Initial Coin Offerings made nearly three times as much money as venture capital in the second quarter of 2017. Considering that most of the investors putting their money in this novel startup funding know little or nothing about coin investment and how it works, it is not surprising that scam ICOs are thriving.
The drive for ICO and the interest it holds among many is the lure for quick money. It has been hyped how people are making quick money through these crowdsales. This coupled with the exponential increase in the price of Bitcoin makes the allure for token investment real.
However, folks need not lose money in the quest for ICO investment if they know what to look out for. It has been reported that majority of projects in this sphere fail, in reality up to 90 percent. To ensure that you do not invest in the wrong ICO, these are some of the indicators to look out for.
What Problem Does It Solve?
You need to understand what an Initial Coin Offering (ICO) is. In a layman’s language, the team has a concept or an idea that could solve a problem. What they have worked out is the solution to the problem but have no money to solve it. So they offer the people opportunity to invest in their token to enable them execute the project.
For an ICO to be worth investing in, it should have articulated the problem, the concept or idea intends to solve. That, in the first instance is indicative that the company means business. Without a problem the concept is meant to solve, the ICO has no value.
In the real world just as in business, money is made by adding value through the
utilization of products or services of an entity. What problem is the company whose ICO you intend investing in plan to solve with their product or service? Is it a real problem that people would pay for?
A company that is planning to supply ice blocks to Antarctica cannot be expected to be successful. The viability of the project is dependent on the usefulness of its offering. These days, there are many initial coin offerings that are promoting projects in which there is no room to add value because the prospect in such area are no longer very promising.
This is why every investor ought to have some understanding of what the team behind an ICO is promoting. It is not enough to depend on the projections made on whitepapers, in reality they mean little debar the determination, drive and competence of the team behind the project.
Sometimes It is All About Greed
You need to know that the drive behind many ICOs is greed. The developers behind them are more interested in making money for themselves than what investors will benefit. This is why you must pay attention to the value they are bringing to the market.
You must remember that ICOs are concept based innovation. In reality, it takes reification of their abstractness to make money for anyone involved. The company is simply telling you that they have a good idea that can make money in the future. Most times, that idea or product doesn’t even have an alpha version.
Bear in mind that an idea alone is not enough to make anyone money. Buying a token just because it is an idea doesn't make sense. It must be a solution to people's problem and there must be a team willing to honestly and professionally work on it to make the token worth anything. Click To Tweet
Who Are Their Competitors?
Before investing in an ICO, you should research, not only on the problem the company intends to solve for people. You should check who their competitors are in that line of business. A company that has no competitive advantage or a unique way of capturing a segment of the market cannot realistically make much money for investors. They may end up running at a loss and closing up. So there is a need to know about other teams that have worked on similar projects. How did they fare? If other companies have dominated the market and you think that there is little chance of success for a new project in that market, you need not invest in the token sale.
What is The Financial Target of the Token Sale?
An ICO must have a financial target it expects to accomplish from investors. It must be willing to follow the right procedure to raise the fund. The smart contract enables self executing programs to manage initial coin offerings based on preset variables. One of such is the soft cap or the minimum amount expected from the taken sale. The upper limit is the hard cap.
Nevertheless, that smart contracts are co-coordinators of crowdsale does not mean that the risks investors are exposed to are diminished. Sometimes, by coding the smart contract in a manner that makes the it favor the team’s objective, impartiality is excluded.
There have been instances when these contracts are coded to have indefinite timing to ensure that the team meets their financial objective. EOS for instance had an ICO that spanned a full year. In essence, teams try as much as they could to ensure that the smart contract met their objective so investors ought to be sure that they understood the terms of the contract before releasing their digital currencies in initial coin offerings.
For an ICO to be safe to invest in, the funding expected by the team must be clearly stated in the whitepaper. How the company expects to accomplish that objective within a specified period of time made clear. Also, the team must announce what will happen if they meet their target in a road map that shows phase-by-phase development of the project. An ICO that is opaque and doesn't explain very well ‘the what’ and ‘the how’ should be viewed with mistrust. Click To Tweet
Transparency with Funds
Some of the ICOs that raised the highest amounts of money went into disrepute due to lack of transparency or weaknesses in the characters of the founders. There are instances in which projects have been investigated due to allegations that funds were misappropriated.
The Plexicoin ICO is just one example out of many that should warn every investor to not just put their money in any initial coin offering just because they expect high return on investment. In reality, many investors make no money because the founders of the project are fraudulent.
ICOs usually have road-map showing what the funds are to be used for at every stage. It is necessary to study this to know if the company actually has need for all that money and to know if the team has articulated properly, how funds raised through ICO shall be spent.
You should think twice before investing in any project in which how funds raised would be utilized is not clearly explained. The proper utilization of token sale funds has become a big issue. In fact, a new sub-sector of watchdog companies are emerging as escrow for ICO funds. Industry leaders such as Vitalik Buterin of Ethereum has suggested the adoption of Decentralized Autonomous Initial Coin Offering (DAICO) concept to give a measure of security to investor funds.
