an airline expert in the advisory board.
⚠️ A board full of random people, with no connection to the industry is a red flag.
1.3 Institutional Investors, Business Angels and Partners
Check if the project already got a “traditional” investment or raised money in the presale. If you found out who is backing the project, search for a relevant statement that verifies their involvement. Also, see if you can find institutional partners with high credibility and good reputation linked to the project.
👍 Established investors in the blockchain sphere (e.g. Digital Currency Group, Fenbushi Capital, Blockchain Capital etc).
👍 Institutional Partners (Hyperledger, Linux Foundation).
If you don’t know them, google is your friend. See if they have a history of investing in well known projects.
2. Product and Market Size
You want to invest in a project with a great product that has a competitive edge and is long lasting. Therefore, it should solve a real world problem and improve over existing solutions by a magnitude.
What is the thing this project makes 10x better than any existing solutions?
Can you identify a dimension where the project is:
- 10x cheaper?
- 10x more secure?
- 10x faster?
Furthermore, the project should present a detailed market size analysis as the market size is crucial for its future growth potential.
👍 Amazon has 10x more books than any bookstore
👍 PayPal is 10x faster than bank transfers
👍 Google’s search performance, accuracy, and simplicity, was 10x better than previous search engines
⚠️ Can’t explain your mom in three sentences why the product has value? Don’t invest.
2.1 Blockchain Use Case
Not every project needs a blockchain and not everything needs to be decentralized. Therefore, when considering an investment in a blockchain project, make sure to find these questions answered in the Whitepaper:
- Why does the project make use of the blockchain technology?
- Can it be done without a blockchain?
- Why does the project need its own “native” token (and not uses any existing one)?
- What gives the token its value? (is it a currency- , asset- , utility- or equity-token?)
- Does the project use a private or public blockchain or a mix of both? Why is that?
💡 To get a better understanding about use cases of blockchain technology and to learn which industries have a high potential, we recommend this article:
2.2 Competition
See how many blockchain projects are working on the same problem. The competition in the market is extremely important when making an investment decision. Therefore, try to find convincing answers to these questions:
- Which other blockchain projects are working on the same product (if any)?
- Why is this project able to solve the problem faster and/or better than another blockchain project?
- What feature of the product stands out most compared to the competition?
- What is the unique benefit to the consumer and is it strong enough to move the masses?
⚠️ Medicalchain has a lot of competitors who try to bring health data on the blockchain, namly Patientory, Medibloc, eHealthFirst, CareX etc.
2.3 Media Coverage and Community
News articles and online-forums are a good starting point to get an outside opinion about an upcoming ICO. Mostly a project will link to all online articles they are mentioned in. Make sure that those articles are neither paid ones nor press releases. If a project refers to many articles, but none of them lead to a reliable, neutral source this should make you think. Another valuable source for information are community forums like bitcointalk.org and reddit as well as group chats like telegram. Usually, projects make use of all these channels in order to create awareness and interact with potential investors. Check these channels to see if critical questions and concerns will be answered properly by the project team.
Be aware: Some positive references are driven by money, not conviction. Many projects run so called “Bounty programs” that incentivise people with tokens if they write articles about their ICO, promote them on social media or make positive comments/posts on forums like bitcointalk.
Join the Telegram group and ask a critical question or write a critical Email. See how fast the team responds and if you’re happy with the answer.
2.4 Bullshit-Bingo & Profit Promises
In order to draw attention to their ICO, projects may use a lot of buzzwords in their marketing (e.g. AI, blockchain, decentralised, innovative, scalable, platform, revolutionary, distributed, marketplace etc.) and make profit promises.
Too many buzzwords should alert you and any promises of guaranteed profits are definitely a red flag. A good, trustful project should be able to clearly state what they do without fancy sounding catchphrases.
Be aware: If a project creates a sense of urgency and FOMO (e.g. with “sold out” messages) you should be cautious.
👍 “Medicalchain uses blockchain technology to create a user-focused electronic health record whilst maintaining a single true version of the user’s data”
👎 “Bullshitcoin is a unique, decentralized, blockchain based platform. Profits are guaranteed due to its revolutionary and innovative scalability approach. Invest now and get a 50% bonus.”
3. Technology
At the end of the day a team needs to build a product. So we have to assess their capability to deliver on their promises. Here are some good indicators for technical capability:
Token sale contract
At the very minimum the project should have their token sale contract on a public repository. As code is law on the blockchain, this one has to be thoroughly checked upfront to make sure there are no bugs/security vulnerabilities. Therefore, without coding knowledge, we need to look for a proof that security audits were performed by external people.
