Three Things Investors Should Look Out for When Vetting an ICObr>
Initial Coin Offerings (ICOs) are growing every day. In 2018 alone, there have been over 615 ICOs, raising an astounding $3.9 billon. While cryptocurrency still may be an unregulated space, investments in it can be quite lucrative. Because of this, there are important things every investor should look out for when vetting a potential ICO opportunity to ensure their capital is being used for the intended purpose.
If you are looking to get into this highly unpredictable class of investments, this piece will help highlight three things you should always be aware of before investing.
How the ICO Aligns with Today’s Blockchain
Blockchain applications and technologies are transcending their traditional functionality in financial sectors and are springing up across a variety of services and industries that we encounter on a day-to-day basis. This includes everything from our online data storages to the way our online devices communicate with each other through the Internet of Things. To this point, some areas are inherently more compatible with blockchain networks than others.
The best kind of investment to look out for is one where there is a high relevance of the token offering to the industry it is hoping to support. For example, a strong component of blockchain networks is that they eliminate the need for third-party interventions. This kind of automation is quite useful for financial transactions but wouldn’t be ideal for situations where the nuances of human decision making is needed. This factor in and of itself could erode the potential success of an investment. Blockchain’s immutable ledger is great for industries requiring transparency as well, such as nonprofits to allow donors to see where exactly their money is going. It all depends on the industry and its role on the blockchain. With blockchain networks extending their reach across all aspects of our lives, it is wise to first consider the relationship between the platform, the features of blockchain and the nature of the industry.
The Problem and the Token
Always ask, what is the problem the ICO token itself is addressing? If that is unclear, run the other way.
Be sure to look and verify that there is a genuine need for the token in the long-term, beyond that of the initial raising venture. If this need is present, you know the project is valid and will thrive within the system. Ensuring that the token is built as part of or on top of the correct protocol for its use case will enhance the chances of its longevity and the token’s adoption on global crypto exchanges.
Additionally, make sure to understand the tokenomics and distribution of the token. Distribution should always occur within a reasonable timeframe after the ICO’s conclusion, which is usually drawn out in the token’s white paper. No white paper? Again, run away. You should also confirm that the percentage of the token held by the company is not more than 35 percent. This stronghold position is not something investors should want to give money to. While all projects won’t publish what the ownership percentage is, there are platforms that provide the highest level of transparency to prevent dishonest companies from taking investors’ money for illegitimate ventures.
The White Paper
As mentioned, the white paper is something all investors should have reviewed in detail before participating in an ICO. Even the most technical paper should clearly describe the problem the technology is solving in clear and accessible terminology, at least in the abstract. If the white paper offers a round-about description or doesn’t make clear sense, this is a red flag. The white paper should demonstrate the creators’ knowledge of the space and clearly lay out what the problem is and how this ICO will solve it.
Always look to see if the white paper references other papers that can help support its claim. White papers that exist in a bubble with no reference to other work is a danger sign as well. These types of white papers will likely be attached to a team that has little to no outside presence. The ideal team of advisors will have credibility and be referenced in reputable channels such as academic research papers, board memberships, presentations and professional affiliations.
Investing in an ICO can be considered a win-win for entrepreneurs and investors alike, however, it this isn’t always the case. Investors need to do their due diligence before deciding to invest in any ICO. By thoroughly reviewing the white paper, the token and the problem it aims to solve, as well as understanding how it aligns with blockchain, investors will have a stronger sense of confidence in the ICO.