How to Choose an ICO to Invest In?
How to Choose an ICO to Invest In?
How to Evaluate ICOs?
There are many ICOs within the market, each one promising huge profits and useful returns for potential investors. But, before you get carried away and start sending your hard-earned money to each project, remember that many, if not most of these projects will inevitably fail or turn out to be scams.
Before you start: What is an ICO?
Keep in mind that all cryptocurrencies and the Ethereum platform, in general, are basically experimental technology. A vast majority of ICOs depend on Ethereum, and they themselves are a very experimental mechanism. It is an experiment on top of an experiment.
A typical project that is launching an ICO will have a website and a White Paper that will have as much information as possible about the project and its goals. Here they will describe the team and its relevant experience, the idea and the roadmap of its execution, the approximate objectives, the means to achieve them, and so on.
One thing the project will not have is a finished, functional product. It is possible that you have an MVP (Minimum Value Product, Minimum Viable Product in Spanish) that allows you to know the initial viability of the project and evaluate whether or not the project has a future.
So essentially an ICO campaign is a situation something like this: “This is the idea, and this is more or less the way we will try to do it, please send us money.” It is up to you to evaluate every possible aspect of a campaign and decide for yourself if you will put your funds at risk by participating in it.
However, it is important to mention that in some cases that risk is worth it. For example, EOS ran an ICO campaign without any running product or even a platform but still managed to raise over $ 4 billion during its entire campaign. Also, its token started trading at $ 0.925 and was trading at around $ 5 for a few days after the ICO. The highest price the token has had was $ 21.30, 21 times the price paid in the ICO.
Should you Invest in an ICO? Simple Financial Advice
All the guides on anything remotely related to cryptocurrencies will give you this simple advice: don’t commit more money than you can afford to lose.
But, do not take this recommendation so seriously. Here’s what the mastermind behind Ethereum (and perhaps the most prominent figure in the crypto world) Vitalik Buterin, had to say about it:
How to Detect an ICO That is a Scam?
1. Find out Everything you can about the Development Team
First of all, make sure the developers are not anonymous. If they are, it is the most alarming thing there is. If they show the names, Google them extensively, with a special focus on the development team and advisory board. Many fake ICOs will claim the participation of some kind of prominent figure in order to gain attention, be sure to always verify that information through the social networks of these figures.
Make sure to check where the team members went to school, what they studied there, and what kinds of things they’ve worked on before. Focus on the experience of criptomonedas relevant to previous ICOs in which participated and their impact on the project. What you should look for here is if their previous experience will be enough for this project in which you will invest, to be successful.
A very promising sign is when team members link to their LinkedIn, GitHub, or Twitter accounts on the ICO website. Even then, be sure to check how legitimate the linked accounts are by looking at how long ago they were created and how actively team members have been using them. It really is not difficult to fake social media accounts.
2. Check out the Community and Media
Always make sure an ICO has a broad and, most importantly, open community of support. A public Slack or Telegram chat for all investors is generally a very good sign. Other sources like Facebook, Twitter, or Reddit can also be extremely helpful when evaluating an ICO.
You should be on the lookout for so-called rewards programs. It is a very common practice to ask people to spread positive information about the project in order to obtain certain rewards in order to increase both the media and the community’s attention to the projects. Bounty posts do not necessarily mean that an ICO is a scam, but a promising project with experienced team members and a decent promotional campaign will not need to rely on such tactics.
Instead, they will take care of the necessary media coverage by sending out press releases, creating publicity around the project, and conducting interviews. The team’s presence on social media and constant communication with investors is also a very good sign.
3. Check the Project Stage and Venture Capital Investments
There is no universal rule about what stage of development the project must be in before it can host an ICO. Sometimes there will only be a white paper and a rough roadmap. Sometimes there will be a beta version of a product or even an MVP with limited functionality.
Of course, it is always safer to invest in projects that are as close to the launch of a fully functional product as possible. As a general rule of thumb, investors tend to prioritize projects with at least a few lines of working code.
The latter is not a universal rule, we have seen many ICOs that have become a success without any written code.
Another reassuring sign is Venture Capital investments. Well-established venture capitalists are usually large and experienced players, so they will not invest in or trust projects that they believe have the slightest chance of failure. Although, we all make mistakes, including them.
ICOs will likely advertise Venture Capital’s involvement in the project in bold, capital letters on the home page of their website. especially if it is a venture capital company related to cryptocurrencies. Still, double-check if this is true to be sure.
4. Read the ANN Thread on BitcoinTalk
BitcoinTalk.org is the largest forum dedicated to Bitcoin and everything related to cryptocurrency. When it comes to ICOs, this page will definitely come in handy, as this is where the announcements are made (marked with the term [ANN]). If the ICO you are considering investing in is not there, get out of there.
Make sure to read the thread dedicated to the particular ICO very carefully, especially if you lack the necessary knowledge to understand the technical aspects of a project. Here you can find more knowledgeable members of the community giving their opinions and questioning the elements of the project. Basically, those threads are a common effort to assess the legitimacy of an ICO.
