Putting money into cryptocurrency projects is a new, exciting, and quite frankly scary method of investing.
Don’t get me wrong, I think the implications of crowdfunding are huge – while before now only accredited investors with a minimum of $1 million in the bank were the only people legally allowed to partake in venture capital funding, tokenized projects allow just about anyone to invest in just about anything. It’s pretty great.
Of course, it comes at a cost. A Wall Street Journal report found that 1 in 5 ICOs were straight up scams, and that’s not to mention the ones that simply don’t have a valid business plan. Most ICOs are going to fail, let’s be real – so how do you know if you’re making a good investment or not?
The answer is due diligence and information, two things that any VC capital firm or accredited investor is very careful about. Of course, the space has been plagued by scams for the exact reason that the general public are less inclined to pursue those things, with a lot of over-eager people vulnerable to predatory marketing tactics aimed at screwing you over and leaving you broke and untrusting of the crypto market.
ICO stands for Initial Coin Offering. Essentially a new project can seek funding from international investors in the form of cryptocurrency. In return, users typically receive the crypto-tokens attached to the project. The value of the tokens is, broadly speaking, related to the value of the project overall.
Sounds a lot like securities? In some cases it is, leading to regulatory problems and concerns that authorities like the SEC in America might be able to legally shut a lot of crypto projects down.
The saving grace is the definition of most ICO tokens as “utility tokens”, not “security tokens”. A security is a tradeable asset like stocks or bonds. Stocks and bonds represent the value of the underlying asset – an Apple stock is worth a direct portion of the value of the Apple company, plain and simple. While arguably a loophole, cryptocurrency tokens are aimed at being utility tokens – the token doesn’t represent the value of the project directly, but acts as a coupon for services provided by the project.
For example, Ether tokens (which users bought at a discount rate during the Ethereum ICO) allow people to pay the “gas” prices on the Ethereum blockchain, meaning the tokens are used to pay the costs incurred by computers running complex processes such as queueing and executing the commands in smart contracts. The token isn’t just an Ethereum stock, you actually need Ether tokens to operate the platform, reclassifying the tokens in legal terms to safer waters.
So, typically users will send cryptocurrency (often Bitcoin or Ether) to a project and receive a discounted amount of new tokens in return. The project probably converts the cryptocurrency received into fiat currency, and if you’ve made a good investment, they’ll use the funds they raised to develop their project into something that will generate profit, and when the token you’ve bought becomes listed on major exchanges and is a necessary tool used to operate the new project technology, demand will increase and drive up the price, offering you a good ROI.
Or, you know, they’ll take your money and replace the information on the ICO website with the word “penis”, to let you know that you’ve been truly screwed. That’s called an “exit-scam” (taking the money – not sure what the penis thing is usually called), and they can be avoided by doing your due diligence and having an awareness of what to look for in a good ICO.
Features of a good ICO
Without any further ado, let’s get to grips with exactly what you’re looking for in a good ICO. Before we start, it’s important to remember that community hype and “Fear of Missing Out” or FOMO are two of the main causes of people jumping in to an ICO with their eyes closed. The crypto-community is full of paid shills (people covertly hired to market a project by pretending to be an enthusiastic community member). Shills will flood message boards, and even have conversations with each other for the benefit of others, with one shill being initially skeptical only to be “convinced” by another.
Between forum shilling, fake news stories, and pump and dumps designed to manipulate price and then crash it when enough people have bought in, there’s a lot to be wary of within the crypto community. Don’t trust anyone telling you to buy into a project, just look into it yourself and do your homework. Otherwise you will get scammed, and it will suck.
1) The project has a use case
What do I mean by use case? I mean the project is actually a good idea, and proposes to do something useful that makes sense. This is probably the aspect of due diligence that is most open to interpretation, and it’s best to combine your thoughts on the use case with the other aspects of due diligence, but if a project doesn’t seem like a necessary invention or if it’s simply too complicated for you to understand, pass. There are so many ICOs out there, it’s worth waiting until you’ve found something you’re sure people will actually want to be involved with.
Good use case example: Unibright
Unibright’s ICO is now closed (don’t want anyone to think I’m shilling in my anti-shilling article!), and I personally didin’t invest in it. I wasn’t 100% sure if it was going to be a good investment, but I was sure that the project use case is solid, and that was providing templates for creating smart contracts without having to hire a developer. That’s a smart move for business integration (blockchain devs are expensive), and while it might be a bit ahead of its time as of yet, I think it’s a good use case.
