Initial Coin Offerings (ICOs) have entered the mainstream investor space, raising more than $6.5 bn alone in the past 12 months.
The hype surrounding token sales is significant, and ICOs have certainly piqued the interest of thousands of investors and participants around the world.
When stripped back, ICOs are start-ups looking to raise capital. But the way this is done differs to traditional fund-raising, providing a potential minefield for investors and participants to negotiate.
Here, we answer ten of the most important questions investors and participants should consider when deciding whether to become involved with an ICO.
1) How original is the project and how well is the white paper constructed?
How original a project is will tell a lot about its potential, as well as the people behind the team. The project’s whitepaper should provide all the information you need to gain a full understanding of the project, from idea behind the product to the tokenomics.
When reading the whitepaper, consider whether it is an articulate, compelling and innovative report, or whether it is just a technical document. It’s also worth noting that in the ICO space, copying and plagiarism are rife, so be mindful of this.
The originality of the project is vital; if it’s not, then it is wise to question the motives, creativity and integrity of the team behind it.
2) How good is the team?
The team behind an ICO, and their experience and background, is paramount to its success. A genuine, co-located team that has members with relevant experience and a track record of achievements is what you should be looking for. This is especially true for the development team and advisory board.
3) Do they have a proof of concept or a minimum viable product?
ICOs are in the business of raising money, but their core purpose is to raise money to bring a product or service to the market. Before investing or participating, learn whether there is a proof of concept (POC) or a minimum viable product (MVP).
A POC is generally a technical demonstration of an idea, whereas an MVP is closer to a prototype that represents a version of the actual product.
Whether a project has a POC or MVP is a significant indicator that demonstrates belief in the idea and investment made to develop it prior to seeking funding. Crucially, it proves the viability of the proposed project. If a project lacks one or both, you should consider this as a red flag and avoid it.
4) If you take the token or the Distributed Ledger Technology out of the concept, will it still function?
It’s crucial to keep in mind that when participating in an ICO, you are buying tokens and not a stake in the company. If the token has no function, then there is no need for an ICO. As a participant, make sure you ask yourself if the value proposition of an ICO is directly linked to the tokens sold. If it’s not, then you should be asking who needs or wants the token you are thinking of buying.
5) Is the main reason for doing an ICO to provide a return to investors?
A common and recurring theme during the meteoric rise of ICOs has been the pervasiveness of fraudulent practices. If an ICO’s main documentation and community engagement are skewed towards returns on investment over the underlying problem the project seeks to solve, then you should question the credibility of the token sale. Guarantees of high returns, rather than focusing on project goals, is a hallmark of fraudulent schemes.
6) Do the tokenomics make sense?
Tokenomics is the design of a token and the set of rules of the blockchain ecosystem where it will be used. Key things to consider in this regard are:
- Do the number of tokens give a realistic valuation of the project?
- How will the supply of tokens impact your investment over time?
- Will there be additional tokens released, and whom will these go to?
- What governance and community engagement has been attributed to the token holders?
- If the token utility offers a return in the form that mirrors a security, then it will likely breach many financial regulations and caution is advised.
- If the token usage is unclear, not well explained, nor defensible, there is weakness in the model.
- Does the token enable a real peer to peer connection between the users?
- Does the token enable the autonomous distribution of other benefits to token holders?
Answering these questions will give you a good indication of whether or not the basic tokenomics will facilitate a possible return on investment in the future.
7) What is the marketing and PR budget and what is the current presence?
New ICOs emerge on an almost daily basis, making the space increasingly crowded. These days it’s no longer enough to have a great idea backed by a credible team. A strong, strategic and well-funded marketing campaign and community management strategy is essential for a successful ICO.
A proper allocation of resources to marketing and a breakdown of how this will be used is a key indicator of how well a project is likely to do. This also means a promising ICO will have a powerful social media presence, and attract meaningful media coverage.
8) Who are the advisors?
It is common to see a long list of industry experts on a panel of advisors for any given ICO. This is a good thing, of course; having a panel with experience and a proven track record in the industry gives a project added credibility. However, many advisors are guns-for-hire, who often receive token allocations for simply having their names listed.
We recommend taking the time to research advisors, and ascertain whether they are actually involved in the project, if they have the experience to bring value and what they have said about the project/token sale to date. Finding this out is beneficial not only for determining the quality of advisors, but also the motivation of the project and the team behind it.
9) What Distributed Ledger will they be using, and what is the benefit of this ledger?
Simply initiating an ICO does not prove that a product necessarily needs blockchain. Certainly, blockchain technology and decentralised applications have the power to revolutionise countless industries. Yet, equally, there is no universal law that states this will always be the best option.
Make sure you have an understanding of the distributed ledger underlying the tokens, and how it benefits the project. The role, purpose and features of the token will determine the DLT platform used. For example, some platforms cannot deal with the frequency and size of micro-payments and therefore makes such transactions uneconomic due to high friction costs and volatility.
10) How much are you willing to lose?
Having considered the above, the final question you must answer is how much you are willing to lose. Any investment is a risk, and ICOs are no different.