Finding Good Ico’s
How to analyse ICOs –from an ICO consultant!
With 2100 ICOs being launched in 2017 alone we have to stop thinking of ICOs as niche unique product offerings and start looking at them for what they are, businesses. Like any other business, the funding for their business model is completely based on the unique value proposition and market saturation.
For this reason, there are some main factors we would use to assess the viability of an ICO as if it were a company in any other industry: their Market (what do they do), any partnerships, team, decentralisation.
1. What does the ICO do? What is the market sector the ICO is trying to disrupt?
Many ICOs will claim that they will “disrupt the market” in one way or the other.
For this reason it is good for an investor to understand how the market they want to disrupt works, and it is generally advisable to only look at ICOs where you’re familiar with that industry sector.
Google search on the element they want to disrupt, and see if any market leaders are debating this issue at hand.
If there is very little information available about this supposed need, this gives you an indicator of the interest in the market – i.e. that it may be possible, that there simply isn’t much interest in that field. Interestingly enough if there is little information available but there is one dominant player in the market this might actually be a good thing, as it shows a large company would have researched the market and potentially found a market need.
Research their product offering. If it feels outdated, then it is outdated. A good example of this is accounting software, where big market players have horrible archaic systems, and ICOs and Fintech companies are now rallying around this to improve the market.
Look closely at the ICOs’ explanation of how they will disrupt the market. One would expect some form of SWOT analysis or competitor analysis to go with their whitepaper. If this is missing then it can be assumed that either they haven’t checked who else is working on a similar product and why they are better, or that they know there are better products and competitors out there and don’t want you to know this. Unfortunately there are many investment type ICO platforms that don’t do this and miss out on the best practise in the market.
To summarise, when we this of the market an ICO is working in, the following checks should be performed:
- What are business leaders saying on this topic – is it a hot market sector?
- How is the market share distributed amongst market leaders – are there any main companies already dominating that sector? For example, Amazon is already dominating online selling, and Ebay online auctions.
- Is the market quickly adopting the sector the ICO is in. For example, VR is quite hot right now and there is an increasing demand for VR products and offerings.
- How does the ICO compare to its competitors? Has the ICO addressed this?
- Is the ICO realistic in its offering and goals for capturing market share?
- Are there users/ consumers already adopting similar products in the market?
2. Does the ICO have any confirmed Partnerships?
One strong indicator for market adoption is the backing from known and existing market players. Does the ICO have a partner in the market that is confirmed or willing to work with them, or use their product. A big part of the success of an ICO is its use case. If the ICO already has one or more companies willing to adopt their product, that is a strong indication that the product is solid.
3. Team and advisors
In most companies, the team usually accounts for 40-50% of the company’s running costs. The key players in a company can also have a disproportionate influence over the company’s failure or success.
An ICO can also be hugely guided and helped by having known and influential advisors backing it.
Some things to look out for in the team of an ICO:
- What are their key skills?
- Do they have any experience in the specific industry?
- Who are their developers? What other projects have they worked on?
- Who is in their advisory board?
- Do the team members list this project on their Linkedin, and are they genuine Linkedin pages? Or are they otherwise known publically or socially?
- How are the team members paid?
- Are the team members even genuine?
The reason to ask these questions boils down to feasibility and credibility. If a team only has one developer to create the complete project than this harms the feasibility of their project.
On top of that, always do a thorough background check on the CTO – Chief Technology Officer. A thing which happens strikingly often is having a “CTO for hire” – someone that has worked on numerous of projects in the last 6 months is not a CTO who is adding value to a project, but rather a paid name to stick on an ICO project.
It’s also very important to check if the members of the team have their project listed in any of their public verified accounts. More that once developers in scam ICOs have used Linkedin profiles to increase the projects credibility. Fake Linkedin accounts with amazing credentials have also been used with the same effect.
If you are planning to invest in an ICO, make sure to check these points out and also spend an hour or so checking their social feed and telegram conversation to check if it matches up.
Finally, check the advisory board. The advisors are as important to the success of an ICO as the team. ICOs are usually put together by young, entrepreneurial and dynamic people that might not have the most extensive experience or resume. But if they have a group of senior advisors from the industry and the blockchain space, this gives a massive boost to the credibility of the ICO.
Again in this case, check if the advisors are actually associated with the project and what their involvement is.
Finally check the payment of the team and advisors. For me personally, if more than 15% of the tokens/capital is used to pay team members than that is a definite red flag. Although I stated earlier that the team costs are usually 40-50% of the costs in a company, part of this should be paid for by revenues of the project rather than just by the funds raised by the ICO. Part of this means that the seed capital or money raised by the ICO, should be used to create a healthy sustainable business. This means a tight monetary policy and maybe your team won’t get rich the first year, but that’s how you run a business.
The final part of my analysis of an ICO is understanding their token ecosystem. There are four main points to look into, to see if an ICO is truly decentralised, and how the infrastructure of its company can even work.
- What can you do with the tokens?
- How would their system look like with a small number of users?
- How would their system look like with a large amount of users?
