The quest for the new Apple

The rapid rise of blockchain technology and cryptocurrency has also resulted in the growing popularity of “Initial Coin Offerings”. Over the past two years, several startups have managed to raise tens of millions of euros in a few seconds, making many of their investors very wealthy despite only being active for a few hours. This is something that is impossible in the regular financial market. According to research from PWC, $10 billion was raised in 2017 and $11 billion in 2018, which amounts to an average of $25 million per ICO. The largest ICO, EOS, raised no less than $4.2 billion.

However, several national and international authorities, rightfully, point to the dangers of investing in these ICOs.

ICOs?

ICOs are a sort of crowdfunding, usually for projects on the blockchain. In exchange for an investment, the lender receives coins or tokens. Whereas startups such as Adyen raise money with a normal IPO, only large, institutional investors can participate. ICOs also allow investors with a small budget to invest. However, ICOs often do not have a working product or service yet, and since there is no central authority controlling their activities, there is nobody you can approach when something goes wrong. Therefore, it can be considered risky; research by PWC showed that no less than 81% of ICOs turned out to be scams.

Since money is being raised for the development of an idea in particular, rather than the further development of a product, the prices of the coins made and issued at an ICO are often very low. However, if the product becomes successful, the return will be insane. That is why many people are looking for the “new Bitcoin” or the “new Apple”, whose shares have grown in value by 29,000% since the first time they were issued.

Here are my top 8 tips for finding a good ICO to prevent you from becoming the owner of a bag of coins that are worthless.

1) Team

Despite having a good idea or great product, if someone is surrounded by the wrong team, it will be likely that the startup will still fail. That is why it is important to seriously research the individual founders, team members, partners, and advisors. For example, do they have the relevant experience in crypto and/or blockchain technology and in the market in which they want to be active? Obviously, you want to have people who have years of experience in the industry in which they want to operate and who have actually achieved something in this regard. ICOs have an important extra point that requires attention: does the team exist? There are many cases where the team members and advisers did not exist or were not involved in the project at all, which was often a precursor to a scam (fraud). Therefore, carefully check the Linkedin/Twitter profiles of those involved too. Are they active? How long have they been active? Is it clearly stated that they also work for the ICO? Some ICOs drop the names of important people as being their advisors (such as former Prime Minister Balkenende) while, in fact, those people have had absolutely nothing to do with the ICO.

2) Why?

“Just because you can, doesn’t mean you should” — Sherrilyn Kenyon

Unfortunately, many ICOs have fallen into the “me too” trap; they made a cheaper, faster version of something that already exists instead of developing something really insanely disruptive that perfectly responds to the blockchain. As an investor you, obviously, want the product or service to be really sought after. That is why it is very important to look at the “why” of the ICO. Will the concept possibly replace the competition? Will it be the answer to visible or predictable market demand? Have clear, specific goals been defined? Is it for long term use? Is it market individuals, organizations, companies? Will large, existing companies were not able to develop this much easier, faster and better themselves? The clarity with which this has been described will also have an impact on the team. In the most ideal situation, the team will be able to already show a prototype or proof of concept.

3) White Paper

Thorough deliberation of the “white paper”, a hip term for “business plan”, will be key in judging an ICO. The website can be beautiful and a lot of marketing can be done, but if the concept lacks a strong white paper that explains the concept then you will have to ask yourself whether you want to invest. Apart from the concept, issues such as the background, goals, and strategy of the ICO also deserve attention. It is certainly worth investigating the implementation and development “roadmap”: the “why” described above, the way success and goals will be measured and what potential obstacles have been identified. Furthermore, the legal relationships between investors and the ICO, the issuance of the coins/tokens (how and when this happens) and the financial models are important to validate credibility and reasonableness.

4) Community

A good ICO has or is working on, a large, strong community that is fed updates regularly. That is why it will be good to investigate whether the ICO and the individual team members are active on social channels such as Facebook, Twitter, and Reddit. Many good ICOs also have a good, open support community on Slack and Telegram.
 
 But … is the ICO not active on the largest forum in this field, BitcoinTalk? That will justify the immediate discounting of it as a possible investment. Check this forum too to see how the team responds to questions and comments and whether the people who respond are not brand new members of the forum. A good ICO has no so-called “bounty posts” (paid messages that spread good news). Make sure you are aware of this.

5) Website

Way too many ICOs still use a standard WordPress or WIX template for their website, unfortunately. A website is really an important part of the success of the ICO because this should attract investors and customers. That is why it is important to review the website very carefully. Bad design is often because a team does not want to invest enough time and money in smart marketing. This will be a death blow to the project. Have a good look at the design. Does it look professional? What kind of images has been used? How is the concept explained? Is it easy to understand? Many ICOs try to impress potential investors by using all sorts of weird terms that they often cannot even explain to their own friends. The same applies to the reason why blockchain should be used: this is often farfetched.

“If you can’t explain it to a six-year-old, you don’t understand it yourself.” — Einstein

6) Code

Obviously, an ICO wants to be as open and transparent as possible at the start. The code of the project is an important part of this and which is almost always published on Github. Github is the world’s most popular online tool for collaborating on (mostly open-source) software. The management of it and was recently acquired by Microsoft.
 
You can analyze the code and determine the quality of the ICO in various ways. One way is to look at the number of “commits” (adjustments). Another is to review the “Insights” tab for the general summary of all developments. The consistency and length of the code (functions with more than 50 lines of code must be immediately rejected) and the processed comments are good parameters for quality too. If the ICO does not disclose the “smart contract node”, it is either unstable or the code has probably been copied from another ICO. These are both certainly good reasons to stop considering investing.

7) Token Sale Distribution

When reviewing the distribution of the tokens, you obviously want an ICO that would rather issue few tokens at a low price. When you are looking for an investment that will experience a large increase in the long term, then it must, of course, have the lowest possible valuation and price (review the increase of coins on Coinmarketcap that have a supply of less than 100 million). If the opposite case is you, you would often see that a price drop occurs quickly after the launch of the ICO. This stabilizes the net asset value. You can, therefore, ask yourself whether an ICO that wants to raise 50 million to build a product that will yield 1 million per year is worth the investment.

Also, consider the distribution of the tokens; how many are sold, distributed to advisers or ultimately end up with the team? Some teams take it too far by paying themselves more than 50% of the tokens as a reward for rendered (but yet to be proven) services.

The correct distribution of tokens is linked to the roadmap since every step in the development needs some financing. This folder also always indicates correctly when the tokens are being issued. Will this be immediately after the ICO or only when the beta version of the product has been launched?

8) Seat Of The Company

Many ICOs that later turned out to be scams were hiding behind a “shell company” on a tropical paradise. It is worth establishing when the ICO is seated. Is there a clear contact address and is the ICO really located here? Although the world lacks laws at ICO level, in most countries it is legally possible to tackle fraudulent companies and individuals.

This post does not provide financial advice and should not be viewed as such. It is my own framework and should only be viewed from an informative perspective. Make sure you do your own research before you invest in an ICO!

Jan Scheele is active in the web3 (blockchain, crypto, NFTs, DeFi) industry since 2013. Besides (former) CEO of a web3 scaleup and founder of an advisory boutique (working for governments, family offices and several multinationals), he is Digital Leader at the World Economic Forum and Board Member at the Blockchain Netherlands Foundation (BCNL). He is writing, consulting, speaking and training regularly about everything web3, all over the world. Furthermore, he is currently finalizing his book about the rise and global impact of blockchain technology.