Token Value and Distribution
Initial Coin Offering is patterned after Initial Public Offering of capital market except that IPOs are sold by companies that are already operational. Entities with block and mortar offices which have products and services already in the market. This is so unlike ICOs sold to bring ideas to fruition.
In IPO, you invest to own equity in the company while in ICO you own just the token. The success or failure of your investment depends on a lot of factors. All things being equal, your primary concern would be the value of the token when you bought it and what the value becomes when you decide to sell.
In launching an ICO, the company keeps a fraction of the total tokens for the people behind that project. The team does this to tell the public that their token is valuable and that they believe in and are investing in their own concept. This fraction for the team may be 30 percent or 40 percent of the total tokens for sale in the crowd-sale.
You may be wary of a company keeping much more token for themselves, say 60 percent. It may be a sign of greed or a sign that they don’t really need an ICO. This can as well become an issue in the future when people realize that the business owners are in possession of up to 70% of the tokens.
An example is the Waves platform which many say are better that Ethereum but accuse of unethical practices in allocating most tokens to founders of the platform. We may be aware of Bytecoin, which was the first privacy coin that used the CryptoNote protocol that inspired Monero. Today Monero is valued more than Bytecoin because the founders of Bytecoin pre-mined it.
A company that sells just 40 percent of their token or less point to the suspicion that those behind it are just greedy and dishonest. It may also be an indication that they are asking for more funds than they actually need to execute the project. Another inference could be they are launching an ICO for the hype and publicity it affords them.
What is the Value of the Token?
The unit price of most tokens during initial coin offerings are usually less than $1. However, you have to study the token based on comparative analysis to know whether it is worth what the company has valued it. Token value is a critical determinant of success or failure of the ICO.
Project teams sometimes value their token without proper crypto-economics analysis. The price of an overvalued token can only be sustained through hype. Click To Tweet Teams behind this sort of token may be tempted to manipulate the market just to prop up the token value.
A token valued more than it is worth would require that demand always be higher than supply. This means that it needs more people to keep purchasing it to maintain its value instead of the competence of the team and performance of the project.
Projects teams whose aim is simply to raise ICO funds and not to provide value for the investors would have arbitrarily valued token whose price may be higher than is realistically sensible. So in investing in an ICO, compare the token price with that of similar ICOs to have an insight into what you are investing in.
An exception to this are scam ICOs. These by convenience value their tokens arbitrarily to create the impression that investors are buying value while in reality they are dumping their money down the drain.
What is the Velocity of the Token?
Another way to value a token is to gauge its velocity. Many investors buy tokens for quick profit. They hope to sell off the token immediately it appreciates within a short period.
Token velocity is the duration people are willing to hold such token. A token that investors sell off quickly has a high velocity. Click To TweetIt is indicative that they purchased it to make quick gain and sell. It shows that they don’t really have confidence in the ability of the team behind the ICO to sustain the tempo of any progress made and catalyze long-term appreciation of the token.
Why do you need a token from an ICO?
If the reason is to get in and quickly get out, it means that you have not gotten all the information you need about the project or that you don’t really believe it’ll be a long-term success or you are just a trader.
There are terms we associate with high velocity tokens such as pump and dump if the people behind the project are the ones that do not really believe in it. They create the conditions necessary to make the token value rise and sell off, leaving the investors with worthless coins.
If your intention is to quickly dump a token, you don’t believe in the project and so should be wary.
Why People Like Bitcoin
A classic example of a low velocity token is Bitcoin. Most people view Bitcoin as an investment, not a just a coin to buy and quickly sell. Click To Tweet They believe in it as a token of value and see investment in it as long term.
There are people who even see the coin as an asset of value they could leave for their children when they die. That is a low velocity coin and you should use it as a standard when assessing an ICO you intend investing in.
Do you trust that the team behind it can build something worthwhile? There are ways to know.
The most popular platform for hosting ICO is Ethereum using its smart contract. Its flexibility and adaptability makes it the platform of choice. NXT, Waves, Cardano, EOS among others have recently proven that they can become important players in the ICO space.
Some of these platforms are claiming that they can surmount the scalability challenges of Ethereum, however that is left to be seen with time as their networks grow.
Publicity & Hype
Successful ICOs generally mostly are hyped by the media. A strong social media presence is a prerequisite to a successful ICO. Good ones dedicate a lot of resources to media campaigns to reach prospective investors. The higher the hype, the more awareness created.
Although this is speculative, the Telegram ICO whitepaper ‘leak’ may have been a clever way of letting the public have a glimpse of the Telegram Open Network project. An ICO with good media campaign will likely generate interest from investors.
If there is little or no publicity for an ICO, it’s a sure sign that it won’t be well-funded unless the team is focused on private sale.
Attention To Detail
Have you ever seen a job application and realized that the job hunter put it up in a hurry? Or even a resume that tells you that the job seeker isn’t painstaking? Apply your intuition while assessing an ICO. Though this may not be the rule. A well organised ICO may be indicative that the team or developers are capable of delivering on their aims.