Bad use case example: BitCar
This is just my personal opinion, but tokenizing luxury cars on the blockchain just doesn’t seem like a good, useful idea to me. Regular cars depreciate in value, and while luxury cars can be maintained in such a way that they become more valuable, the process of a company physically buying fancy cars and storing them somewhere so they can sell tokens that represent the value of the car without being classed as a security so that people can own part of each car and hopefully earn money just seems… dumb. Frankly it also seems to be inspired by the lambo meme culture to an extent. Anything convoluted or seeking to capitalize on crypto memes is fun on the surface but not necessarily going to be a good move as an investment – remember, in this case you’re buying tokens, not cars. Speaking of which…
2) The token has a purpose beyond fundraising and a low supply
ICOs are a booming trend right now, with projects suddenly freed from the strict regulations around securities and suddenly free to raise millions of dollars in the almost entirely unregulated ICO space. That’s great – for the projects. It’s obvious why a project would want you to buy their token, but why would you want to buy it? What does it do? It’s crucial that the token has a use case beyond simply making enough money for the team to develop their project. Sure, the funding could help to create a valuable project, but you could be buying into the most valuable technology in the world – it won’t make you your money back unless the token is inseperable from the project.
You want to look for projects that hinge on the value of the token. You’ve heard of whitepapers, the investment documents providing the details on the ICO. Don’t skim the token section – if the purpose of the token is skimmed over or vaguely phrased in the description, odds are it doesn’t really do anything, meaning no-one will buy it, meaning it won’t increase in value after the ICO is over.
Beyond that, it’s good to be aware of the effect that the total supply has on the price. ICOs often release hundreds of billions of tokens in their ICO – the more, the merrier, right? Not really – take Bitcoin, for example. The total supply is 21 million, which is one of the factors that contributed to the price increasing so much. Supply and demand is key here – there are comparatively few tokens, so if people do want them, they becomes rare and therefore expensive. If you’re interested in a project, check the total token supply and compare it to some other projects with valuable tokens. You can do that on coinmarketcap.com or livecoinwatch.com.
3) The project has a good team
This is an area that I see people skimming over sometimes, but it’s absolutely crucial to the success of the project. I’ll keep this short: Check the project description and find out what they’re trying to do. Tokenising real estate? You’re looking for real estate developers with years of experience. Creating a cryptocurrency video game platform? You need all-star game developers on the team. Ask yourself, do the team members have a lot of experience in that area? Like expert levels? If the answer is no, move on.
4) The project has a good website and whitepaper
This is the part that often puts off potential investors. And by that I don’t mean “puts them off from investing”, I mean “people are put off by reading long documents and will just randomly gamble their money away regardless.”
Don’t! Just read the damn thing. Break it into smaller sections if you like, and take some notes. Go over everything on the checklist. You’re looking for a well-written white paper that doesn’t use flashy marketing language.
Note: NEVER invest in something that guarantees returns. That’s a scam, every time.
The website and whitepaper should have no errors and should look like some time and money was spent on each. The whitepaper should leave no question regarding team, token, or project unanswered. Don’t skip that part – it’s important.
5) The project needs a blockchain
Yeah. Sometimes it just doesn’t.
Don’t get me wrong, not all ICOs are crypto projects, but the vast majority at the moment are, and they run on blockchain technology. Why? What can blockchain do for the project that normal IT can’t? I recommend joining the telegram group of an ICO (usually found on their website) and asking them exactly that. Too many projects are jumping on the ICO bandwagon as a way of making easy money, and a lot of tech projects are being launched that have no business being a blockchain project.
Reminder: a blockchain is a ledger that creates records that cannot be altered. Generally it requires a comparitavely huge amount of storage space to keep the ever-growing amount of data. It’s great for tracking transactions and supply chains of goods, or fighting censorship – it’s not great for centralized projects that require a lot of data storage, for example.
The jury is still out on blockchain even among worldwide adoption, so to say that a project doesn’t necessarily need a blockchain doesn’t mean it won’t make a good investment – but it’s definitely something to be considered.
So don’t just rush into any project that catches your eye. Do your homework.
Don’t want to end up like this guy, eh?
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