Most of the companies that enter the ICO will not meet the expectations of investors, experts say. How to evaluate a project that decided to release tokens, and choose one that does not bury the investment?
Risk factor: No risk no gain
Every ICO now claims to be new Google and tries to reinvent existing successful schemes on blockchain basis. Since December 2017 this so-called bubble has become a giant hot air balloon which is rising high and isn’t planning to burst. According to coinschedule.com statistics ICOs have raised about $3.8 billion in 2017 and by April 2018 there are almost $6 billion raised already. Being enchanted by the charm of six-digit figures, token buyers forget that most ICO projects fail and investors lose their money. It is supposed to be more dangerous to invest in tokens than in venture projects. It is difficult to estimate exact number but over 80% of ICO projects are likely to collapse or turn out to be a scam, experts say.
The main problem is that not everyone understands that ICO investment will succeed not after a huge amount raised during tokensale but when the project achieves its goals and fulfills promises and is viable in the long run. People simply believe that digitized asset sales can generate funds, and digital assets will be valuable when they go to the exchange, but the sad truth is that most of these so-called utility tokens have no value without a working product.
The situation becomes even more complicated if we consider the lack of independent expertise on the market. Services that are ready to analyze the risks of initial placement of tokens can be counted on the fingers, meanwhile investors can rely only on themselves. If you consider ICO as a financial instrument, you need to understand the subject well. That’s the only way to reduce risks.
Clarify you goal.
You must clearly evaluate your goals. Everybody understands that investing in a good project at an early stage has all the chances to pay off. Especially that works in crypto world where a gain from a sound investment may reach 1000% depending on how long you are prepared to hold and how lucky (or well-informed) you are. You must keep in mind that your crypto token will not double in value overnight. That is unless you purchase a token that is to be listed on major token exchanges right away, but you understand quite well how tiny this possibility is.
Even if your token is finally listed at an exchange be sure not to rush in selling it. There’ll be lots of investors waiting for token to list to sell them right away. You’ll find yourself competing with others rapidly dropping the price of a token.
More realistic and advisable behavior is to hold a token at least for a month, unless the project fails while you wait (but this is the worst scenario, let’s hope for the best) or there’re some issues or problems the project faces. Sometimes it’s better to leave this token rest for a while and switch to the search for a new project. Do now rush to store your tokens in an exchange wallet as it might not be safe enough.
Usually getting good revenue from your crypto assets requires weeks, even months of patience. Prepare yourself, use all sources of information to be well-prepared, don’t hesitate to ask for advice in crypto communities.
The worst approach for a crypto investor is to panic with each market fluctuation. The crypto market is an extremely unstable system and the blockchain whales enjoy the inexperience of investors to provoke them to sell tokens at a low price. There’re several reasons, why people usually sell those tokens too fast:
- They see bad news about the project and panic. You always should remember that there is a big and tough competition at the crypto market right now and some marketing teams use black PR to eliminate competitors, posting false news in communities. It’s crucial to doublecheck everything before deciding on an unprofitable sale
- Some people sell their tokens early planning to get them back later at a lower price. They sell large amount of token that also causes panic. Be sure not to be impulsive when working with crypto-currencies.
- Bounty campaign participants don’t care about token price as they don’t pay for these tokens. They’ll try to get rid of them as soon as the token lists on exchange. That’ll also influence the price.
- Roughly the same thing happens when project offers lots of bonuses or airdrops to create more buzz around the project. Token holders won’t value these cheap tokens and will try to get the profit as soon as they can.
- Some people are so afraid of losing profits and are so unsure of their portfolio that they are ready to sell tokens cheaper than they bought, simply because the general instability of the market does not allow them to calm down. if you decide to get involved, remember, the main goal is to sell at a higher price than you bought it, definitely not cheaper.
Very often the price of a token decreases immediately after the completion of the ICO and shows a sharp increase in a few months. Reliable projects are good in the long run. This is a special crypto wine - the more patience, the better the product.
ICO vs PreICO
Pre-ICO is the tokensale held before the official ICO launch that allows investors to buy tokens much cheaper and often with very nice bonuses. Users can make a greater profit and team gets funds earlier which could be crucial for the project development. But the risks are also higher. Buyers can find out in a year that they have invested in a fake bubble. Or the number of new tokens issued for ICO will devaluate their assets.
Another negative side effect of pre-ICOs is how early investors often sell at ICO prices once a token hits an exchange. In doing so, they still make a very big profit and cripple the token’s price in the process. A pre-ICO is an amazing investment opportunity for a quick buck, but it can hurt the project’s appeal and credibility when large amounts of tokens are sold at bottom prices.
The ICO itself is less risky comparing to Pre-ICO. And you get a chance to see who is participating and decide whether it’s worth trying or not.
Top criteria to evaluate an ICO
First thing you should check is roughly the main idea of the project you’re interested in. Many projects have a very good initial idea that might work in theory, but results that there’s no need to produce it over blockchain. if there are already traditional analogues and they are successful, there is very little likelihood that the blockchain project will work in the long run. A very good question you should ask yourself and community is “does it really need to be decentralized?”. Also should be obvious that creation of a crypto currency in order to create a new crypto currency is doomed to failure.
It’s very important to evaluate team members and check their backgrounds. Be sure to look through there LinkedIn profiles. If there’re no profiles, it’s a great opportunity to stop and think twice. It’s good to know that team members worked before on similar products or in related fields and have a rich experience in developing. A project with team members that lack experience is definitely a red flag.
