Initial Coin Offerings (ICOs) are a popular way to raise money for companies developing their own token or blockchain. However, crowdfunding campaigns like these have also claimed many victims because they turned out to be a scam afterwards. What should you watch out for to avoid losing money?
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What to check first?
When it comes to analyzing ICOs within the crypto market, the Internet often talks about so-called “Red Flags. Red Flags freely translated mean “warning signals”. The most important of these we will go through with you so that soon you too will know what to look out for. The most important things to analyze are:
- The team;
- The amount of money to raise;
- Social-media channels;
- Promises about the future.
One of the first things I look at in an ICO is the team, regardless of the idea this team wishes to implement. For me, an experienced team is a prerequisite and indication that the project has a chance of success. Indications for a rogue ICO are:
The ICO is anonymous: the team, company information and physical address are not mentioned on the website.
When an ICO does not give any insight into the team behind the project it often means that they have something to hide. Do you encounter an anonymous ICO? Then you should not invest at all.
- The ICO does name their team, however they have:
- no social media channels, or:
- have no information about the ICO on their LinkedIn.
- have no experience with blockchain or the business sector in question.
- recently created a LinkedIn.
If an ICO does have a team in place, this does not automatically mean that they can be trusted. It could be that fake profiles have been created on LinkedIn or that people are just named while the real person doesn’t even know it. So always check if there is a LinkedIn profile, if this person names the ICO on her LinkedIn and the team members do not have a recently created profile.
The amount to raise
ICOs always have an amount they aim to raise, often involving millions of dollars. An acceptable amount for an ICO is often between $5 million and $20 million, depending on the size of the project. Ideally, you want this to be as low as possible. Don’t invest in an ICO if:
- The target amount is too high, for example higher than $100 million.
- The ICO has barely raised any money yet.
- When an ICO wants to raise a lot of money you will have to seriously ask yourself what all that money is for. At a target of $100 million, the ICO seems to think money is more important than the project itself. Where is the motivation to deliver a project when you have already raised millions in this unregulated market anyway?
In addition, an ICO should be transparent in the amount they have raised so far. Don’t be fooled by intermediate figures displayed on a website. Always ask for proof so you can check the raised amount yourself. Think of a public key so you can see for yourself in Etherscan or something similar how much money is in the account now. Prevent yourself from being one of the first to invest. An ICO that hardly raises any money (yet) is doomed to fail – and then you will lose your money.
Social media channels
A good ICO makes sure it is accessible through various channels, including social media. Telegram and a public email address where people can send their questions are a minimum requirement. This does not necessarily have to be Telegram, as long as there is a platform where people can communicate directly with the team. Again, openness and transparency is a plus.
In doing so, also make sure that the team is willing to answer critical questions. A serious project welcomes feedback and listens to its customers.
The whitepaper (or white paper) tells you the purpose of raising money through an ICO. This document explains how the technology and product solves a specific problem. In this way it is a marketing tool in which they want to convince the readers why the ICO is a good idea. At the very least, make sure you get answers to the following basic questions:
- Why is the company choosing to adopt blockchain technology?
- Can the problem be solved (cheaper and/or easier) without blockchain?
- What is the purpose of the token?
- What keeps the value of this token alive?
Many (new) companies jump on the blockchain hype because they see how much money is involved. However, it is often not or hardly clear why a blockchain solution is chosen, whether or not in combination with a token. If this is not clear to you or you think the problem can be solved without blockchain, we advise you not to invest.
Promises about the future
Nobody can promise you golden mountains, including an ICO. One of the biggest red flags for me is when the team starts openly speculating about the value of their own currency, especially when they say their own crypto currency is going to be worth a lot. This is an absolute no-go and shows little professionalism. No one is in a position to predict its usage and value, don’t let anyone tell you otherwise.
Often a construction is devised in which these tokens are sold in several rounds, with the value “rising” after each round.
For example: There are a total of 3 million tokens for sale at 1 eth each. However, in round 1, 1 million tokens are sold at a 40% discount. In round 2, 1 million tokens are sold at 20% discount and in round three at the “full price”. You can wonder to what extent people will want to buy at all in round 3, after all once the token is freely tradable the people from round 1 will want to sell everything at 40% ‘profit’.
The ‘profit’ an ICO presents with this is artificial, once a coin is tradable on the market it remains a guess what the real value will be. We advise you to avoid such constructions.
Why ICOs remain a big risk?
Almost half of the ICOs in 2017 failed, according to research by news.bitcoin.com. Also, according to the website deadcoins.com, there are currently more than 900 crypto coins that are no longer used or supported. These include both scams and failed projects. Even of the ICOs that did ‘succeed’, the profits on them are not always guaranteed for any early investor either. Although precise statistics are lacking, we know from our own experience that many (new) crypto currencies currently have a value below the value at the time of the ICO.
However, projects that did succeed have the potential to achieve staggering profit percentages. For example, Stratis (strat) had an ICO value of $0.007 per coin and is currently worth $1.5. This was even above $20 at one point. However, projects like stratis are more the exception than the rule, which is why we recommend caution when investing in ICOs. This is an as yet unregulated market, if the ICO fails you run the risk of losing your money. Therefore, think carefully before you decide to invest in an ICO.