An Initial Coin Offering (ICO) for cryptocurrencies is like Initial Public Offering (IPO) on stock market. ICO is crowdfunding mechanism where a new project sells their underlying cryptocurrency tokens in exchange for other cryptocurrencies like Bitcoin and Ether or fiat currency.
ICOs provide a means by which startups avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges, while increasing risk for investors. ICOs may fall outside existing regulations depending on the nature of the project, or be banned altogether in some jurisdictions, such as China. Learn what an ICO is in more depth here.
One of the biggest advantages of ICO investing is the chance of investing into a new and possibly game changing technology. Many ICOs which have done very well, have provided their early backers huge returns on their investment.
ICOs provide a means by which startups avoid costs of regulatory compliance and intermediaries, such as venture capitalists, bank and stock exchanges.
Most ICOs don’t have any kind of minimum investment threshold or geographical borders, allowing even small investors to participate in the token sale.
One of the biggest risks of ICO investing has to do with absence of regulations in the space. The lack of regulations has made ICO and cryptocurrency space filled with worthless or even fraudulent projects. Making the wrong move and not conducting your due diligence could potentially and likely cost you every last penny you send into that smart contract.
Most projects start the fundraising process even before they have any kind of working product of proven business model, which makes ICO investing highly risky.
In order to maximize your risk to reward ratio you need to conduct your own due diligence. Here we have provided you with a checklist of the most important aspects you can follow when conducting your due diligence on an upcoming ICO. You should follow this checklist in order to minimize the time spent on researching an ICO and maximizing the amount of valuable information to you gather from doing your due diligence.
The following steps will help you conduct due diligence and evaluate projects.
When conducting your due diligence you should first check out the team members and advisors because it’s usually the single most important aspect of determining if a project is legit or scam. It’s not worth wasting time by looking into a project that’s a scam. Most projects will drop off in this step.
If the project team members don’t link to their LinkedIn profiles, 99% of the time it’s a scam, the 1% of the time they are probably just incapable. In either case, you probably don’t want to look further into the project.
But if they do, look for these things:
#1 Check the amount of connections the profile owner has. More the better.
#2 Check the amount of endorsements the profile owner has. More the better (you can find this section at the bottom of the profile)
#3 Check the past experience
If the team members and advisory board looks real and skilled enough to develop the product, proceed into the next step.
Make sure the whitepaper and website are professional and transparent. Website should be lengthy and have abundant amount of information contained within it.
The whitepaper should contain these following categories:
After reading the whitepaper and checking the website you should be able to answer:
Tip: It should be noted that there has been massive influx of ICOs from Russia, Ukraine and Asian countries, and as English is not their first language, a certain level of leniency should be applied. This means that the overall white paper and website looks professional and legit but there might be some spelling errors etc.
Tip 2: Make sure you can find contact information
If the overall structure, visuality and professionalism of the whitepaper and website is on sufficient level, move onto step 3.
You’re looking for a token that increases in value overtime. You need to understand HOW it’s supposed to increase in value. This is the most fundamental thing about investing into ICOs.
You’re looking for a problem that truly exists. Most projects fail because they aren’t even solving a real problem, therefore they don’t have a market they serve. It can be hard to verify this, so it’s easiest to stick to projects where you personally understand the problem.
If the project has relevant partnerships to help it gain traction, this can be a massive advantage to help them grow quickly. They need to be relevant to the project though.
Because hype is an important factor in token/crypto prices, you should have a look if the project is capable of creating hype for themselves or not. If they cannot generate hype during the ICO, how are they supposed to do it later down the road when the options are more limited?
Tip: Don’t rely solely on the absolute number of members in a specific social media channel, since there are many companies that are buying likes and followers for the purpose of market perception.
Participating in an ICO can sometimes be the hardest part of the whole process but more often the ICO has provided step by step instructions on how to participate in the tokensale.
Most ICOs only accept Bitcoin and Ether as a payment. If you already don’t own either or any other cryptocurrency, the next step would be to obtain them. There are multiple ways you can buy cryptocurrencies with more coming by the day.
There are multiple different platforms to execute an ICO. The most successful and common platform is Ethereum platform. Each platform usually requires its own wallet to store the ICO tokens on. Some wallets can store tokens from multiple different blockchains like Ledger Nano S.
Ethereum’s ERC-20 protocol makes all ERC-20 tokens easily interchangeable with other ERC-20 tokens. Since September 2017, all Ethereum ICOs should conform to the ERC-20 standard. All ethereum tokens can be stored in the same ERC-20 compatible wallet.
ERC-223 is a backwards compatible upgrade to ERC-20 protocol, meaning that every ERC-223 token can be stored in ERC-20 compatible wallet.
Here is a list of our recommended ERC-20 compatible wallets:
NEO has its own protocol to make the tokens able to operate on NEO blockchain. This protocol is NEP-5. It’s basically the same thing as ERC-20 standard but on a different blockchain.
Here is a list of our recommended NEP-5 token compatible wallets:
Exchanges in the cryptocurrency space can be divided into 2 different categories, centralized- (CEX) and decentralized exchanges (DEX). Centralized exchanges are usually better in terms of liquidity, speed, cost, volume and amount of users. Most users prefer centralized exchanges for their various benefits.
Decentralized exchanges shine in other aspects like the amount of trading pairs, security and trust. With decentralized exchanges there is no central author who has control over your funds or private key.
Here is a list of our recommended exchanges:
Now that you are familiar with the factors to consider when evaluating ICO’s, lets quickly summarize the practices you should take away from this guide: