Bitcoin and other alternative cryptocurrencies have been gaining a lot of attention this year. And if there’s one big thing driving interest and curiosity both from the public eye and that of the financial industry, it’s initial coin offerings (ICOs).
There’s a lot to envy about ICOs. Venture capitalists are amazed at how quickly and effectively ICOs are funding blockchain startups. Regulators and governments are worried about what threats they pose to the status quo. The Chinese government’s crackdown on ICOs in September showed that the tremendous buzz and money involved is no longer a secret.
Perhaps more importantly, casual crypto users and retail investors are excited at the promises of instant riches. ICOs provide the opportunity to buy into a company’s assets in the form of tokens, with the hope that they can be traded or exchanged at a much higher value once tokens enter the market post ICO.
The success stories are plenty. Cryptos like Ethereum and WAVES have multiplied in value since their ICO prices, making instant millionaires out of many. But there are also a lot of failures. Fanciful ICOs like the Supercomputer Organized by Network Mining (SNM) and the payment card Monaco (MCO) are trading well below their ICO prices. A lot of investors were disappointed, wtih expectations that ICOs that could raise millions should have made them a lot of money.
With scores of ICOs launching every week, how can you ensure you pick one that will give you good returns on investment? The short answer is, you can’t. There is no guarantee that an ICO token will become more valuable over time. But there are some things you can do as part of responsible due diligence to help you choose a winner.
Solid, recognised development team
The first clue about successful projects lie in the expertise behind them. Take a look at the team behind the ICO: the CEO, the partners and especially the developers. Look up the team members. Do they have LinkedIn profiles? Can their experience be verified? Are they active on the discussion channels and do they respond well to queries? Are they even real people?
If the ICO doesn’t even have all their developers recruited yet, or have inexperienced members on their team, it’s unlikely that they will have the means to complete any of their proposed objectives. ICOs after all are about developing new technology, so they need the best brains behind them.
Clear, established objectives
A lot of ICOs these days launch without even having established their plans through a coherent whitepaper. Some even outsource their whitepapers, resulting in confusing and vague ideas that only really seem to focus on the crowdsale and token distribution. A good whitepaper should be able to summarise what the project is doing, why it is doing it and how it will do it.
Additionally, a good ICO has set deadlines and responsibilities. In other words, a clear roadmap, detailing expected milestones and key achievements. Without this, a project can drag on forever, as ICO funds dry up and interest wanes.
It’s all about the money in the end. A good ICO will also have plans to maintain and add to the value of its token. Some projects lock-in a portion of tokens for months and years, ensuring that they aren’t all dumped on the markets immediately after the ICO. Others seal agreements with merchants and partners, providing products and services that can be exchanged for the tokens.
Basically, you don’t want to end up with tokens that nobody can use for anything. That’s the real price killer after an ICO.
Examine the way an ICO distributes its tokens. Watch out for those that allocate huge amounts to promotions or to developers. There’s no fixed figure to stick by. But if an ICO is giving out 20% of its tokens to promotional efforts and bounties, you can be certain that the token will suffer an immediate price decline when bounty hunters dump their tokens as soon as they become available on exchanges. In general, good ICOs set aside pre-existing funds other than tokens for promotions and bounties, ensuring that tokens are only accumulated by investors and stakeholders. Some ICOs do a pre-sale to raise funds for exactly this purpose, so watch out for that too.
The same can be said when developers or owners own too much of the percentage, as they can be tempted to cash in immediately, causing massive sell outs on exchanges. Good ICOs should have lock-in periods with staggered releases to help keep the circulation scarce while maintaining liquidity.
Escrows and multisig wallets for ICO funds
Another thing you want to see is ICO funding that is secured from project abuse. It can be really tempting for projects sitting on millions of crypto funds to suddenly pull an exit scam or claim a fraudulent hack.
Some ICOs now implement third-party escrows who hold all ICO funds, releasing them slowly to developers as milestones and roadmap objectives are met. This helps secure the funds from abuse, while giving investors some form of confidence that the project development can continue. Multi-sig wallets containing ICO funds is another way to prevent abuse, and more ICOs are now implementing this.
At the end of the day, ICOs, like all investments, are not risk free. The best projects can falter, the best developers can fail to deliver, and the best ideas can still be backed by tokens that don’t perform well.