How to Identify Good ICOs for Investment
Updated: Sep 26, 2019
Investing in ICOs will be less risky and more profitable if you follow these simple guidelines.
As ICOs become a more popular method of raising funds, it is used by an increasing number of projects and start-ups. A report by PwC shows that the ICO volume in 2018 is already double that of the previous year. Hence, investors will have a harder time identifying good projects from bad ones. This article will give you a list of guidelines on how to assess different aspects of an ICO before making an investment decision.
Before we start, it is essential to remember that ICOs are still considered a risky way of investing due to a lack of regulation. In case of any failure, it might be difficult to claim back your investment, which is why the first-hand evaluation of projects should be your first and foremost priority.
Always read the project’s white paper
If a project is created because it brings up a specific solution, then a white paper is where the project team back up and strengthen that solution.
A white paper gives you everything you need to know about a project’s token, from facts regarding the Blockchain, its protocol, distributed applications (dApps) that are being built to a description of how the tokens work. It gives you a basis for further assessment of different aspects of an ICO.
White papers these days can vary in style and differ in structure. Yet whatever the style is, they should impress and explain the project clearly and efficiently. In contrast, bad projects often lack the technical description of the technology they are working on.
It’s a fact that most of them will miss one of the key aspects of business building. If one had to take out a bank loan, this matter should be the most important one, yet many whitepapers miss this section. This shows that the founders have no business experience and are not capable of presenting their fundamental analysis. They only view their business from a very simple aspect and just hope for the best.
No one would entrust their own money to some random strangers whom they know nothing about, so why should you? When things go wrong, the people behind it could vanish with no responsibility left behind. For such reason, anonymous ICOs should be the first to be off your list.
The team can be seen as the soul of a project. It’s important to learn about the co-founders, developers, and thinkers behind the idea. Rely on the project’s white paper to discover it, but also make sure to do your research. The ICO’s website should share specific details regarding the team, including developers and collaborators, or they might even get covered on news and media channels.
Since this is a technology field, each team member should have a decent Linked profile presenting their credentials, experiences, and associations. Some endorsements at the bottom of the profile will help determine their business experience. Do not leave them out.
The most basic way is to search for their profiles on Google. If Google gives you zero results about the project team, you could easily spot that there’s something wrong going on.
Business model and future development
Even though it is possible for a group of people/developers to launch their own ICOs, there is always a possibility that they haven’t had any previous activity in the field. How could this guarantee that their ICOs will produce any effective or profitable result anyway?
It would be best if you determine whether the ICO is created by a real company that has been involved in the blockchain and cryptocurrency business for a while. Moreover, the released tokens should be closely related to the business model or the so-called ‘ecosystem.’ You should be able to fully understand the purpose of this token, and how it can be utilized in the company or its products. There are a few questions you should ask yourself prior to investing in an ICO as follows:
Does this business model make sense?
Is it profitable?
Is there any promising future for it?
Does the company have any specific plans for future development?
What will happen after the ICO?
and so on.
After all, your invested money should be used for a specific purpose. It is best that the company behind the ICO has its future milestones publicly listed. This means that their road map must be available to view in the company’s whitepaper or their site. Last but not least, you must seek out when the new coin is going to be listed on an exchange. The payoff is generated when you are finally able to exchange the new coin for a profit. This relates to security tokens. In utility tokens’ case, the actual utility achievement is when the token itself can be worth a lot.
Open cap or Hard cap
The difference between an open cap and a hard cap could severely affect the value of your token. In an ICO project with an open cap, it allows unlimited investment poured into the project’s ICO wallet. The more coins circulated in the total supply, the less unique your tokens become later on when the demand for the project’s token slows down.
Otherwise, a hard cap in an ICO means making a total supply of the generated tokens/coins. This amount is fixed and the ICO company must release this piece of information prior to the launch of the ICO. Scarcity is the concept of a hard cap in an ICO. As in, the value of the coin/token may increase over time due to the limited supply.
On the other hand, if the network does not succeed in achieving its set target, the value of the coin/token will dilute, leading to a deteriorating decrease in the value and integrity of the network.
However, this does not mean that a hard cap is always better. When the number of token users is too little, it will be tough to sell the tokens after its release.
The more followers an ICO has on social media platforms such as bitcointalk, telegram group or even Facebook, Twitter and LinkedIn, the more reliable it will be for investment. Sure there is still a project with somewhat 35,000 telegram members (29,000 of them are bots), but you can always go through the channels and check how active conversations are and how the community supports the project (especially sharing). Social sharing shows that the project has something to catch on. If you are getting genuine word-of-mouth referrals, then you should consider eating well.
Bitcointalk.org is the biggest forum for crypto discussions. Here, you can find announcements for projects (ANN), community opinions on projects and latest project updates.
Any of your concerns regarding ICOs could be answered here directly in its own threads. If you find your questions ignored by the ICO’s developers or thread operators, it could also be a bad sign.
Smart Contract Code
If you are a knowledgeable developer, it’s necessary to go through the project’s smart contract to verify if it matches claims made in the whitepaper. If smart contracts deal with a situation when an ICO has not achieved the targeted cap, check to see how the money will be refunded to investors.
Smart contracts should be able to view in public once deployed on a main net. Etherscan provides options to make smart contracts public and even allows adding a logo and other social links. This increases the overall security of the token as contributors and token owners can see an actual smart contract address and can confront it with the code or other associated info available.
By following these simple guidelines, you can have a pretty solid picture of whether that ICO is worth investing in or not. Hopefully, this article helps you to improve your judgment and make better decisions on your ICO investment career.