ICOs are – as a collective – double-edged swords. This is because they have the highest potential for astronomic returns and the greatest cryptocurrency profitability, but also conversely the highest potential of being a fraud and resulting in major losses. One must be very careful when handling a double-edged sword so that one does not cause damage to oneself. This guide on investing in ICOs will explain to you what ICOs are, how to evaluate them and what to think about when making ICOs part of your cryptocurrency investment strategy.
What is it?
ICO stands for Initial Coin Offering (the term lent from the stock markets’ IPOs – Initial Public Offerings) and is a vehicle for raising funds. Through ICOs, blockchain start-ups distribute a portion of their new cryptocurrencies/tokens to early concept enthusiasts in exchange for their investment (Fiat currencies, or other cryptocurrencies such as Bitcoin or Ethereum). These funds collected through the ICO act like crowd-funded seed money for the start-ups to develop, market, and promote their proof-of-concept (POC) and/or product. Accordingly, in an ICO, you will be the first holder of a cryptocurrency/token, unlike when buying at an exchange where you can never be the first.
There are two ICOs specifically worth to mention here. The first is the MasterCoin ICO in August 2013 and the second is the Ethereum ICO in July-September 2014. The MasterCoin ICO (MasterCoin has changed its name to Omni) was the very first ICO. They announced themselves on the Bitcoin forum (here: https://bitcointalk.org/index.php?topic=265488.0) and ended up collecting USD 600,000 in Bitcoins. The Ethereum ICO was the second ICO ever and took place during 42 days (22 July 2014 – 2 September 2014). The Ethereum ICO collected 31,500 Bitcoins that at the time was worth approximately 18,400,000 USD. If you bought 100 Ethereum at the time of the ICO, they would have set you back roughly 30 USD. At the all-time high on 13 January 2018, 100 Ethereum was worth roughly 140,000 USD. We wish we could have gone back in time and screamed “Ethereum!” when asking ourselves what cryptocurrency to invest in…
Since then, there have been hundreds (if not even thousands) of ICOs, some with great return and some with disastrous returns.
Most ICOs follow roughly the same strategy.
The ICO-project announces itself on one or several forums crypto-enthusiasts regularly scavenge in search of new interesting investments/technical solutions. The ICO-project then reveals important information. Such information can include the official website, the whitepaper, the roadmap, the development and marketing teams, the experience and other items (read more about all of these below).
When the hype has become real (i.e., enough people say good enough things about the prospects of the ICO and their proof of concept), then the team typically announces the ICO more broadly. From there on, they dissipate the information regarding the ICO and try to get the attention of early investors. Information such as ICO timelines, what portion of the total supply of crypto-coins they are going to sell in the ICO, how much percentage is going in for development and marketing, the currency in which an investor can invest, etc. is shared at this stage.
The ICO is over and the ICO-team has raised its money. Now, the project starts. The cryptocurrency/token gets admitted to trading on the best cryptocurrency trading site (hopefully). Most of the projects allow its investors to trade their cryptocurrency at this stage. From here, the price of the cryptocurrency/token fluctuates as any other existing cryptocurrency/token reflecting how the market values the ICO’s application/protocol (i.e., what other investors are interested in buying/selling the cryptocurrency/token for).
How should you know which cryptocurrency to invest in? How should you know which ICOs that will skyrocket and enable you to buy that beach-house, and which ones that are frauds and will cause you great financial damage? There’s no simple answer. If there were, we would be sipping Margaritas on a yacht right now instead of preparing blogposts/guides for you guys. Sure, there are very interesting AI-powered crypto price prediction tools out there (see for instance the upcoming TRAKCrypto-tool), but no such tool is bullet proof. However, keep reading and you’ll learn which tools you need to include in your cryptocurrency investment strategy and use when assessing ICOs.
Do Your Research when Investing in ICOs
Maybe we are beating a dead horse now but – if we should be true to ourselves in our ambition to be your number one trading cryptocurrency guide – we must still say it: the single most important rule when investing in ICOs is to always do your research. The same rule goes for all investments, but particularly so for ICOs where there are numerous pitfalls. Doing your research consist primarily of the following aspects:
- Read the whitepaper and evaluate use cases
- Analyze roadmap
- Research the team
- Watch announcements and interaction with the crypto community
- Understand the coin distribution matrix and total supply
Let’s go through them, one by one.
Read the whitepaper and evaluate use cases
The first step when investing in ICOs is to read the white paper. The white paper for an ICO is what corresponds to the prospectus in an IPO. As the regulation of IPOs is far heavier than the regulation of ICOs, prospectuses can be up to 400 pages (with extremely small font). Whitepapers, however, are rarely more than 40 pages.
The most important information in a whitepaper is usually the information on the technology the team behind the ICO is building, what market need there is for the technology and the forecasted roadmap. Try to understand that they’re saying in the white paper, and – if possible – make your own assessment of whether the white paper’s assessment of the market need is realistic. Sometimes you can follow independent experts in the same field as the ICO-project and see what they have to say about the ICO-project. If doing that, however, you must be sure that they are in fact independent.
