Many newbies in the cryptosphere are drawn to ICOs (initial coin offerings) because they can rake in millions, or even billions, in funds raised. For instance, blockchain startup Block.one amassed $4 billion just through their ICO, an impressive feat given that the product itself had not even gone live yet. In addition, Headlines of Today also previously iterated that there are many benefits to investing in ICOs. They not only allow investors to diversify their portfolios, they also provide early access to a token that may see rapid capital growth.
Despite all this, do note that just like any other investment, ICOs still entail very real risks. For guidance, a pool of market experts, analysts, and fellow investors have come together to establish best practices for evaluating ICOs:
Many entrepreneurs are confident that their projects will change the world. But as reality dictates, not all actually turn out successfully and no investment is immune to risk. FXCM details that over half (58%) of ICOs did not report their funding figures in 2017, which likely spells failure for their respective token. This provides a challenge for investors, as they need to wade through the clutter of ICOs to pick the best options for success. Therefore, when examining startups, it’s best to practice a healthy level of skepticism. Remember to look out for those that are promising and that clearly have their ideas and timelines fleshed out.
Do Your Research
There are several factors you need to consider when evaluating ICOs. Through practice, you will be able to spot which startups have red flags and which ones seem legitimate and likely to succeed.
— The White Paper: The white paper alone can provide you valuable information. A well-crafted white paper contains the startup’s clearly defined goals and their means of achieving them. It also mentions the terms and conditions for the ICO, as well as a detailed explanation of token distribution. When researching on ICOs, the white paper is definitely the first thing you should factor in.
— The Team: If the team’s members are anonymous, then it’s a startup you should skip. Nothing sounds more suspicious than developers who refuse to reveal themselves. For members that are visible, you can look up their names on Google to pull up any useful information on them. Visit their LinkedIn profiles, find out if they have any crypto experience, and most importantly, see which previous ICOs and projects they were involved in.
— The Community: See if there’s a growing community behind the project, like a public Slack for all investors, a Reddit thread, a Twitter account for updates, and a Facebook Page. If the people on these channels don’t interact much, then you may have to move on to the next ICO. It’s generally a good sign if the community is active, since it conveys the interest on the project and its ability to attract more investors.
— The Project Stage and VC Investments: See how far the project has gone in terms of development. Does it only have a white paper, or does it already offer a beta version? Although there are many successful ICO investments made without any code written, it’s still less risky to choose projects that are already in the middle of development or have existing lines of code. It’s also important to check which venture capitals (VCs) have invested in the project. If a well-known and trusted VC is on board, then the project should at least be on your radar.
Check if ICOs are Legal
Unfortunately, ICOs are not legal everywhere. For instance, ICOs are not legal in China and South Korea. Meanwhile, ICOs may not technically be legal here in the US, but Coin Desk explains that the Securities and Exchange Commission is so understaffed that it doesn’t have the capability to properly enforce the law on ICOs. However, a private party can still sue the startup, although there’s only a small window for them to do so. In order to protect yourself from these legal risks, do study the white paper again and check the startup’s legal terms.