So over the course of week, you have just opened your Coinbase account and bought your first bitcoin(or part of a bitcoin). Now you’re checking your Coinbase app 34 times a day to check on your “gains”. After reading anecdotal stories of some 15 year old kid in Hong Kong turning their $100 bitcoin purchased in 2009 into millions today, you’re thinking to yourself, “Let me get in on that action”.
After a few days of ups and downs, you’re profits are about 50% of your initial investment. Pretty amazing in conventional terms but nothing close to resembling the bitcoin-millionaires. You start to look for how you could make those outsized returns and make it fast. After hearing about ICOs and how some of them have “mooned” giving their investors a 10–50x return, you decide to jump in headfirst into the world of ICOs.
Im sure this story rings familiar to many. But now comes the hard part. There are already more than a 100 Initial Coin Offerings (ICOs) launched just in the last month alone adding to the countless out there, so how do you choose which project to invest in?
With the large number of ICOs out there today, each claiming to solve X problem and decentralise X, it can be difficult for us to determine what is a good investment, risky investment or a scam.
What I’ll be sharing is my personal ICO evaluation process. It is constantly in the process of refinement with every investment and I hope it will serve as a useful guide for you to identify the next token to rocket to the moon, hopefully improving the world at the same time, and help you to avoid scams or ICOs that might be doomed to fail.
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Before we even get into evaluating the ICO project itself, it is best to first understand what kind of investor mindset you have. This will affect how you look at the guide and can broken down very crudely into 2 categories.
Value Investor (Long term hodler)
You are investing with the intention of buying and hodling. You believe the current valuation is less than the intrinsic value of the project in the future. You believe in the project and intend to hold through all the price fluctuations because you believe in the underlying value of the project. Patience is your best friend.
You are investing already with the intention to sell with as high a profit and as soon as you can. Timing the market is key to your game. You are looking at the hype around the ICO and how much media its receiving. You are looking for sharp price increase once the tokens are on the open market. You browse through the fundamentals and will hold as long as the token value keeps going up but intend to sell at any major sign of price fluctuation to collect your profits.
Now you have to understand your own appetite for risk. The words high risk, high rewards comes to mind but remember that high risk can also mean huge losses. So consider this point well.
Personally, I see myself as a value investor with quite a high appetite for risk. I intend to hold my coins for a minimum of 1.5/2 years. Most of the ICOs will probably need at least that span of time to fully get up and running as well as expand their customer base beyond crypto-enthusiasts. Hence, the guide below is crafted with this mindset in mind but will still serve as a useful analysis tool for any ICO investor.
1. Is the proposed solution better that what exists today?
What many people do not realise in today’s speculative market is that if you’re looking 2–3 years down the road, adoption will be key. Adoption will more or less determine if this project was a success of a failure. The human species has historically proven to be very resistant to change. If the proposed solution is one that has much more friction in its process, giving the user a worse experience than what already exists, it is very unlikely for the product to be successful in the wider market. Decentralise is the trendy word at this point in time, so look out for companies just riding the “decentralize X” wave.
If the solutions did not work as centralised companies, so why would it work as a decentralised one?
2. Applicable Market
One of the biggest problems in the start-up world is an even bigger one in the world of ICOs.
Entrepreneurs creating problems for their proposed solutions instead of creating solutions to existing problems.
At the end of the day, it doesn’t really matter if the technology is amazing if there isn’t any real world applications for their future (hopefully) paying customers. You are investing in a business not a technology. To get a return on your investment, these companies have to build something that people want. Look at the project and make sure that it is solving a real market need. Make sure there is even a market for the product. Google the problem and existing solutions. Analyse how this would be any better. You should at least be able to justify to yourself that there is a market for this product if you intend to invest in the project.
3. The Whitepaper
Most investors, especially new investors, do not read the whitepaper. Either they find it too intimidating or they are just lazy. Usually its the latter. Even if there are some technical terms in the whitepaper, you should be able to read and understand majority of it with a little help from Google. PLEASE READ THE WHITEPAPER. All the necessary crucial information is in it. It shouldn’t matter if it’s 2 pages long or 55 pages long. Try to note down the good and bad points about it in your own view. Add it to other research you find from blogs, reddit and your own prior knowledge. At the end of it you should be able to tell yourself what value the project brings to yourself, the industry or the world.
The quality of the work can also be used to judge the team’s attention to detail and if they have done their homework. Look at the citations and check if they are just citing media outlets that are hyping their project or academic studies and subject matter experts. You can check out Filecoin’s whitepaper which is very, very professional. They even have a section where they list down problems that still remain unsolved which is a level of transparency that I like.
If you are going to put your money in something, make sure you have a clear understanding of what “IT” is. If not, just buy the lottery.
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4. Team, Team, Team, Team
Personally, this category can single handedly make or break my decision whether or not to invest in an ICO. One of the first things I do when someone tells me about a project I have not heard of before is to scroll down to the Team section of the company website.
In this stage of investing, especially in the high-risk world of cryptocurrency, trust is a hard thing to come by. The people behind these projects are people that we will probably never meet in real life or ever talk to. Hence, the simplest/perhaps best way to establish trust would be through their history and experience. Does this person have the chops to run a company? Does the team have the network to push for the adoption of their token? Do they have the technical know-how to build these platforms or protocols?
Remember that for these companies to be successful, it requires more than great and reliable technology. Adoption is key. No point having the best tech in the world if no one or no business is going to use it. You will need people with the networks to get it through the right doors. The team must be able to influence and collaborate with existing businesses that they are disrupting so that they can change the way they run their business. Or have the technical and financial muscle to push them out of the way.