You should also pay attention to projects that run existing companies with a good reputation. They are guaranteed to have established teams and built-in project management processes. Such a launch pad gives the project excellent chances to moon.
3. Transparency of the budget and roadmap
It’s impossible choose right without checking transparency of the budget. White Paper of any project contains information about how the team plans to spend the investments. Usually the structure looks like this: 50% - development, improvement of the product; 20% - marketing; 20% - administrative, legal expenses; 10% - other expenses. This is just a simple example. You, as an investor, need to check the following:
- The costs of developing, improving the product - they must be at least 30% of the collected funds.
- The cost of marketing - the cost should be within 20-25%.
- They have to plan costs for legal support (5-10%).
- There should not be any strange items that you cannot understand.
4. Working prototype
It’s a very good sign if the project you’re interested in has a prototype to demonstrate. Creating a colorful site with videos and kittens is not enough anymore. ICOs which have a working product are always a good choice. They bring the experience & knowledge to develop the product that they promise to the investors. Also, a big advantage is a Github account with code base which shows a progress.
5. Whitepaper quality
It’s very important to read the projects whitepaper as it’s basically the company’s pitch to a potential investment. This is a business card of the project and it is very important what exactly and how exactly the company describes its project in the Whitepaper. The quality of the Whitepaper shows how serious the team is and how well it can present its project to potential investors. It is also extremely important to pay attention to details and check the facts, as companies are often trying to exaggerate their contribution and the limits of potential growth.
6. Advisors and major investors
Check who else is involved in the project, that might be an obvious quality mark.
7. Publications in the top media
Be sure to check major crypto news resources to mention the project you’re interested in. Publications in respectful media is also a good sign as those media usually have a pull of experts that can evaluate the project and it’s an additional expertise you can get for free.
8. Reviews of the blocking community
You should also check reviews in crypto communities. Look at all the negative posts. You’ll be able to tell, that there are users’ whims (like “their white is not enough white for me”), and that is a serious problem of the project.
Signs of fraud
Here’s a list of reg flags that should immediately stop you from investing in the project (prepared by the Securities and Exchange Commission (SEC):
- “Guaranteed” high investment returns
- Unsolicited offers
- Sounds too good to be true
- Pressure to buy RIGHT NOW
- Unlicensed sellers
Talking about ICOs is impossible to avoid the most common advice: do not invest more than you can afford to lose. You always must keep in mind the probability of complete loss of your investment – that’s the fee for the possible high return.
As there is still no gold standard for project evaluation, the main strategy is to obtain the maximum amount of information about the project of interest. So, your first steps should be read, read and then read more. And after you explored everything you could find, don’t forget to check ICO trackers and ICO communities for additional info. You’re never done with your survey even if the choice is made.
A possible way to explore it faster is to use ICO trackers reviews. ICO trackers themselves is also a good tool for choosing a reliable project. Although we strongly recommend conducting a profound research by yourself, you can use an advice from respected ICO tracker. Good trackers usually hold a whole team of experts that can evaluate ICO for you and provide transparent rating based on clear criteria. Be sure to check if you’re using a reliable tracker. One of the most obvious way to check it is to go to any traffic counter site and see, which platforms a visited the most.
Here’s Top-10 trackers according to SimilarWeb statistics:
Another option to invest with less risk is to use hedge funds. When choosing a fund first thing is to look at the reputation of its founders and their past merits. Funds, as a rule, have a team that weight the risks on the portfolio and the small part that goes to invest in the ICO, invests only after a comprehensive evaluation of the project.
It makes sense to choose large funds that have wallets in the public domain, so you can be sure of the transparency of their operations. Because in the world of cryptofunds there are no auditors, no custodians (institutions that store securities), nor any established infrastructure.
However, as in other areas of the crypto market now, the crypto world is flooded with various scammers that will turn your money into a hole from a donut. Be aware of scammers and always check anything twice.
It should be noted that the model, which in the recent past was used by crypto-currency hedge funds, may undergo changes due to the position taken by the Securities and Exchange Commission (SEC). So, in March, the department sent several funds to the court. The regulator intends to clarify the specifics of the methodology for assessing investments in the field of cryptocurrencies, and to find out whether the requirements for protecting the funds of hedge fund clients are being complied with.
Beginning of a long journey
The boom ICO is moving around the planet, making a serious competition to venture financing. So far, it could not be stopped by the SEC's restrictions and it is unlikely that the Central Bank of China will succeed. Remember that ICO is a high-risk but incredibly fascinating way of investing.
The approach should be comprehensive and cover as much as possible all sources of information. Be sure to explore all sources available and choose whatever suits you the best. Thanks to the SEC’s initiatives American market invents new (some of them even more reliable or more regulated) forms for digital investment.
Many companies are now choosing STO (security coin offering) instead of ICO, they work in close contact with the US regulator, are mostly oriented to American investors, and they guarantee greater reliability and legal protection for their users.
There is also easy way to get rich: airdrops and bounty campaigns. With airdrops you’ll receive free coins just for signing up to the project, which helps marketing team to build strong ICO brand and spread awareness about the project. Taking part in bounty you join marketing team at some point and help promote the project you like, getting coins as a reward.
Let’s not forget about ICO pools that are getting more and more popular every day, allowing investors to combine their aspirations and investment budgets, for example, for the purchase of tokens at the stage of presale.
Choosing a project for investment is just the beginning. It is obvious that the blockchain is Pandora’s box, which talented developers have opened to their trouble and it is here to stay for a long time. Let's try to play our card right and enjoy predecessors of the digital future, which is being built directly before our very eyes.