According to CoinSchedule, 2018 has witnessed the launch of more than 680 ICOs that have collectively raised more than $17.4 billion. More ICOs are launching every day and many investors are left wondering how to pick the legitimate projects from the money grabs. Although by no means an exhaustive list, here are five things that every investor should ask before throwing their hard-earned money into an ICO.
1. Does the Project Fill a Legitimate Need?
A lot of so-called “experts” have compared cryptocurrency to the Dotcom bubble that lasted roughly from 1995 to 2001 and they’re right in one respect. In 1995, I was 23 years old and a fresh-faced BBS sysop. Home internet use was beginning to expand beyond AOL and Prodigy and websites were the Next Big Thing. Every business worth its salt just had to have a website – whether they needed it or not.
The same thing is true with blockchain. Companies are tossing buzzwords like “blockchain” and “tokenization” around and expecting investors to throw money at them, and in many cases, it works. Remember Long Island Iced Tea Corp.? They were wallowing in obscurity until someone thought it would be an awesome idea to rebrand the company to capitalize on the blockchain craze.
In December 2017, the company re-branded itself as Long Blockchain Corp. and almost overnight its shares rose nearly 289% – from $2.44 to $9.49. Why? Because blockchain, dammit. It didn’t matter that the company had no real connection with the technology. The word “blockchain” itself was enough to spark investor interest.
Karma’s a harsh taskmaster, though, and their attempt to grab those sweet, sweet blockchain investor dollars ultimately came back to bite them in the butt as NASDAQ announced in April of this year that Long Blockchain Corp. was being delisted and would no longer trade on the exchange.
So, when you evaluate an ICO for investment potential, read the whitepaper. Watch the videos. Take a good look at what the project is trying to accomplish and ask yourself “Is this something that needs doing and does it really need blockchain to accomplish it?”
The bottom line is this: Blockchain isn’t bacon. Not everything is better with it.
2. What Do You Know About the Team Behind the Project?
The lion’s share of a project’s success is determined by the team behind it. An ICO can raise millions of dollars, but if the team isn’t solid, the project will ultimately fail and lose community support and its token will wither away until it is just another sh*tcoin.
So how do you find out if the team is legit?
You put on your detective cap and investigate. Check out their LinkedIn and other social media profiles – where have they worked in the past? What other projects have they worked on? What is their educational background?
You should also look at how engaged the team is with the crypto community. Are they willing to answer questions about the project? How do they handle critics? If they can’t field questions without banning users and screaming “FUD”, that should raise a major red flag.
One last bit of advice on this particular subject – don’t be afraid to verify the legitimacy of a project’s advisors. Just because a project lists some heavy hitters as advisors doesn’t necessarily mean that they are affiliated with the project. Heck, they may not even *know* about the project! Earlier this year, there was an ICO-that-shall-not-be-named that listed a number of advisors – several of whom were professors in technology fields, on the boards of major companies, etc… As it turned out, not only were they not involved in the project, but most of them hadn’t even heard of it!
Remember: You are evaluating these projects as an investor. It is your right to ask the tough questions and to expect answers. If someone on the team tries to make you feel ignorant or adversarial for asking a critical question (or worse yet, brushes you off entirely), that’s generally a good indicator that you shouldn’t trust them with your money.
3. Are They Trying to Baffle You with Buzzwords?
With so many ICOs being launched, they are scrambling over one another to get your attention – and your investment dollars. Each one claims to be revolutionizing an industry, doing it better, faster, and safer than their predecessors. CryptoCompare offers a great example of what they call “buzzword salad”:
Our decentralized blockchain-based platform will disrupt the landscape of cryptocurrency investment while building a trustless network of pseudonymous users that leverage swarm intelligence technology to provide real world financial services in a tokenized ecosystem.
Sounds impressive, doesn’t it? But what does it really tell you about the project? Not much beyond the fact that it is blockchain-based and fintech-related. If you were thinking about investing in the project described above and had to explain to your partner/colleague/friend what the project was about, what could you say?
If a project’s whitepaper and other marketing materials are so chock full of buzzwords that you’re left with more questions than answers, that should serve as a warning that there might not be much substance to the project after all. At the very least, it should be an indicator that you need to do some more research and ask some more questions.
4. Are They Promising / Guaranteeing Profits?
Let’s face it – nobody invests in an ICO because they want to lose money. We all want to profit from our investments but it is important to be wary of unrealistic and outlandish claims of guaranteed ROI, promises of token appreciation, exponentially increasing dividends, etc… There is no guarantee of profit when you invest – whether it is in an ICO, stocks, commodities, or any other kind of asset. In fact, the only thing that is 100%-without-a-doubt guaranteed is that you are risking your money when you invest.
It is an unfortunate aspect of this industry that where money flows, scams will inevitably follow. One of the most well-known examples of an ICO-turned-scam is BitConnect.
For those that are new to the crypto scene or simply just don’t remember, BitConnect burst onto the ICO scene in December 2016 and by the end of Q1 2017 they were well on their way to becoming one of the best performing cryptocurrencies on CoinMarketCap. In fact, at its peak, BitConnect (BCC) was trading at more than $500 and boasted a market cap of more than $2.9 billion.
BitConnect promised its investors up to 40% ROI per month and implemented a 4-tier investment system where the larger an investor’s initial deposit was, the more profits he or she would earn and with greater frequency. If everything BitConnect claimed had been true, a $1000 initial investment would have resulted in more than $50 million in just three years’ time.
Ridiculous, right? But people bought into it. They saw what they thought was an opportunity to get rich quick and they fell for it – hook, line, and sinker. Like all scams of this nature, however, it wasn’t sustainable. In November 2017, the British Registrar of Companies threatened to shut down BitConnect unless it could provide “cause to the contrary.”
While BitConnect was able to spin the development as “fake news” to a degree, they couldn’t downplay the cease and desist order handed down by the United States’ SEC in January of this year. After that, it was all over but the crying.
Remarkably, BitConnect is still trading on one exchange – albeit at a laughable $0.31 per token.
Moral of the story: If it sounds too good to be true, it probably is.
5. Is the Token an Integral Part of the Platform or an Afterthought?
This ties into the first item in the list. When you are trying to decide whether or not to invest in a project, ask yourself whether or not it could still operate without its token. Take Ethereum, for example. Its public blockchain could not function without Ether. Most projects and platforms can’t make the same claim. Sure, they can integrate the token with their platform, but that isn’t the same thing as being integral.
One type of ICO that often fails in this respect is what I like to call a ‘bolt-on’ ICO. Tying neatly into the first item in this list, a ‘bolt-on’ ICO is what you get when you have an existing business that wants to raise funds – whether it be for expansion, R&D, or just plain greed. Someone in the company has heard about blockchain and about how much money is being raised through ICOs, so they figure out a way to add a blockchain component to their platform/service (or announce ‘future plans’ to do so) and BINGO! Time to launch an ICO.
Keep in mind that a project doesn’t absolutely have to have its token function as an integral part of the platform to be legitimate. NAGA is a good example of this. It started out as a publicly traded pre-existing company that developed a blockchain-based wallet and trading platform. While their token (NAGA Coin) can be used on these platforms, it doesn’t have to be. You can use other cryptocurrencies and still use the platform.
So on its own, a non-integral token is not necessarily a sign of a bad ICO, however, if a project is already throwing up red flags and then you can add this on top of it, there is every probability that you should not be investing in it.
So what is the takeaway from all of this? Do your due diligence, don’t believe the hype, and please – PLEASE – don’t invest more than you are prepared to lose.
Do you agree with the questions above? What else should investors take into consideration before investing in an ICO? Let us know in the comments below.
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