The ICO excitement that has captured the imaginations of crypto enthusiasts across the globe has yet to lose its momentum. After a strong start to 2018, with fundraising eclipsing the sums raised in 2017, investors are growing more discerning when picking new allocations for their crypto capital.
When considering the majority of coins issued through a token sale go bust within a few months of completion of their fundraising event, it is the investor who often loses. The question is, how does one improve the likelihood of investing in a successful ICO?
Breaking Down The Data
Through the ICO (Initial Coin Offering) crowdfunding vehicle, many a blockchain startup has managed to raise funds to fuel the development of their blockchain-based solution. However, with over 80.0% of blockchain startups not surviving beyond the ICO phase ,investors stand to lose a significant amount of capital to a scam or poorly planned project.
According to findings from analysis conducted by blockchain research outfit TokenData and investment fund Fabric Ventures, the ICO market brought in $5.60 billion US worth of speculative investments in 2017, far outstripping venture capital investments. The ICO feeding frenzy, despite increased regulatory scrutiny, has thus far showed no signs of abating, raising $11.75 billion by June of this year.
If one takes into account the statistical likelihood of the majority of ICO’s (which usually rely on investors’ speculative confidence as opposed to an actual working product) going belly-up, it goes without saying that a great number of investors are going to be left ‘holding the bag’.
Owing to the fact that most ICO investors usually have no financial background or investment experience and are, more often than not, attracted by the allure of potentially buying into the next Ethereum, they tend to neglect the due diligence required to make an informed investment decision. Oftentimes, these poorly planned strategies result in disastrous outcomes.
With 55.8% of blockchain startups flopping within 120 days of completing their initial coin offerings, it would behoove investors to build and complete an ICO checklist. Falling into major ICO investing pitfalls and supporting a dud ICO can lead to the rapid loss of funds. While no strategy is absolutely ‘fool proof,’ avoiding these common mistakes when participating in an ICO can lead to better returns and results:
1. Buying Into A Mere Idea
If you’re investing in a project with a pretty website and a jargon-laced whitepaper that has not produced a prototype or presented its source code on Github or other forums for public scrutiny, how can you be sure that the project’s blockchain or smart contract truly exists? If the company has made no effort to prove their concept or their team’s blockchain programming abilities, the odds of them simply making off with your money are significantly higher.
Investors are often tricked by the rambling technical jargon used in a project’s whitepaper, whereas the more legitimate blockchain projects opt for simple language to explain their concept in as concise a manner as possible. Bitcoin’s whitepaper was just 9 pages long for example.
Another aspect to search out along these lines is a clear and well-planned roadmap.
2. Buying Into An ICO Project With A Dubious Legal Structure
Sometimes a blockchain operation will register their company in a country that best suits the needs of the business they will be conducting, as with ARK.io, which became the first crypto company registered in France. Other times, an outfit looking to conduct an ICO will not be as forthcoming and transparent as ARK.
Some companies incorporate in a different territory than they plan to operate, often registering shelf companies, simply to escape legal ramifications for their unsavory activities. These types of ICOs will often not place their business address on their website, raising a serious red flag that should not be ignored. Although the idea of anonymity is synonymous with cryptocurrency’s earliest days, this shouldn’t be the case with a serious investment.
3. Not Scrutinizing The ICO Team
Scam ICO’s will often not list their team, or if they do, populate the team with false members and fabricated credentials. In such a case, the onus to investigate and verify these claims falls squarely upon the potential investor.
If the listed team members have no social media links like Facebook, Twitter, or LinkedIn then it’s probably best to give the project a pass. However, supposing you do uncover their social media profiles and it turns out they make no mention of the project, the company may be making false claims to ensnare unscrupulous investors. Regardless, it’s probably worth doing a little more digging and diligence before making any decision about an ICO, even if the team looks entirely legitimate.
4. Investing In An ICO Project With No Real Business Case
It helps to invest in projects that otherwise could not have been possible without distributed ledger technology. If it’s going to speed up international payments like Ripple or Stellar Lumens or streamline logistics, then it’s may present a worthy project for investment. If it’s designed to encrypt your emails and charge you a token every time you send a message when non-blockchain platforms already accomplish the same activities for free, then it’s probably not worth exploring.
Always look for projects with potential for real world impact that are not only relatable, but also accessible. Any successful blockchain-based launch will ultimately depend on the size of its audience, and adoption is key to unlocking any one solution’s true potential.
5. ICO Projects With Unclear Token Distribution
If nothing else gives the investor insight into the ICO team’s intentions, their token distribution plan should shed a little light. A scam operation will sell a large number of the project’s native token in exchange for a single ETH, which may sound like a great deal at first if one takes the possibility of future appreciation into account. However, offerings with more than a hundred million coins in circulation usually take longer to appreciate in value. These aren’t always scam coins however, as many companies tend to focus on oversupply to keep the cost of using their platform reasonable.
Scammers may also opt for a token distribution structure that favors the developer. This means that the majority of coins the project generates will be held by the development team, with the intention of cashing out based on the coin’s future value gains after it has been sold to unwitting investors.
A Changing Game
With the ICO model proving a powerful fundraising vehicle for startups operating in the blockchain sphere, authorities in the European Union and United States as well as other territories are stepping in with regulatory framework to curb the ‘Wild West’ style free-for-all environment scammers thrive in. Apart from protecting investors from losing their shirts to fly-by-night coin offerings, it will also help improve confidence in the entire blockchain ecosystem by adding some measure of oversight.
The ICO market of the future will likely be more standardized and offer scant room for bad actors to operate. However, until such a time, it is best to err on the side of caution by checking off all the due diligence boxes before getting involved.