The blockchain ecosystem has found itself increasingly crowded by new start-ups eager to capitalize on this surging market. As cryptocurrencies, as well as their technology, become even more popular over the coming years, investors will be increasingly drawn to the prospect of the Initial Coin Offering (ICO) as a way of diversifying their returns. The billions invested in ICO’s already account for more start-up funding than most of the Venture Capital world combined.
But just as how financial analysts have their own methodologies for analyzing a financial security, so too does one need to have a system for evaluating the likelihood of success of any particular crypto-project. While the market is certainly popular at the moment, unverified and fraudulent projects are popping up at an increasing pace.
One notable instance was the Mycelium ICO in 2017. After successfully raising over $2.3 million during their funding campaign, their team disappeared completely – using those funds to pay for their own vacations. While the lack of regulations might be one of the reasons why this happened, there were a number of warning signs that if investors had known about, could have avoided the entire debacle. Whether you’re a professional investor looking for the best investment, a crypto-enthusiast trying not to get burned, or a start-up looking to make the best possible impression, here are a few things to keep in mind in analyzing a potential ICO token.
The Power of Comparison
Before mentioning any of the more specific things to look for, it’s worth noting that with the blockchain world exploding in popularity as it is, there are multiple new ICO’s taking place every single day. Thousands of new projects are trying to secure funding, which is good news enough for investors, it also means that one has many different ICO’s to compare each other with.
Of course, it’s difficult to find two ICO’s that are comparable in an apples to apples like fashion, especially in terms of their specific goals and objectives. However, you can still compare projects within the same industry to get an overall idea of how other projects stack up in terms of professionalism, how the project is presented to the public, how well it’s marketed, and other qualities.
Perhaps the most important part of evaluating a successful ICO comes from its team, and a great team is a clear indicator of a successful project. For starters, team member profiles should be easy to view and have ample information on hand. You should be able to cross-check and verify the previous details through various social media sites such as LinkedIn and Facebook.
Here it becomes important to do your due diligence and research both the development team as well as the advisory board. Did they have any experience in past blockchain projects, or are most of the teams relatively new to cryptocurrencies? How large is the team in relation to the scope of the project? Is the team too large for what they’re planning to do? Are their advisors renowned in their fields? Do they advise other companies?
Another thing to keep in mind about any potential project is how transparent the team is? Does the ICO clearly state what the funding proceeds will be used for in as much detail as possible? ICO’s aren’t obliged to hold themselves to the same level of financial transparency as Wall Street would demand of a public company, but whether or not a potential blockchain start-up reveals its financial plans to their prospective investors is an important sign of their trustworthiness.
It also helps to see how active the founders of an ICO are, and whether they go out of their way to represent their brand. It’s one thing to create a great website, post frequently on social media and have a perfect LinkedIn account, but it’s another to see the founders actively participating and speaking at blockchain/cryptocurrency conferences around the world. Are there videos or interviews with the founders of said token online?
Lastly, look for potential partnerships. If the company has already made strategic partnerships in their industry, that’s a great sign, especially if those partners are trustworthy, known sources. For an outside company to team up with a blockchain project means that they take the project seriously.
The next thing to evaluate is the general level of interactivity this particular ICO has with the blockchain community at large. Do they have a pre-existing community following them? How active are they on social media sites including Twitter, Telegram, Medium, and other channels? If they do post content in the form of blogs or articles, how relevant is it?
One good place to look is for the projects announcement (ANN) threat on BitcoinTalk.org, which is the biggest forum for crypto-related topics. Often, investor concerns will be answered in these threads, while at the same time, it’s a bad sign when developers avoid answering certain questions asked by commenters.
While it definitely takes some time, it’s worth it to wade through the comments and see what the general consensus of any project is. You can also check out alternative crypto communities and news sites such as CoinSchedule, CryptoCompare, CyberFund, CryptoSmile, and others.
Consider The Market Potential
Another important step is to stop and consider what exact problem is this blockchain project trying to solve and what is the size of the potential market? Is there a legitimate demand for this solution? Even more importantly, does an existing coin – such as Bitcoin – already solve this problem? Redundancy can be a big issue when so many new ICO’s are jumping into the investing pool.
Like I mentioned before, look if the ICO already has successful partnerships with other, non-crypto companies. If other organizations are jumping on board an idea, then it’s more likely that there is a legitimate need for this project, rather than simply being an optimistic appraisal on part of the ICO’s team.
One thing that can help determine how legitimate a project’s market potential truly is can be a proof of concept. In short, this is an alpha version of their project. Often times a transparent ICO will upload some of their projects code to their GitHub page, which is a popular code repository used by developers to share code with each other. This ties into community involvement as well, and if developers and code experts are happy with the quality of the project, then it’s more likely that the market will be as well once the token launches.
First thing to ask is whether this project has had any previous funding. Although it’s unlikely that companies going through an ICO to have any backing, it’s good to know who they are if that’s indeed the case.
Secondly, does the project have a hard cap or is it unlimited, or open? In the early days of ICO investing, the difference between a hard or open cap wasn’t as impactful as it is today. An open cap lets investors send unlimited funding to the projects ICO, letting them have as many tokens as they wish. What this means is that one large investor can end up controlling the majority of the tokens in circulation, meaning that each individual token is worth less through the law of supply and demand. For smaller investors, this means that as open caps grow larger and larger, there is less gain for investors to acquire.
A hard cap ensures that with a limited token supply, there will be more demand and also a bigger return on investment for the tokens owners.
Another criteria to consider is just how the equity will be distributed amongst the investors and developers. When the ICO’s management wants to keep a high percentage of the tokens – over 50% for example – would generally be considered a red flag, as they might have trouble achieving their funding goals. At the same time, you don’t want them having too few tokens, as they might not have enough incentive to make sure the tokens increase in value over time.
A good project will distribute it’s tokens throughout the roadmap, with each milestone in the process requiring a certain amount of funding. It’s also worth noting that some projects release their tokens soon after the ICO has ended, while others wait to develop a beta version before releasing them to their investors.
With all this said, ICO’s and cryptocurrencies are an incredibly exciting field for both start-ups and investors alike. While both are looking at things from the opposite side of the coin, hopefully these considerations will help both start-ups have the most success with their ICO’s and investors find the best projects to contribute to.
Also published on Medium.