In the cryptocurrency community and on this forum, in particular, user reputation is of the utmost importance. Each post in a thread will contain the current ranking of the user and the number of previous posts. In general, the higher the rank, the more trustworthy a certain user is.
Those ad threads are also a great place to check how responsive developers are. If they are not answering certain questions or are simply not active in the thread, it is a red flag. Also, you can always try sending a personal message to the developers to check how responsive they are.
5. Read the White Paper
This entire guide can be summed up in a few words: know exactly what you are investing in. And there is no better way to learn as much as possible about the project than to read its white paper.
An ICO seeks to attract funds from small and casual investors. So developers should be able to define their project goals and the means to achieve them clearly and in relatively simple terms.
It can help you: What is a white paper and how to write it?
A good white paper will also include outlines of a legal framework between investors and developers. First of all, this should include terms and conditions for the ICO. Also, you need to provide a detailed explanation of the token distribution, specifically when and how the tokens will be sent to investors. A good sign is when the token distribution is tied to the roadmap, as a certain amount of funds will be required for each phase of the project.
Another crucial question that the White Paper has to provide the answer to is Why does the project need its own dedicated token? Why can’t already established cryptocurrencies like Bitcoin or Ethereum be used?
The same question goes for the use of Blockchain technology. Why do you need to apply Blockchain technology? How can Blockchain technology improve the service provided?
As mentioned above, a legitimate project will provide its potential investors with at least some kind of roadmap. It’s a very good sign that such a roadmap contains a detailed breakdown of exactly how the money raised will be used, the pricing model, and the value assigned to the business.
Finally, and perhaps most importantly, you should ensure that the funds are stored in an escrow wallet. The best scenario here would be that the escrow service is not provided by an individual or a company, but is done automatically through the use of Ethereum smart contracts.
6. Assess Code Quality
If a project doesn’t have any working code before an ICO, or even if they do, but it’s not open source, that’s a huge red flag.
If you have even a little programming experience and know-how to read the code, you should do so when evaluating an ICO. You can understand a lot about a project and its developers simply by analyzing its code.
Learning From Venture Capital Investors
Venture capital investors make a living from investments, making them the most selective contributors. They carefully examine everything about the project with only one very particular thing in mind: How big will the return on this investment be?
In addition to all of the above, here’s a science of behavior: A general consensus in the venture capital world is that it is never good for a start-up to receive too much money too quickly, as they will be forced to spend the funds just because They’re available.
So you better understand the process: How to buy ICO Tokens: A Beginner’s Guide
Likewise, venture capitalists have very clear and strict requirements in terms of the monetary return and benefits of the projects in which they might be interested. They won’t even consider investing in projects that don’t meet those requirements.
Even if you are a casual investor and do not intend to put in large amounts of money, there are many useful lessons to be learned from venture capitalists. Know what you are investing in, investigate, know your risks and never participate in an ICO of a company that does not meet your standards.
Are ICOs a Bubble?
History tends to repeat itself. In the past, the dot-com bubble was compared to the gold rush. Now, the hysteria around ICOs is being compared to what was happening around dotcoms, and not unreasonably: like dotcoms, all investments made through ICOs are made out of fear of losing potential gains and are based on exclusively in speculation.
As a potential investor, it is essential that you understand that most of these projects will not get the bottom line or will simply turn into scams. Others, like NEO or IOTA, which will reach maximum prices one hundred or two hundred times higher than the price of the ICO, will be a total success.
Learn more about the projects with the best returns: The 10 best ICOs with the highest return on investment
Although the aforementioned points are not infallible to determine if an ICO is a failure or if your investment will bring you some profit, it will help you to contrast the projects that have the greatest probability of success from those that will not report good news for the clients. investors.
ICO Legality Issues
Before even considering taking part in an ICO, make sure you are not breaking the law. ICOs are completely prohibited in some jurisdictions, such as China and South Korea. And while they are currently allowed or simply unregulated in many other places, the vast majority of local regulators are currently developing legislation to outline certain rules around ICOs and impose certain limitations on both startups and investors.
The cases of Paragon and AirFox with the sanctions of the SEC (Securities and Exchange Commission of the United States ) denoted a before and after for the ICOs that arose in the United States. The American authorities determined that the sanctioned projects had to comply with the same requirements that were determined for the sale of regulated securities in the US market and for non-compliance, they had to pay significant fines and return the money to US investors.
The decision was emblematic since it put the entire market on notice and showed that ICOs that had already arisen in the past could still be regulated in the absence of regulations.
While the sanction was limited to US jurisdiction, all token holders of both Airfox and Paragon were affected. The large fine and the fear of future sanctions caused the prices of the tokens to plummet, thus generating negative consequences for all investors.
In conclusion, you must be very attentive to the news of legal regulations that may be brewing within the jurisdiction of the ICO you want to invest in. They may well be laws on cryptocurrencies in general or regulations for the collection of funds via ICOs