I would be much more confident of the team’s success if its members have proven track records and recent experience in the industries that they are seeking to disrupt. Look up the ICO team. Look up the advisors. Google their names. Visit their LinkedIn accounts. Some well-known names in the crypto space on the team or advisory board would give the team much more credibility.
Once you’ve invested in the ICO, you have almost no say in what goes down. Make sure the your investment is in good hands before putting your money in.
5. Utility of Token & Token Structure
How are the tokens related to the business model of the company? Remember that for most of these tokens, their purchase does not entitle you to any share or stake in the company itself. If the token is just an afterthought once the ICO is over, even if the company excels and establishes itself as a market leader, your token value may not increase at all (not accounting for speculation and dumb money).
These tokens usually have a function/utility within the platform or ecosystem. Usually. Something like Steem where the tokens are used within the system to incentivise content creation and curation. The tokens can be earned by posting or curating content and also easily traded for fiat or otherwise.
Watch for ICOs that seem to tie themselves up into knots trying to find a use case for their token. These companies may be trying to raise quick capital and the token-sale is just their path to it. Nothing wrong with that. But I prefer my tokens to have an inherent value and if it plays a key part in the business, it means that the team has a stake in ensuring the success of the token as well as the company.
This can also be useful in evaluating the future value of the tokens. Some companies burn coins over time or with every transaction. Some have unlimited coin generation and others plan to release more coins to the supply over fixed periods of time. Who owns the tokens and for how long are the team’s tokens locked up? All this plays a big role in the supply of the tokens and should be a consideration when evaluating the ICO.
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6. Development progress, Roadmap
Look at the stage of development the project is at presently. Do they have a beta running? Are they just at the MVP stage? Or are they raising money off their whitepaper. A beta would be most favourable as investors would be able to interact with the platform or at least view it prior to investing. Having at a proof of concept will give investors more confidence that the team knows what they are doing. But thats not to say ICOs that run with just a whitepaper will not succeed. It all depends on the proposed solution/concept itself and your own appetite for risk.
A good project will also link its token distribution to the roadmap. Usually each milestone of the project requires a certain amount of projected funding.
7. Community and Media
An engaged and active community around the project (even if its still small) is usually a good sign. This can come in many forms and on many platforms like Telegram, Slack, Discord, reddit etc. This community acts as a form of social proof that what the team is building could have a future. They give you the opportunity to engage with people already involved and familiar with the project. You will be able to ask questions and learn more about the project.
Look at how often the team reaches out to the community as well. Whether it’d be through AMAs, comments or blog posts. A good example would be the Cardano team. They organise regular Meetups, have weekly updates on their site and are regularly updating and informing the wider community through Medium posts and Youtube videos. It is usually a bad sign if there is no outreach from the development team to the community.
Spend some time surfing through google, bitcointalk, reddit etc to see what the wider community is saying about the ICO. Use a critical eye and take everything you read with a grain of salt.
8. Market Capitalization
This is one of those key points that is often overlooked in all the hype around ICOs and the millions that they raise. As value investors, we want the value of our investment to increase in the long run. Hence, we are looking for projects that are preferably under-capitalised. This means that the market cap still has of room to grow to match its intrinsic value. Should the market cap be severely above its actual real use value, then once the speculation dies down, there will probably be a strong price correction downwards, towards its intrinsic value.
The market cap is calculated by the multiplying the circulating supply of the cryptocurrency with the price of each coin/token. For example, if a crypto has a 100 coin circulating supply and the price of each coin is $10, then its market cap is $1000. For ICOs already launched, you can simply check on https://coinmarketcap.com/ . The hard part is trying to figure out what could be its true market cap with the coins priced at its intrinsic value.
Personally the simplest method I use would be to reference the market cap of the ICO I’m analysing with one that is already on the market, still fairly young and in a similar space (Remember much of the market may be overpriced at this point in time to take that into account). Sure this may seem very simplistic but this is a much easier starting point for the young non-technical crypto investors. From the difference you can make a judgement how far up or down the token’s value might go. You can understand more regarding market capitalisation and how to go about analysing it here.
As much as we like to think Bitcoin and cryptocurrencies in general will be fully-decentralised and never subject to any form of external governance, this is a highly unlikely scenario. With the recent SEC statement regarding cryptocurrencies and ICOs couple of days a go, we can see that the regulators are keeping a close eye on the market and at some point in time there will be some form of regulation. The question is just how strict/constraining it will be.
Most of the ICOs launching soon or those that have been launched recently seem to have done as much as they can to prepare for this future. But remember to still do your own analysis and try to gauge how well positioned the company will be, should regulation be implemented after the ICO. Do keep this in mind and read up on guidance from regulatory bodies. Remember that every country has different laws. Some ICOs also specifically state that certain nationalities are not allowed to invest. Be prepared and do your research into how the ICO token is positioned, sold and how it relates to possible regulations.
As much as this guide may help you to extract the golden nugget from the basket of rocks, remember that investing in ICOs is extremely risky. This is unlike investing in initial public offerings where companies have existed for several years and have some sort of track record. Many of these are startups are barely a couple of months old and aren’t even operational yet.
Always do your own due diligence. Read the whitepaper. Understand the problem, the market and the solution. Do not just invest based on reddit hype or word of mouth.
Investing, for me, is supposed to be fun and one of the most enjoyable parts is doing the research and understanding more about all things blockchain and crypto. Don’t be intimidated. Once you get past the first few initial hurdles of understanding some of the basic underlying concepts, you’ll be hurtling down this rabbit hole of knowledge and curiosity with me.
The knowledge you’ve gained will also help you to fine tune your radar on what constitutes a good project and help you to avoid being conned as well. So have fun, good luck and may we see each other on the moon (: