Investing in Initial Coin Offerings (ICOs) – Things to Keep in Mind
Initial Coin Offerings (ICOs) are currently the craze in the technology industry. ICOs are a method of raising capital that does not require a company to go public or issue shares. Instead, companies will sell cryptocurrencies or tokens to the general public to raise funds. Usually, the company exchanges ETH for their token as most ICOs are conducted on the Ethereum blockchain. Compared to traditional Initial Public Offerings (IPOs) or venture capital, ICOs have a lot fewer regulations which is why many startups prefer this route to raise capital.
However, because there are so few regulations in this space, investors much also watch out for obvious dangers and some not so obvious ones too. Many ICO projects lack the stability of large cryptocurrencies like Bitcoin and Ethereum, which makes investing even riskier. In this post, we’ll go over a few things to keep in mind before buying into an ICO.
Does this project need a blockchain?
This should be the number one thing you should ask yourself. Different variations include: Can this project be done without using the blockchain? Does it need a cryptocurrency? What’s the value proposition? There are so many projects out there that use “blockchain” simply as a buzzword. The use cases for blockchain are often times very specific. You may realize that what they are doing can be done without a blockchain. For example, if you run into a project that wants to “move e-commerce onto the blockchain”. You may need to ask yourself does e-commerce really need a blockchain? The answer to that may very well be no, because there are lots of successful e-commerce platforms out there that don’t use blockchain technology, making such a project redundant. Perhaps the answer could also be yes because they are applying the blockchain in a novel new way (such as integrating a dApp or smart contract technology into the e-commerce platform).
What is the team’s experience?
The number two thing after figuring out the project’s value proposition is to look into the team. Projects should always list their team members on their website. If they don’t have team profiles listed in the About or Team section, that is a BIG red flag. Credible projects always list their team members.
A good place to look up the background of the team members is their Linkedin profiles. Also, a simple Google search should reveal info too. While this isn’t a foolproof way to see if someone is a scammer or not, it does help to know a little bit about a team member’s history and experience. Experienced members often have years working in whatever industry their role requires.
Another good place to look is the project’s advisors. If you see some big names or titles like the Co-Founder of Ethereum, or founders of major blockchain companies, then the project is most likely legit and properly vetted by all these advisors.
Read the whitepaper
Yep, it’s simple as that. Just read the whitepaper. Many investors get sucked into all the marketing hype that they forget to conduct proper research. You should always read the white paper before investing and really understand the project inside out. Your goal is to become an expert on the project, its roadmap, value proposition, use cases, and community. The reason is that all the ICO marketing highlights only the positive aspects of the project. You will never hear the team talking about the risks or downsides in public. This kind of info will only be disclosed in the whitepaper. That’s why it’s crucial to orient yourself with the nitty-gritty details of the project.
Following these three tips will drastically decrease the risk of making a bad investment. However, there are no guarantees and this is by no means comprehensive investment advice. Investing in an ICO is by nature risky because you’re essentially putting money into an early stage startup. Many projects don’t even have working prototypes or betas yet so that’s why there’s also a luck component to everything.