It is always good if the project has an MVP ready but that will not always be the case. Accordingly, it is best to thoroughly understand their concept and try to find answers to as many questions as you can. For instance: Are they building real tech that contributes to a need or solves a problem? What’s different about their approach? Are they in active development? Do they have their own blockchain? Is it a clone of another token? If you manage to answer all questions, you might be one step closer in deciding which digital currency to invest in.
One aspect that is always included in the white paper is the road map/timeline. When reviewing this you should try to assess whether the ICO-project has real and clearly defined goals. The goals should also feel achievable and reasonable. Understanding the timeline is of paramount importance when choosing which digital currency to invest in and the right time to invest. If there are no foreseeable milestones until over a year later, that should be considered a big risk factor and it might be wiser to invest elsewhere in the short term.
Research the team
The first part of the research should be to confirm that the people really exists. Try to do so by checking Twitter-accounts, Facebook-accounts, LinkedIn-accounts and other profiles of the team members (maybe not Tinder, that could be thought to be going a little bit too far). Why should you do this? Well, if I would start an ICO to raise money from you with the sole purpose of defrauding you, than I would probably not do that under my real name, right? What we’re saying here is that the existence of the persons in the team is not in any way whatsoever a guarantee that the ICO will be successful, but it is at least one less big risk factor to worry about.
Also try random google searches and try to find relevant stuff on forums such as Bitcoin Talk and Reddit. This is partly in order to verify information listed in the abovementioned accounts. But mostly, it is to find out whether or not the project team members or founders have a questionable history. Also, it’s for seeing if you can find anything questionable about their current or previous business.
Finally, you should try to figure out if the team members have a good fit for the project. Are they experienced? Do they have a reputable background etc.? The team members are a crucial part of the future success of the relevant cryptocurrency/token and if you can “check the boxes” above when researching the team, you might be yet another step closer to knowing which digital currency to invest in.
Watch announcements and interaction with the crypto community
Another smart thing to do when investing in virtual currency through ICOs is to join the ICO’s relevant social media channels (often there is a Reddit-channel and/or a Telegram-channel). There, you can often interact with the concerned teams and polish your findings quietly without making much noise in the group. This way you will hopefully understand whether the project is worth looking into or just a money making scheme for them.
You should also watch the official announcements and threads of the ICO-project on Bitcoin Talk and other forums. In these threads, try to assess what people think and say about the technology. Once the ICO is completed and you have your cryptos, the value of them are ultimately set by the crypto community and its members. Accordingly, what other members of the crypto community think is of course very important.
Also, you must review how different people from the ICO-team and the team moderator of the project responds to questions. Are they proactive and interested? Are they dodging your questions? Have they banned you from asking reasonable questions? If you have asked a question you have after reading the write paper and you’ve been banned, this is a big warning flag that could mean that the ICO is a fraud. If your questions are responded to in a nice proactive manner, again, we can’t guarantee that the coins in the ICO are the best crypto coins to invest in, but it’s at least one less big risk factor to worry about.
Understand the coin distribution matrix and total supply
Finally, you should try to understand the ICO’s “token economics” or “tokenomics”. This is basically how many tokens they issue, if the supply of tokens is a specific number or not, the allocation of tokens (how many tokens they issue to the public and how many tokens they issue to the project team), mining capabilities etc.
A part of understanding the coin distribution is also to see what currencies they accept as payment for the tokens. Do they only accept QTUM? And you don’t have any QTUM? If so you must acquire QTUM and analyse when’s the right time to do so, etc.
All of the above things is more thoroughly explained in our guide Security Measures. but for now, we settle with stating that you should have the following in mind when it comes to the ICO-s tokenomics:
- a vast majority of the tokens are pre-mined (this is a risk factor);
- the token supply is gigantic and there is no market-model around it to really help it thrive (this is a risk factor);
- you need a specific wallet (such as a dogechain wallet) to pay for the tokens (this is just something to take care of so you don’t miss out on the investment); and
- you need a specific cryptocurrency to use as payment for the tokens (this is just something to take care of so you don’t miss out on the investment).
Accepted Wallets to Receive Payments From
Another part of understanding the coin distribution is to assess what wallets they accept payments from. If you don’t have a separate crypto wallet and have all your cryptos at your exchange, then the ICO-market is off-limit for you. There is no best altcoin wallet, best paper wallet or best hard wallet that will always enable you to participate in a specific ICO. For instance, a company might require you to have a dogechain wallet in order to participate. If you then don’t have one, you’re out. But don’t worry, find which wallet that is the best altcoin wallet that suits your needs with our Cryptocurrency Wallet List (or just review which wallets are the largest bitcoin wallets, if that’s what you’re interested in).
There is no doubt that ICOs are an excellent way for companies of generating initial seed funds. Such seed-funds can kickstart a start-up from anywhere in the world. However, there are several pitfalls and traps to look out for. The ocean ICO’s are indeed treacherous waters. But, we think that if you follow the above advice and properly do your research, you’ll do just fine.