So you’ve been investing in Bitcoin for a while now, as well as Ethereum and maybe even some Litecoin. You’re watching your holdings steadily increase, but the thrill is gone. That initial rush just doesn’t cut it anymore.
You want to get in on the ground floor of something new and exciting. You want to back a winning horse instead of piggybacking on the Bitcoin wagon. You have a modest budget and want to use it to support something innovative with potential for high returns.
If you agree with any of these statements, you may be ready to invest in an ICO.
It’s not for nothing that ICOs have been nicknamed “the new gold rush,” and they hold the possibility for phenomenal gains.
However, they also make for an incredibly risky investment – more so than Bitcoin, even. The ICO market is currently so oversaturated that most of them never get off the ground, and outright scams are not unheard of.
So as you do your due diligence, here are 3 key points to take into consideration before you participate in an ICO.
Disclaimer: This article offers a few helpful tips to minimize risk for people thinking about investing in ICOs. The following should not be taken as investment advice.
1. What Sort of Product/Solution Are They Offering?
While there are methods of discerning a sound ICO from a stinker, the fact of the matter is when it comes to making a profit, ICO investing is largely the luck of the draw. So much depends on whether an ICO is pitching the right product at the right time in the right way. So, when doing your research, use common sense and trust your gut instinct.
First, take a look at the product or service the ICO is raising funds for. Is it something innovative, exciting, and needed? Does it fill a gap in the market? Is it something you could envision yourself using in the future, and does it make you jealous you didn’t come up with the idea yourself? Any of these may be a sign that a project is worth diving deeper into.
Next, take a look at their website. Is it sleek and professional looking? Is it something the team clearly has invested a lot of thought, time, and money into (a sure sign that they expect high returns)?
Read through their whitepaper (age-old advice: never invest in something you don’t fully understand). Is it clearly organized, describing a coherent agenda and business model, and well written? A poorly written whitepaper with spelling errors and the feel that it’s been slapped together in hopes that nobody will read it is a danger sign.
Finally, assess the token economics of your investment: what sort of coin are you looking at? For new investors, there are three types – protocol, utility, and service coins – and they all require different investment strategies. A protocol token is a direct extension of its blockchain (such as Ethereum or NEO), which in turn determines the rules of the dapps that are built on it. A utility coin is one that’s built on a protocol blockchain. For example, Waltonchain, Golem, and VeChain are all ERC-20 utility coins built on the Ethereum blockchain.
Security tokens are tokens without a use case, that essentially work like shares in a business – whether they grow in value depends entirely on whether the project in question makes a profit.
In a market where most cryptocurrencies are designed to have a use case that fuels demand, thus increasing value, it is wiser to invest in a coin with an intrinsic value that will stay relevant in the long-term. Security tokens tend not to pull their weight, so anyone approaching one of their ICOs should do so with skepticism.
2. Team and Advisors
Once you’re satisfied with the “what” of the cryptocurrency project, take a look at the who.
Check out the team of developers, founders, and advisors behind the project. What are their credentials and expertise? Do they have working links to LinkedIn profiles, Twitter accounts, interviews, websites for previous projects or workplaces? When you Google their names, are you confident in what comes up?
The same goes for advisors – what have they been involved with in the past, and how does that influence their role with regards to the ICO?
Anonymous developers are a bad sign, as are developers without a paper (or digital) trail to follow. The people involved with the ICO you intend to contribute to should be transparent, straightforward, and easy to contact. Moreover, there should be a legal framework for the ICO, with clear terms and conditions that developers have to follow regarding contributions.
3. Online Presence and Community
Some people are better at social media than others, and some cryptocurrencies inspire more of a fanbase than others – that’s just a fact. However, so much of a coin’s strength and staying power lies in the enthusiasm of its community, both on and offline.
So follow the ICO on all their social media channels: Twitter, Reddit, Slack, Telegram. Do they have a robust presence, with a lot of followers that they interact with? Does the team engage with their community, answer questions, and respond to feedback? Are they personable? Are they eager to address criticisms, or are they difficult to get a straight answer out of?
This goes for overall online presence as well. Is there media coverage for the project? Are there news articles written about them, and what are experts saying?
As a prospective investor, you will want to ensure that the token is built on a sound business model headed by reliable and responsive developers. There’s nothing worse than having a sum of money invested in a project that’s gone off the rails, with its developers suddenly MIA.
Unfortunately, there is no exact science to investing in an ICO. But hopefully these tips will set you in the right direction to finding an ICO that’s raising funds for that one killer blockchain app that will shake the world to its core and leave Bitcoin in the dust. Or, alternatively, it might just be something new to try to diversify your portfolio.
Either way, ICOs make for a risky investment – even riskier than buying an established altcoin, which is even riskier than buying Bitcoin. And we’ve all heard what the “experts” have to say about Bitcoin!
But if you do your research, hone in on a cryptocurrency that strikes you as particularly interesting, innovative, viable or better yet, all of the above, enough so that you want to put money towards its success, use its services, and be part of its community, it could potentially be an exciting way to make some profit – and contribute to the blockchain revolution.
If you are ready to start your research, you may take a look at CoinGecko's ICO Calendar. Good luck!