- What would happen with the price of the token in scenario two and three?
The first question “what can you do with the token” touches on how the ecosystem is designed. More often than not a token system is designed in order to generate profit for the team behind the project. Although there are no objections to making a bit of profit, this stems against the ideology of a decentralised organisation, which in theory should focus on getting the best results for its users. The best scenario is when the users are the producers in the system as well as the consumers. In game theory, we call this ‘alignment of interest’ or an ‘evolutionary stable strategy’. We won’t go to deep into this topic, but needless to say this the most optimal outcome.
For question two and three, we look at how the system would behave if there are a lot of users or only a very few. Most ICOs would work and are based on a position of having lots of users. With thousands of ICOs now in the market and only so many users to go around, only the best will actually have a large user community. Which in itself isn’t inherently a problem, but if a system needs critical mass to function it is. To run the parallel, If I would create a new decentralised Facebook tomorrow, the chances of my platform being more widely used than Facebook are nihil. For this reason I wouldn’t invest in an ICO that would need critical mass before it can work. Imagine also the same ICO with an enormous user base, but with a token that makes it very expensive to use the platform, this would be a problem to sustaining an ICO. One recent ICO requires a smart contract to be deployed every time you use the service. Taking into account that deploying a smart contract will cost you anywhere between $50 and a $100, this has to be some great service to make that a profitable use case.
Finally, how do the developers propose to deal with fluctuations of token prices? If the price of a token shoots up, will the product be too expensive for the platform to run or have many users? Or would volatility of the token prices put people off using the platform if it means needing to face the volatility of that token? Is there some mechanism in place to counter that? Tokenomics is a large field with many factors and variables that need to be taken into account, and not every ICO spends a lot of time considering the implications of their choices regarding their tokens.
In summary, do a quick check to see if the market is ready for this product, check the background of at least some of the team members to see if they can live up to the task, and finally see if their product is suitable for a decentralised governance.
This whole process might seem like a hurdle to jump before investing in ICOs but consider the risks of losing your investment if you happen to invest in a scamcoin.
By Alex Apeldoorn
How to minimise your risks when investing in ICOs
Investing in ICOs is always risky. In addition to all of the risks of investing in crypto – the high volatility, the lack of regulation, problems with exchanges, security of storing cryptos and the potential for hacks – investing in ICOs is far riskier.
Some of the risks of investing in ICOs:
ICOs tie up your money for often unspecified periods of time until they are ready to hit exchanges. Many ICOs don’t even reach exchanges. There have been too many cases of ‘exit scams’ where the founders run away with the money raised straight after the ICO, causing investors to lose everything. Many just don’t work and just drop in value, for many reasons, such as poor planning, the developers leaving the project, or a team who don’t know what they’re doing. Many ICOs have just been run as ‘get rich quick schemes’ for the founders, and whilst their intentions may also involve getting the ICO traded on exchanges, so that investors can cash out, they just don’t follow through with the claims promised on their whitepapers.
Some legitimate ICOs will always drop in value, for various reasons- including competition, the market, regulation and others will hit unexpected issues which means that investors don’t profit. However, there are a lot of things you can look out for to minimise your risks of getting caught by a scam ICO, and to help you see some of the problems with ICOs that will most likely lose you your money.
Here are some questions to ask yourself, and aspects of the ICO to research, before investing in any ICO broken into sections: about the ICO, their fundraising goals, the team and advisors, and about the actual coin or token itself.
Key questions to ask before investing in any ICO
Before investing in any ICO, you should be able to confidently answer all of these points, to reduce your risk of losing your money in a bad ICO investment. These questions will help you rule out the majority of ICOs straight away, with a little research.
- Why are they launching this ICO? Is there any real-world purpose to it?Can you imagine this project having any value or use in 12 or 24 months time, or its token being actively traded on exchanges? There are hundreds of such ICOs, trying to raise funds to sell banana chips or make up products, or other uses for which they simply don’t need their own cryptocurrency launch. Some ICOs are too niche and localised to specific areas, but is it likely that a small project limited to a niche or a particular city will do well in the long term?
- Does the ICO need its own cryptocurrency?Is there anything about this ICO, that would not be possible using fiat currency, or even an existing crypto such as Bitcoin? Is it realistic, that people would buy this crypto token, to use this product, or is it more likely that there are similar products or concepts already available that one can buy with fiat?
- Does blockchain even benefit this ICO?Many ICOs advertise that they are using blockchain, and in some cases even creating their own blockchains, but where there is absolutely no benefit to them of using blockchain, and in some cases, the use of blockchain, especially with its current limitations such as storage capacity on the blockchain, might actually be detrimental to the product. I.e. is the use of words such as blockchain just hype, designed to promote the ICO rather than having any use.
- Are the team real people with sufficient (or any) experience in crypto, blockchain and the
industry they are operating in?Can it be confirmed, that the team are actually real people? Many ICOs hide behind anonymity, or even create fake profiles of fake people. One recent ICO used the actor Ryan Gosling as the photo for one of their fake team members! Do the team have provable profiles on social media, or Linkedin, or are they already known and respected in crypto or in their industry? If not, this should be cause for serious concern. If you are sure that the team are real people (and not fake profiles and made up names hiding behind stock photos), do they have the experience needed to make this project work? Many ICO teams have almost zero relevant experience, and are literally just individuals looking to get rich quick.
