Let’s talk about ICOs. But first, what is an ICO? Well, to put it simply, it’s a crowdfunding campaign for a blockchain-related project.
It involves the creation of a new crypto-currency, or a new token on top of an existing blockchain. Basically, some pool of crypto-currency or token is pre-sold to the public for a limited period of time, in exchange for existing crypto or fiat currency. And then, funds can be used to finance the actual development of the project.
The first ICO happened in 2013, but in 2017 alone, more than 4 billion dollars were raised by ICOs.
Setting up such an ICO is pretty easy, it doesn’t require any legal or regulatory approval or validation. And they are pretty accessible as well because they don’t require any specific investor status either, and tokens can be purchased in very small amounts. In addition they generally occur way earlier in a project’s lifecycle than their traditional fundraising counterparts.
All of that makes them very risky.
Some people would like to forbid, or at the very least regulate them. But that’s a conceptual nonsense given their distributed, international and anonymous nature.
Plus the ICO concept is not bad in and of itself and some very valuable projects were already funded thanks to an ICO, including Ethereum itself.
So the best way to protect investors is not to regulate, but to educate, to help potential investors make better informed decisions, which is what we do at ChainSkills.
So let’s talk about 6 things you should watch out for when evaluating an ICO investment opportunity.
It’s supposed to be a formal and rigorous description of the business model, the team and the roadmap of the project. And more importantly it should also describe the exact rationale of the token to be sold to investors, things like whether it will be traded on exchanges at some point, whether investor will be able to use tokens to pay for the service, whether it gives them any voting power in the decisions about the project, and whether it creates an incentive mechanism for participants in the service.
Reading and understanding that whitepaper is absolutely crucial as it should help you evaluate the scientific relevance of its content and team. If you, or an expert you ask for advice, spot any technical approximation, misuse of a blockchain term or over-optimistic prediction about what a blockchain can do, that should be a red flag.
Another question you should be able to answer after reading the whitepaper is this one: do a blockchain and a decentralized token make actual sense, or is it just an opportunistic way to raise some funds when it’s easy to find?
Of course, if it’s the latter, you should be very wary.
Are they clearly identified? Has their identity been cross-checked with several long running social profiles in such a way they wouldn’t be able to run away with the money without being held accountable?
If so, are they recognized in the crypto community? Do they have a proven track record? Did they speak in some well-known conference?
And then of course there is the question of the expertise of the team, as this is a very complex technology, and every ICO team should have at least one permanent blockchain development expert on board.
Another thing you should look for is the advisory board. Do they have backing from well known experts in the field they are trying to disrupt, or from traditional VCs who would have done their actual due diligence?
Of course, if there is only a whitepaper, that’s a big red flag.
There should be a working prototype somewhere, and the code of that prototype should be open source and publicly accessible. Was this source code actually written by them or sucked out of somewhere else? Is it good quality code with enough documentation, readability and evolutivity? And more importantly, was this code already audited for security, especially the code that will be used to handle the ICO itself?
ICOs are generally announced on certain community websites like BitcoinTalk and Reddit. It’s very important to spend some time on those to read discussions about the project, and responses from the project team in order to get a better idea of their character, how they respond to criticism, their real motives and so on.
When you do that review, be sure to watch out for paid reviews and biased posts from bloggers who might have been paid out to spread good data about the project.
Are there any other projects with a similar value proposition who might have been funded or failed already?
How do project holders justify creating a separate project instead of collaborating with existing projects?
And are there potential synergies with other existing projects that might strengthen this one on the long run?
Is there an actual legal structure behind the fundraising campaign, like a Californian company, or a Swiss foundation, a structure that would be allowed to carry crypto-assets in a crypto-friendly jurisdiction?
Is it clear whether the fundraising campaign is capped or not, and when the cap will be revealed if ever? Is the price of the token clearly known, including the early bird bonuses and their timeframe? Was there a private pre-sale for other investors? Do founders get to take away a chunk of the funds for themselves? And last but not least is there some escrow intermediary responsible for holding the funds in a multi-signature wallet so that they are released progressively as the project reaches some milestones?
These are just some of the most important aspects to watch out for.
And I just want to conclude with a couple of general tips for investors.
As always with such risky investments, as well as gambling: don’t invest money you’re not prepared to lose. You should see this as a contribution, a donation even, that may turn out to bring a return on investment, but with no guarantee.
In the grand scheme of things, investing in a blockchain project means participating in R&D in a decentralized technology that has the potential to profoundly change the way we organize and structure our societies, ridding them of their inefficiencies, corruption and single points of failure.
So even if a project you invested in doesn’t come through, it will have byproducts that will be useful to the progress of the ecosystem as a whole.
If you are a developer, don’t waste too much energy and time on ICOs, because you have a greater responsibility and the ecosystem needs you, and can pay you to work on improving scalability, security and viability of blockchain technologies on the long run.
And whatever happens, don’t expect the protection of a government, jurisdiction or regulation to turn to in case your investment goes South: the decision to invest or not is your own responsibility. Blockchain technology is still very young and immature, so it’s risky but more importantly it’s a long term game. And the best way to play it right, is to really understand it.