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What is initial coin offering (ICO) ?
An initial coin offering (ICO) is a fundraising investment method that trades future crypto coins for crypto currencies with immediate cash value. Usually, a percentage of the tokens is sold to ICO participants or investors and a percentage is kept for the company’s needs (private investors, etc. Terms differ from one ICO project to another). An ICO allows both big and small investors to fund the projects they like. This year there were many successful ICO startup stories. The motivation for these project is obvious. The motivation for the investors of the ICO project is when the price of the token would be higher (or if lucky much higher) than the token’s price during the ICO they will be able to sell their ICO tokens and can make decent profit.
The highest investment in value was raised by an Tezos, it raised a record breaking $232 million in less than a month!. Like any other investment many factors influence the chances for a successful ICO project and with some carefull risk assessment and market research one can predict whether it will be valuable for its investors or atleast money will not be completely lost (Yes, there are rumors about that too).
How ever at this point it is right to mention less successful stories like the Mycelium ICO. Team members disappeared after raising the money, and later it was reported that they used the funds to pay for their own vacation. The lack of ICO regulation might be one of the reasons this happened. Just couple of weeks ago, $7 millions were stolen as CoinDash’s ICO started. Right before the start of the token sale, their website was hacked and the ICO wallet address was changed to the hacker’s address.
But regardless of all these ups and down it looks that for time being ICO is here to stay and some how its future is also tied with future of digital currency or Crypto currency.
Guide for evaluating an ICO investment and ICO analysis
* Important warning : ICOs investments are a high-risk way of fundraising. Never invest anything you can’t completely afford to lose. Keep in mind that due to a lack of regulation, you will have difficulty getting back your lost money in case of any failures.
– The Team
Find out everything you can about the core teams of the project, especially the development team and the advisory board. Look up each team member for relevant experience. Google their names. Visit their LinkedIn and Facebook profiles.Find out how long they have been in market, what have they been doing prior to this ? . Look for famous names among the advisory board of the project. Find out if the team has any crypto experience and more importantly – in which projects, or ICOs, they were involved with and the impact they had.
– What is the word out there –
Some how market is self cleansing in its nature and sooner or later “the word” comes out. A good starting point is the project’s announcement thread on forums and message boards. BitcoinTalk.org, as Bitcointalk is the biggest forum for Bitcoin and crypto related issues. It is strongly recommended that you read the messages carefully. Some times other Investor’s concerns will be answered (or may be unanswered) in thier threads. It is a bad sign when the developers avoid answering certain questions or aren’t collaborating. Sending developers a personal message to see how responsive they are is also a good idea.
– Stages of the project and Investments
Evaluate the project time line to study different stages of the project. When it comes to technical side of things ..does it only have a whitepaper? Find if there is a beta version? Is there a proto type available with limited functionality? Prefer projects which have something happening inside the trunk, however, keep in mind many ICOs have proven otherwise too.
Venture capitals tend to invest and support projects fin early stages. Look out for this information usually on the main page of the project’s website. It’s likely to be considerable if a well-known crypto if any VC is involved, like Blockchain Gold etc
– ICO Community and ICO PR
Project must have a wide open supporting community like a public Slack for all its investors. Openness is crucial in gaining trus. Try to grasp the atmosphere within the community. Look at the size of the community and its activity.
Other sources like ICO Risk Register,Reddit, Twitter or Facebook can be relevant when evaluating the project. Be aware of any bounty posts. It is one of common practices to launch a fake bounty thread to reward users for spreading positive information about the project, increasing its media coverage, or to helping out with translations in other languages. These bounty threads can stimulate the fake (False News ) hype around the project but they are not very objective while some other participate only for some free tokens.
An easy way to do quick risk assessment of an ICO is by checking its ICO RiskScore™ and ICO RiskProfile™.
– Why to even have an ICO? Is blockchain really necessary?
ICOs mean the creation of a new dedicated token or altcoin for the project. One of the most important questions each ICO needs to answer is what is ICO token for? Why isn’t Bitcoin or Ethereum enough to serve as the project’s needs ?The same question needs to be asked regarding the use of the blockchain technology behind the project.
Most of new investors have no idea about the technicalities , hence it is always advisable to take advice of technical people if possible. An ICO investment should be treated as any other investment and all due diligence must be carried out in regards to ICO project technical white paper.
– Tokens, Tokens, Tokens ! How Many ?
As investor , you need to know about how many tokens in total ICO will circulate. Are they unlimited or is there any hard cap ?
In the early day ICOs, the difference between open and hard cap didn’t have the same impact as today’s ICOs. An unlimited supply of token allows investors to send unlimited funding to the project’s ICO wallet. But if more tokens are circulating, the less unique your tokens become for the trading afterwards – through less demand.
As ICOs become mainstream within crypto land, enormous amounts are collected fo tthese projects. Take a look at Bancor, this project raised an astonishing $150 million in just three hours how ever this resulted in no gain to the token value.
Investors should all keep in mind , you don’t want to be the only one investing in the project. So you want other people to invest too and some may need extra time, some need extra share. Normally it is an observation that Crypto Currency exchange’s show less interest in projects that raise very little amount of tokens, which makes it even harder to sell these tokens after release.
– Token distribution – when and how
How many tokens are kept and how many are given out?. Is it just the greed of ICO project team or there is a valid reason to sell all those tokens ?.A good project will have a token sale and distribution roadmap with set benchmarks. This will explain each phase or milestone of the project requires a certain amount of funding.
– Read the Whitepaper
Investors actually don’t read through the whitepaper, even though it contains all the necessary information about the project and its ICO. Do read it, or at least the majority of it. Try to grasp as much as you can . Use internet to search for technical terms. Find spositive and negative aspects and use them in your own research.
Whitepaper is summary of ICO project to its potential investors. After reading it you should be able to answer a simple question – what kind of value does this project bring to our world? Or at least you will know what are you investing in ?
Investors and venture capitalists can also use online services like ICO Risk Register. ICO Risk Register is an independent Initial Coin Offering (ICO) rating company, on-demand due diligence service providers and centralized ICO risk assessment register that issues independent analytical ICO RiskScore™ and research reports. We also maintain a central DB Register for all the ICO (initial coin offerings) made over time.
– The Last Word
ICOs are becoming more and more common as an alternate to simple crowd funding. Soon there will be many projects to choose from, hence it will become even harder to risk assess these projects. It is investors responsibility to investigate and read as much information as possible and write down all the important aspects, positive and negatives, before making an investment decision.
If as investor you can afford to take some risk and have the ability to endure the market’s ups and downs, equity investments may grant you good returns. A wise and prudent investor chooses an investment product not only according to his goals and the amount of capital available but also according to his tolerance for risk. All investments carry a certain degree of risk. You have to determine yourself if you are a “risk-prone” or a “risk-averse” person. Depending upon the extent of investment risk, investor should follow an investment strategy (aggressive, moderate or conservative) that fits ICO risk profile.
Tier3 has worked previously with its clients to write technical reviews and perform risk assessment on technical projects.Our team will be happy to work with you for technical appraisal of any requested Initial coin offering (ICO).
For more about our services contact us.