This article was written by Itay Malinski, Head of Operations at Cryptovest.
Initial Coin Offerings (ICO) today are like Initial Public Offerings (IPO) were during the dot.com boom – lucrative but speculative. If you are here, you’ve probably heard a couple of success stories where tokens bought for pennies made investors rich in as little as a year.
- ICO by Developer of Popular Kik Messenger Raises Nearly $100 Million
- AICoin ICO Raises Over $3m for Cryptocurrency Investment Collective
- Kyber Network ICO Raises About $60 Million in a Little Over a Day
While that has indeed happened and is entirely possible in the future, investing in ICOs is not as straightforward as it was a couple of years ago. Right now, ICOs are a dime a dozen and all of them want your money. Sadly, there is a very small, minute percentage of them which are feasible and have a future. The rest are mostly marketing gimmicks that will leave you holding a bag of tokens worth nothing.
Make no mistake, there is money to be made in ICOs – the last 12 months alone saw over $1.5 billion raised in coin offerings and some of the tokens have gone from mere cents to over $50 (more recently Antshares, now known as NEO) – but you have to invest prudently, which is why we are here with 5 tips for investing in initial coin offerings.
1) It’s All About the Team
The first and foremost thing you have to do is look into the team behind the project. This is where most ICOs are filtered out if you are careful.
Go to their website, look at their about page, note down names of all developers, executives, and advisors. Any serious ICO campaign is going to have a good amount of information on the team backing it. You should be able to get names, pictures and even links to social profiles like LinkedIn and Twitter.
Don’t stop here – go check out their profiles, look at projects they did before the ICO and what kind of success they achieved. If you feel something is amiss, do not go ahead without clearing all doubts.
If you run into an ICO with an anonymous team or very little information, stay away at all costs. People ‘make’ projects, not ideas or marketing. No matter how well put together everything looks, if the people behind it are not capable, you are going to get nowhere.
2. Scan Bitcointalk Forum
The Bitcointalk.org forum is the de facto announcement (ANN) hub for all ICOs. Scan the ANN post for the ICO you’re interested in and look for actual comments rather than hype from sock-puppet accounts.
Even on the forum, there is a lot of fake information, so it is best to go over comments from older, reputable members. Look for questions and how the development team has answered them. Also, be on the lookout for any red flags – terms such as ‘scam’, ‘pre-mine’, ‘mlm’ etc.
Going over the ICOs Bitcointalk thread will give you a good overview and possibly some useful discussions or descriptions to help you understand the project better.
3. Read the Whitepaper
Every ICO has to release a whitepaper, which is a detailed account of the project, all the way from the idea to the technical execution.
Often these are lengthy and filled with hyperbole and jargon, which may seem impressive to the uninitiated but should serve as warning signs for you when overdone.
If the whitepaper presents the project as “a revolutionary blockchain based interconnected hub that allows seamless flows of information which facilitate meaningful communication and generate trustless transactional records that are irreversible and anonymous” – it may sound decent, but you are not actually getting any useful information.
Some of the things you need to watch out for include:
- The names of the development team and their advisors
- The basic idea presented clearly (what is it and what does it do?)
- Whether the use of blockchain is integral to the project or forced for the sake of it
- Is there a market for the product/service? Who are the existing competitors?
- The proof of concept work or at least technical description of how it will be executed
- The utility of the token or coin being distributed
- The amount of money to be raised and what is to be done with it
- The roadmap for future developments
- ICO particulars like the hard cap, number of tokens and timeline of distribution, etc.
Without understanding all of these things, you cannot possibly invest in any ICO. For instance, if there is no hard cap in an ICO, it means there is no limit to the amount of money that can be raised or the number of tokens that will be distributed. This will naturally lead to a large supply, and demand will dwindle, affecting token price.
Similarly, even if the idea seems solid, if there is no market for it, it is going to face a tough time gaining real world traction, which will reduce token value down the road.
You have to understand that no project is going to make you rich overnight unless it has actual potential, usability and the team backing it to make the vision a reality. A lot of things come together for investing in an ICO to gain value in the market and a lot of times what you will read will sound too good to be true. Don’t be afraid to pull out if you are not satisfied.
4. Check Out the Community
Community support is key, not only for a successful ICO but growth afterwards. Most ICOs today have community hubs on popular platforms like Reddit, Slack and Telegram. Visit all these communities and observe the conversations.
A productive and active development team will share updates regularly and keep you in the loop about progress in terms of the defined roadmap. This is also the time for you to ask any questions and clear any doubts you may have about the project. Once again, be wary of sock-puppet accounts generating false hype.
5. Don’t Risk Everything and Don’t Sell at the First Opportunity
That’s two pieces of advice for the price of one. Let’s say you’re all set to invest in an ICO and you’ve done all the research. At this point, some people are willing to go all in in the hopes of making it big. That’s a big mistake.
Yes, the ICO may go big, and yes you will regret not going all in, but there is a bigger chance that it might not turn out to be everything it promised – in which case you will have wiped yourself out completely.
In this highly volatile market, you cannot afford to risk everything. If you really want to be successful investing in ICOs, you have to live through a rough patch to fight another day. And there are going to be many rough patches.
That being said, if things do go well and you start seeing token prices rising, don’t just sell at the first opportunity. If you have already taken the risk, give it some more time. There are people who sold Ethereum and Antshares (now NEO) as soon as they went up by a few dollars. Ethereum went on to rise from under $20 to almost $400 within a year. If you’re already on the train, don’t be in a rush to get off.
Finally, the golden rule. Don’t invest what you can’t afford to lose
That’s all for now; we hope this post helped you pick up on the important factors that need to be considered before any ICO investment. Feel free to drop a comment below with any questions you may have.