So you keep hearing about all the hype in Cryptocurrency ICOs but you don’t know which coin to invest in? Well, the first thing to do is look at the project’s white paper, especially if you have some technical know-how and can tell the difference between a great idea with potential and a scam. Nearly any startup building a platform and planning an ICO will have a white paper on its website, outlining what the platform will do and how the company plans to develop it. If you feel the idea is sound, the next step is to evaluate the developer team. If the team is anonymous, walk away. The members of the team should be listed with their real names and pictures and, ideally, a link to their Linkedln or GitHub profiles, so you can verify they are real people and qualified to create the software they’re promising. Evaluating ICOs is time-consuming and becoming more difficult now that there is a steady stream of them being introduced.
Here are some things to look for when deciding on which ICOs to invest in:
1. Does the product solve a problem through a Blockchain application which could not be solved in a more traditional way? Some Blockchain projects are disrupting traditional business models and software architectures, some are useless, as their business case could be solved more efficiently in a centralized way. Blockchain can solve very efficiently almost all bureaucratic issues, like real-time maintenance of registries and real-time accounting. Blockchain computation can be very expensive for performing some type of operations, so it is important to understand how the team plans to leverage the strengths of this technology to gain a competitive advantage over centralized platforms.
2. Can the team execute on the business model/whitepaper? What are the working proof-of-concepts or previous projects that already have been delivered by the team members? The team will be fundamental in assessing the market need of the product, the funding strategy, and the product usefulness. Funding is very important but so is having a strategy for selling the product. Has the funding team been involved in this or previous projects. The team should be clearly identified with connections to their Linkedln profiles. You should easily be able to determine their “pedigree” from education to professional experience and previous project successes.
3. Who are the outside advisors? One of the most telling factors to look at when assessing an ICO is the caliber of the advisors from outside the company. If there are only one or two with limited previous blockchain success, that should be a red flag. ICOs that tend toward high rates of success typically have 4-8 outside advisors from multiple disciplines to expertly guide the development of the project after the ICO. When highly credible, previously successful people fend their names to a project, they want success and will not only lend advice, they will also make key connections in the industry on behalf of the company to further its likelihood of success.
4. Is the token a security or utility token? Does the token have any utility? Is it being pitched as an investment? Is the project offering dividends or interest? Tokens that have the characteristics of investment assets will be treated as securities with restrictions from regulators. Tokens that have utility and are necessary for the business model will not be subject to regulation as a security. That’s because users of the platform must purchase tokens in order to use the platform or get any benefits. Security tokens are tokens that represent ownership of an asset, such as debt or company stock, and as such are to be regulated as a security by the SEC and other governing bodies around the world that view the SEC guidelines as a best practice. Utility tokens, often called app coins or user tokens, provide users with future access to a product or service. The defining characteristic of utility tokens is that they are not designed as investments; if properly structured, this feature exempts utility tokens them from federal laws governing securities
5. Where is the company located and why? The location of a blockchain startup is an important consideration. There are countries such as Switzerland that welcome blockchain and cryptocurrency companies. There are other countries whose uncertain regulatory climate could affect the success of the project. Is the company you are looking at connected to a reputable law firm that can guide it through the regulatory issues of the country where it are located? If the company has potential to scale, it must have a great talent pool from which to draw. Does the company’s location offer access to a good talent pool?
6. What is the business model in relation to the Blockchain? is it a network application built on its own blockchain, or is it a platform/ protocol built on top of an existing network? Thanks to the latest developments, applications do not necessarily need to have their own public blockchain and can benefit much more from building their technology on top of an existing blockchain. If a project is generating its own blockchain, why is it necessary?
7. What is their business plan? is the product necessary? If yes, how? Is there a revenue generating model? What are the distribution channels for selling the product? Is the product completely open-source and maintained by a strong and active community? Not all projects are completely open-source. Some are closed- source, in which case the management team has a big impact on network survival. in the case of an open source platform, a strong community around the project is needed to keep the product alive when the ICO funds are gone. Do all transactions happen on-chain or is there a substantial off-chain component? Off-chain means that some of the operations are either performed on a central server or still manually.
8. Is there a substantial off-chain component of the process? This is not necessarily a bad thing, since in many cases, a hybrid approach can help use Blockchain more efficiently. But in this case, is the team well aware of the off-chain aspects? Has the white paper addressed how it will be handled?
Which ICOs are you looking to invest in?
Let me know in the comments! And if you’d like to learn more about this topic and others check out Crypto.IQ and use code “jsherm” to get a super discount.
You can also watch an episode about How to Pick an ICO Cryptocurrency in our web series “Mastering Cryptocurrency” right here featuring Bitcoin Legend Charlie Shrem and Serial Entrepreneur Jason Sherman: