How to research an ICO
Public interest in initial coin offerings, or ICOs, have boomed in recent years after investors have been able to multiply their initial investment by 100 or even 1000x over a short period of time. If you’re reading this article, you are probably interested in ICOs yourself. But which ICOs will moon or bust? What are the key elements to look for? How do you decide which ones to invest in? All of these questions are important to consider since, despite promising returns, ICOs are high-risk investments. Many ICOs are money grabs or even scams. So it’s important to Do Your Own Research before investing. Below are some basic guidelines to consider before investing in ICOs.
The Golden Rule
NEVER invest more than you can afford to lose. While this may sound obvious, many people get carried away and invest way too much while they are blinded by greed or FOMO. If the coin/token goes to $0, they may end up financially crippled for a long time. Additionally, you need to have some patience. Some ICOs can take off quickly and others will require time in order to realize a return. How long are you willing to wait?
Ok, so now that you’re in the right mindset, you can start researching the project. Start by checking whether the team has formed a company and look at which country it’s registered in. Where is their office located? This info helps confirm that the project and team actually exist somewhere in the world.
Check out the website. Does it look professional? Or does it look like something your 15-year old nephew can create on Wix or WordPress in a couple of hours? The website can demonstrate the credibility of the business. Of course, any information should be presented in a clear manner to the visitor. Read the site, watch their explainer video, and ask yourself if the content makes sense. At a minimum, the website should include these key pieces of information: the product/service, the team, the token sale structure, the roadmap, the white-paper, and any social communities they may have.
Research The Team
A strong team drives the success of any company regardless of how much the project raises. Researching the team’s experience and credibility is important. Check whether profiles are easily accessible and disclose sufficient information.
Use LinkedIn to further research team members. Have they updated their profile to reflect their position in the ICO team? Check their credentials to see whether their previous experiences are relevant to the project and if anyone has prior crypto or blockchain experience. You should pay extra attention to the management team to judge their ability to lead and build a successful business.
Outside of the management team, check the team size, team diversity, and whether or not the team has worked together before. A team comprised of multiple people with different skills and have a history of working together has a higher chance of success than, for example, two people working on the project.
Last but not least, check the project’s advisors. What is their role in the project? Are they supervising every decision or simply supporting the project because they believe in its future success? Check their social media accounts to see whether they pay attention to the project, make announcements, or give insightful opinions on the progress.
One final point. Scammers like to use random photos to create a fake team roster. Always check for social proof or actual videos of team members speaking about the project. Sometimes people are added to a team or an advisory board without their consent.
Github is a public collaboration tool used mostly by programmers to share and build software together. Because many projects are open-source, the code is often hosted on Github for the public to review and provide feedback on. If you have a technical background, go ahead and check the validity of the source code. If you are not a techie, you should still check whether the code is published on Github or similar repositories because if not, it could be a red flag.
Read The Whitepaper
You definitely should read the whitepaper in its entirety. If you don’t have time to read it, then you have no business in investing in the project. The whitepaper should contain all the pertinent project information. It should include details about the utility of the project, evidence-based market research, risk analysis, security procedures, and so forth. See if you can easily understand the value the project holds and what problem it is trying to solve. Does the whitepaper answer all of your questions or does it leave too many unanswered?
Incomplete or poorly written whitepapers with grammar or spelling mistakes should invoke serious doubts and caution. And always check for plagiarism in the whitepaper. It indicates a high likelihood that the project is a scam.
Is There A Prototype?
There are two types of ICOs, those with a working prototype and those without. An ICO without a prototype is often referred to as a “whitepaper ICO.” This means investors are investing in a whitepaper (only the idea) with nothing else to show yet. Of course, projects with a working prototype generally have a higher chance of success, no matter how limited its scope is. And, frankly, whether the project has a prototype should be a primary deciding factor, since ideas are cheap and there are millions of good ideas out there. Without a prototype, it’s difficult to prove the concept will work. Check whether the team has a Minimum Viable Product (MVP) or even an alpha version of the future product on their website or Github. A working product with an existing user base suggests a safer investment.
What Problem Is Being Solved?
After the team and prototype, this is the next most important factor to consider. What is the utility of the product or service? What is the real-world problem this business trying to tackle? How does blockchain technology help solve this problem? If what the company proposes can easily be done with a different technology other than blockchain, then there is no good reason for them to force blockchain into their system and do an ICO.
In addition, ask yourself “what is the token for?” The whitepaper should include use cases for the token. Can it be used in multiple ways in order to increase future demand? Can the value appreciate over time? For example, Ethereum uses Ether as “crypto-fuel” to pay for computation, while Bitcoin is only used as currency.
Any business plan should be backed with evidenced-based market research to give an overall picture of the market being served by this new business idea. It is hard to imagine that an ICO will succeed if the whitepaper lacks proper market research. The information they provide should help you understand current market conditions, its growth, and the position that the project tries to establish in the overall space.
Competition is a big one. Always compare an ICO to the rest of the market. Are there similar applications in crypto space or in traditional markets? If you don’t find a direct competitor, it could mean one of two things: the project is a true pioneer with a breakthrough technology, OR it doesn’t have a valid use case in the market. If you do identify a competitor, then you should compare the teams, project features, project stages, and try to understand who is achieving their objective more efficiently. Also, you can use previous ICOs as references to determine the project’s current and future token value.
A roadmap summarizes the short and long-term goals of the project with a clear timeline, helping investors evaluate the stages of the project. The lack of a roadmap with specific dates can indicate that the team has an only short-term financial gain in mind. The roadmap should also include some prior progress as an indication of the team’s ability to execute.
Token Sale Details
Any time you evaluate an ICO you should look at: (1) the token sale structure; (2) soft and hard fundraising caps, and (3) the token distribution structure.
First, the token sale structure can be used as a data checkpoint to validate the intention of the founders. A token sale can comprise of different stages, including private sale for large contributors, pre-sale, and public sale. That said, we are now seeing a new trend with ICOs, especially for hyped projects, where they only have a pre-sale and replaces the public sale with an airdrop. Generally, the team will reward early investors with an attractive bonus, ranging from 20-50% (or even more). The higher the bonus, the higher likelihood that its token will be dumped after exchange listing. Therefore, check if the team locks bonuses in escrow for a certain amount of time after launching to discourage immediate dumping.
Second, check the token supply, soft cap, and hard cap of the ICO. Compare it to similar ICOs or existing projects to determine the market cap after the token sale is complete to establish a benchmark. Is the amount too high or is it reasonable? For example, it is usually safe to go with a hard cap between $10M-$40M, otherwise, you have to ask yourself whether they really need to raise such a high (or low) amount.
Third, check the token distribution structure to see whether it is distributed proportionally. Ideally, you want less than 30% of the tokens reserved for founders and a vesting period of more than one year. Otherwise, it appears suspicious and may be a money grab. Also, check how the team will allocate their raised funds to see if it makes sense.
Community Support And Media Presence
It is important for an ICO to develop an open, supportive community. Usually, community building is done via Slack, Telegram, or other social media channels that allow the team to directly interact with the public. Communicating in these groups shows the transparency of the team, how they handle the public relations, and how they good they are at building a healthy community to back the project. It is a bad sign when the team avoids answering certain questions or does not communicate with their supporters. In addition, you can also get an idea of the project’s culture by looking at its size and activity.
A presence on websites or forums such as BitcoinTalk, ICODrops, or CoinSchedule also shows the popularity of the project. Ideally, you want to see it command mass appeal to a wide range of investors because that can increase demand for the token, leading to your investment gaining value.
In addition, you can check the project sentiment using Google Trends or Twitter Search to quickly research public interest, how the team responds, and the overall sentiment of the project.
As mentioned from the beginning, the crypto market is risky and, therefore, requires a cautious investing approach. With the growing number of ICOs announced every day, it is challenging to find high-quality projects. There are numerous online resources which deliver quality reviews when it comes to ICOs. However, you should always take those reviews with a grain of salt and do your own research, as some reviewers are paid to promote certain projects. Don’t be afraid to trust your gut and once again, don’t invest more than you can afford to lose.
To check out some of our own ICO reviews, click here.
This article was written to the best of our knowledge with the information available to us. We do not guarantee that every bit of information is completely accurate or up-to-date. Please use this information as a complement to your own research. Nothing we write in any of our articles is intended as investment advice nor as an endorsement to buy/sell/hold anything. Cryptocurrency investments are inherently risky so you should never invest more than you can afford to lose.