- Are the advisors real people?Are the advisors shown on the whitepaper and website even aware that they are being used by this project as advisors? Many ICOs have put the names and faces of famous people in crypto to their websites- but without informing these people- they are just stealing their profiles and hoping they don’t find out! Have the advisors just been paid to put their names to the project, or are they actually invested in the project and motivated to make it work? Is the ICO paying celebrities to put their name to the ICO? Don’t be fooled by this- just because the ICO has good marketing does not mean that it’s a good project or that it will do well, or that the celebrities will benefit the project in any way other than helping to raise initial funds.
- Do they already have any customers, or partnerships in place?I.e. if am ICO is proposing launching a credit card in partnership with Visa, does it actually have that partnership confirmed by Visa? Or are they just using the Visa logo? Or are they just giving their vague hope that they might one day be able to partner with Visa but have no plans or idea of how or when this might happen? If there is any doubt about any potential partnerships, it is best to exercise caution.
- How much is the ICO looking to raise?Are they just being greedy or unrealistic? Could they make do with a lot less money? Have they already raised any funds? If institutional investors or funds have already invested in the project, it is more likely to have support and pressure to succeed. Have the team invested any of their own money (or time) already – i.e. do the team have a vested interest to see the project through? Are they being clear on how much they want to raise, and what they want the money for? Is there a clear roadmap of how they will develop the project and spend the money on? Do they need the money all upfront, or would they be able to make do with stage fundraising, so that investors don’t have to tie up their funds for so long? What is the ICO market cap of this project, relative to similar existing projects?
- Why do they need to do an ICO to raise money?As opposed to raising funds by any other means or not raising funds at all. Do they even really need the money? Or is this just a made up concept designed purely to raise funds from an ICO? Would they not be able to raise funds from VCs or angel investors? Many ICOs exist purely because the founders know, that they would never be taken seriously by experienced investors, but know that because of the hype and lack of regulation around crypto, they might be able to raise money from some unexperienced individuals who fall for their pitch.
- How long has the company been around?When was the website domain registered? Do the founders’ Linkedin profiles show how long the team have been dedicated to the project? Is there any proof that the team have been committed to this project for a while – i.e. such as raising VC funding, or the company having been in existence for a long time? Do they have a project or protocol that is already working, with customers and an active use case, or is it simply an idea on paper at this stage? Many ICOs are run by teams who just got together, only recently bought the domain and had a website built, have no or limited previous experience in the field, and most importantly, haven’t invested any of their time and money into creating a working project before going to ICO. Most ICOs are literally just ideas on paper. I.e. – if the project fails, they lose nothing, if it does well, they get rich, at the expense of their investors.
- How long will the ICO be holding your investments for?Is there a clear roadmap? Does the ICO have any incentive to release the tokens on time, to get the project up and running, and to get the tokens tradable on exchanges so that investors can cash out or release their initial investments? Where will the funds and tokens be held until distribution – i.e. do they have safe storage? Many ICOs have been hacked and investors funds lost, and not all ICOs return these funds?
- Is there any hope that the project or product in the ICO can actually work or have a real world
use?A lot of ICOs use buzz words such as AI or VR or mention futuristic tech, or ideas that they want to implement on a blockchain. However, in reality, some of these concepts are simply not possible with the technology we have today, or even, don’t have enough of an interested user group to get enough customers to justify the money they are looking to raise. Some ICOs bring nothing new of value at all, and stand very little hope of succeeding. For example, Amazon, Ebay, Google and Facebook all have their issues and all are heavily centralised- however, they have a huge market hold, and it is unlikely that their dominance or market share will be changed any time soon, and especially not by a small or unknown ICO claiming to want to disrupt auctions or social media etc. And some ICOs really have nothing of interest or value to add.
- Do you understand the field and market the ICO is about?For example, if an ICO is launched about the cruise industry supply chain, do you understand that industry inside out? Would you know if what they are saying is possible? Is there actually a market or use for this product or service? In many cases, it is easy to make an ICO sound good and pitch it as having a large potential market share, but unless it is an industry sector you are familiar with, it might be best to not invest, in case you are missing some fundamentals, or else to do an extensive amount of research, to see if the idea is plausible.
- What are banks, hedge funds, and experienced investors doing?Note- just because a fund is investing heavily into a certain ICO, doesn’t mean that it’s good for you. Large and institutional investors generally get discounts or bonuses on their investments, and so might be paying a fraction of what you are for their shares or tokens. Or, institutional investors might be getting shares in the company, rather than the less valuable tokens that you might be getting.
- How will the coins or tokens be used and distributed?I.e. if the founder or team get a large percentage of the tokens, is it possible that they could just dump them and run? If the devs and team are given a large percentage of the tokens, will they be released at once? This might risk their being dumped on exchanges, dropping the value.