Start with the website. How impressive is it? Does it seem like a site that would convert well? By conversion, it means that visitors are not turned off from it because the content or graphics are not engaging.
A website with poor scripts or slow loading speed should flag off a warning in your head. Internet users do not have patience to wait for slow loading pages.
Are the graphics decent? Are there some grammatical errors in the content? These are little things that matter and could mar an ICO campaign. Nevertheless, that these things are present doesn’t mean that the campaign will fail. It may be that the team are working on a tight budget and unable to hire professional designers, developers and translators.
Another side to this ICO quagmire is that everything may just seem perfect with a project; good site and campaign and yet the people behind it are crooks. Click To Tweet This is why at Cryptoinfowatch, our emphasis is on investigative reviews that try to sieve out the wheat from the chaff of crypto and ICO investments by identifying scam ICOs.
Who Are Behind The Project?
You wouldn’t hand your money over to a complete stranger to help you make more money would you?
Well…that’s exactly what investing in an ICO without researching the people behind it is. A lot of things can go wrong. We have already looked at cryptoecononmics. Aside that, there are issues like integrity. How do you know that the team behind the ICO wouldn’t run away with your money?
There is a long list of exit scam ICOs that made away with people’s money just because everyone was excited to make gain but no one really cared to know who they are handing their digital currency.
This is where due diligence is applied. ICOs usually list the team members behind them with their photographs on their websites. Any that doesn’t disclose the team members should be regarded with suspicion. Every member of the team should be shown with their roles and experience. Links to their social media site should be given, especially LinkedIn.
This will enable potential investors to know more about them. While at it, if you have some unexplained unease about a project, it might be that something isn’t quite right about it. It may be in your best interest to avoid putting money in it.
Always crosscheck social media accounts; the personal ones to know when they were put up. A hurriedly put up website or social media account may be indicative that you are dealing with possible scam.
Always Investigate An ICO Team Before Buying Its Token
Many investors have lost money to ICOs because scammers are in it to defraud the unsuspecting. This ought not be so were people careful enough to investigate the people behind these ICO before investing in them.
Do you have an ICO to investigate? Contact us to do it.
As mentioned earlier, there are many things that could go wrong with an ICO intentionally or inadvertently. Sometimes, a team may mean well but due to oversight things may go awry. So in reviewing the team, what do you look out for?
Competence: The team must be comprised of people who know what they are doing and how to do it. They must have experience in the line of business they are trying to raise funds for.
For instance, a project that wants to fund a ticketing business must have team members that are experienced in ticketing. There must be people who know how to manage the money when it has been raised. There must be people who know how to deploy it to work and many others.
One person in an ICO team may have multiple skills nevertheless be sure that any questions you have is answered.
Communication: The ability to get feedback and answers to the questions you have about an ICO you intend investing in is important. Try asking questions to know how their support system works. Ensure that all your queries are satisfactorily answered to have an insight into the sort of people you are investing your money with.
Community: A good ICO should build a community around them. Be a part of the community on social media to know what other investors are saying about the project and its team. You could get a hint of how things work there or what future outlook would be before you purchase the token.
Legal Framework: Be sure that the company has complied with the rules in their native country. Some countries like China are vehemently against any form of token sale. Make sure that the company has a legal team that has taken care of compliance issues. In China, ICOs were made to refund investor funds. You may not be as lucky investing in the wrong ICO.
Security: Security is one of the biggest concerns of teams hosting ICOs. Some good ICOs have been hacked causing losses of millions of dollars. Do not presume that your investment is safe. Always ask questions on how the team plans to secure investor funds.
That a company is planning a crowd-sale is enough motivation for hackers to attempt stealing investors funds. Sometimes security issues arise due to faulty programming codes as in the case of DAO in which a hacker made away with $50 million dollars. The shock of that hack caused Ethereum price to drop dramatically in less than 24 hours.
The programming team of an ICO is very important in protecting investor funds. You’ll do well to ensure that they are well experienced and have left no stones upturned in ensuring that the ICO platform is hacker proof.
Find out from the team what security layers they have put in place. What about the private keys to the ICO wallet?
As you must have realized, it could be risky for one individual to be in possession of private keys of an ICO trying to raise millions of dollars from investors. What if something happens to the person?
Find out how the company plans to secure your funds from hackers and how they plan to ensure that there would be no losses as a result of insider heist or oversight. There are hacker platforms that search for bugs in codes for bounty. If it is possible, teams should employ the services of bounty hunter hackers platforms to ensure that their codes are hacker proof.
Another way good ICOs guard against uncertainties is the use of multi signature wallets. These are the sort of wallets that you need three private keys to access but two of those keys to unlock them.
With multi signature wallets, one individual cannot have access to the private keys. The team behind the ICO could delegate the three keys to three trusted members of the team. Alternatively, two members and keep one in company safe. This creates room for democratic administration of investor funds since two members will be needed to unlock the wallet.
It is necessary to find out how your funds would be secured before investing in an ICO.
Remember that ICOs can be profitable if meticulously selected. Nevertheless, it could be a financial disaster without due diligence. Be sure that you know what you’re buying into.