⚠️ Don’t trust a project that can not provide a publicly visible token sale contract.
⚠️ Don’t trust a project that can not provide a proof that they performed external security audits on their code.
3.1 Demo
Is there any kind of demo, proof of concept that we can test?
👍 “INS Ecosystem provides a working consumer application”
3.2 GitHub
If the project is open-source, the code base is maintained on public repositories like GitHub.
Even if you are not a coder, you should have a look at the project`s GitHub repository:
We can see that the Lisk project has 6000+ commits (code modifications) and 37 contributors. An active Github repository helps you to judge the technical competence of the team.
Check the contributors tab on the GitHub repositories.
- Can you identify the proclaimed CTO or other technical members from the team page?
- Click on the core members and check their contributions graph
4 Token Sale Information
You should find information about the Token Sale procedure, Usage of Funds, Token Distribution, Vesting, Escrow and KYC in the Whitepaper.
4.1 Usage of funds
The team behind an ICO should have a clear idea of how they will use the raised funds after the coin offering is completed. This information should definitely be provided.
👍 Since each phase of the project requires a certain amount of money, a good project will link its usage of funds to the roadmap.
4.2 Token Distribution
Check how the project team plans to distribute the tokens and validate this information by searching on etherscan.io to see if it is true. On Etherscan you can see how many tokens each Public Address keeps.
⚠️ If the team keeps more than 50% of the tokens it is a red flag.
4.3 Vesting
Vesting means that the team will be not allowed to spend their own tokens for a certain amount of time. This incentivises the team to reach their milestones after the ICO funding.
4.4 Escrow
An escrow holds the collected funds until the ICO is completed and the coins/tokens are openly accessible to the public and tradable. Therefore, it is important to find out if the payments that are received during the token-sale will be held in an escrow (most likely in form of a multi-signature wallet).
An escrow can guarantee the return of investments, e.g. if minimum fundraising goal is not reached or the funds are misused.
4.5 KYC — Know your customer
Know your customer (‘KYC’) is the process of a business identifying and verifying the identity of its clients. The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. For projects to get their coins/tokens listed on exchanges after a completed ICO, they must do a KYC.
⚠️ Check if the project does a KYC for every investor — if not it is a red flag.
5. Paper Jungle
Every trustful blockchain project launching an ICO should provide certain (legal) documents you ideally have read and understood before making your investment. Let’s have a look which kind of documents you should find.
5.1 Whitepaper
This document is the most popular in the ICO space and usually every project has one — even the scammy ones. It gives you an overview about the whole project and should include all aspects we touched so far.
⚠️ The Whitepaper is usually not a legally binding document. However, you should read and understand it before making any investment.
5.2 Terms and Conditions
Although the Terms and Conditions document (or Token Sale Agreement) is far less known than the Whitepaper, it must be part of every trustful ICO. Essentially, this document is a formal agreement between an investor and the ICO issuer. Therefore, read it carefully before making any payments for tokens, as it contains your obligations and legal rights, waivers of rights and limitation of liability as a potential buyer of tokens. If you do not agree with the Terms and Conditions, you shall not make any payments for tokens.
⚠️ If you don’t find a proper Terms and Conditions document, it is a red flag.
The Terms and Conditions should contain the legal entity of the project (including company name, country, address, company/registration number etc.). In case of a lawsuit, the residence of the token issuer and the token buyer will matter as the law of these countries will apply.
5.3 Privacy Policy
A privacy policy is a statement/agreement that informs you about the ways the project uses, discloses, and manages your data. It is required by law to protect a customer or client’s privacy (depending on the country’s law it is registered in). When you access or use the website of the blockchain project, the online services at the website, or when you otherwise interact with the project this is relevant.
If the project provides a Privacy Policy it is an indicator that it is run by professionals.
5.4 Terms of Use
The Terms of Use or Terms and Conditions state what the user must agree to in order to use the website. A Terms of Use is not required by law, unlike a Privacy Policy, but it is highly recommended for a company as they can prevent abuses happening to their website or mobile app and to limit their own liability.
If the project provides Terms of Use it is an indicator that it is run by professionals.
Conclusion
Within the next years we will see many more blockchain projects arising. In 5 years probably 90% of them will have disappeared and just a few will survive.
We hope our guide helps you to choose those projects with high potential to establish themselves in the market and be successful.
⚠️ Beware: even if your investigation and research is done perfectly, ICOs are still a high-risk way to invest. Therefore, never invest anything you can’t completely afford to lose.
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