Investing in an ICO

The ICO, or Initial Coin Offering, remains one of the most potentially effective ways for tech companies to raise money, and for investors to see return on investment unheard of in traditional investment circles.

How to Find and Invest in High Quality ICOs

In the guide to follow, we’ll explain what an ICO is, why they may be very worthwhile as investments, and how to choose high quality ICOs from all the possible contenders. So whether you’re an advanced cryptocurrency investor or a relative newcomer, we hope you’ll both leave this guide having learned something.

ICOs explained

Like any investment vehicle you must understand the principles behind it and how it works. For a more in-depth explanation as to what an ICO is, see our 'what is an ICO' page.

Below are some brief points you should know about ICOs before looking to invest.

  • An ICO is a way of raising money for tech companies that use blockchain technology.
  • These companies sell their coins / tokens during the ICO.
  • Once an ICO is complete, the coins become available on public exchange platforms.
  • Cryptocurrencies rarely represent equity in the company and therefore do differ from IPOs.
  • ICOs are not strictly regulated in most juristictions, which has led to lots of companies using the method to raise money.

 

Complete Guide to Identify & Invest in High Quality ICOs

Now that you know what an ICO is, let’s get right down into how one might pick out an ICO that will result in big investment returns. Understanding how ICOs work and the fact that they are in their infancy stage as an industry is important to understand with the landscape constantly changing. Governments are getting to grips on their stance with ICOs, and this may lead to increased regulation or in some countries complete bans of ICOs.

ICO Due Diligence Checklist

When looking to invest in an ICO, you must do your research. We have identified eleven points that you should consider whilst doing your due diligence:

  • Use of the coin
  • ICO Whitepaper
  • ICO Developers & Leadership
  • Community Support
  • Technology Roadmap
  • Partnerships
  • Investor Requirements
  • Coin/Token Distribution
  • Social Communication
  • Developer Activity
  • Blockchain Platform

What is the ICO Coin’s Use Case?

Great ICOs represent great technology. Ethereum raised millions because it offered a new way to create digital applications and services (and much more). EOS raised billions because it offered a global decentralized computer with vast capabilities and throughput potential (and much more).

These ICO luminaries are incredible, but not the norm. More frequently, an ICO will offer a technology that some other blockchain project is already working on. Or the ICO might represent decent tech, but be slapped together hastily as a money grab. Other times, the ICO may be a complete scam organized to raise funds from gullible investors.

The technological purpose of an ICO, its coins, its dev team, and its platform must be clearly communicated, and you as the investor need to work to truly comprehend them. If you’re investing in something you don’t understand, you’re more likely to be tricked into buying digital coins with no inherent value.

A blockchain’s purpose is referred to as its “Use Case”. Bitcoin’s Use Case is to function as decentralized money that can be sent anywhere fast and cheaply. Cryptocurrencies may have more than one use case. For example, Ether (Ethereum in coin mode) can be used to generate income through staking, used as money, used for transaction fees on digital games and services, etc.

At ICO, a new cryptocurrency (and the technology it represents) will be in its infancy. Multiple use cases likely will not be mature, if they exist at all. In order to invest in an ICO, though, the investor must identify one central use case (at least) that serves a purpose in the real world and seems realistic given market and industry conditions.

Whitepaper

The Whitepaper is where the team behind an ICO makes its case for their product. It’s here that they explain their vision for their technology. What does their new cryptocurrency do? Does it function as part of a larger platform? What will the funds raised through the ICO be used to pay for? How does it all work? ICOs may be just a couple of pages, but more frequently they are at least a dozen. Whitepapers of 50 pages or more are not unusual. A blockchain company may release a whitepaper without using an ICO (Ontology, for example), but any ICO company worth your attention will release a whitepaper prior to its ICO.

ICOs may be just a couple of pages, but more frequently they are at least a dozen. Whitepapers of 50 pages or more are not unusual. A blockchain company may release a whitepaper without using an ICO (Ontology, for example), but any ICO company worth your attention will release a whitepaper prior to its ICO.

The whitepaper is typically somewhat academic in its content. Blockchain technology is...well...technical, and it’s here that blockchain technologists have the opportunity to really explain the complexity of what they’re creating.

Other whitepapers are written for a very general audience. More often, an ICO will try to split the difference with their whitepaper, producing a work that’s not overly dumbed down, but not so arcane that interested parties can’t understand it. Ethereum’s various whitepapers ride this line, with varying levels of success.

ICO Developers and Leadership

A true blockchain/cryptocurrency is decentralized. This means that no one truly “owns” it. Its development is driven by the international community. Even though a person or persons may become closely associated with its development, they won’t be able to make 100% unilateral decisions. There are exceptions, but this is more or less how things work.

But a blockchain technology has to be started by somebody. The “Company” behind an ICO may be one person, or it may be a whole team of people who have banded together to create decentralized tech that’s useful for people the whole world ‘round.

These teams are especially important in a blockchain’s early days. Without committed development, it’s unlikely that a blockchain will reach its technological potential. Blockchains fail all the time, simply because lack of development and leadership let them go defunct.
The company behind an ICO may have a traditional corporate structure. There may be a CEO, CFO, marketing executive, dev staff, advisors, a board of directors, etc. No matter the size and composition of a blockchain company, it’s up to the investor to vet these individuals for skill and experience.

A qualified blockchain tech team will usually radiate competence. You’ll be able to learn about past projects that the CEO ran, or other blockchain tech that a main dev might have worked on (like EOS’s Dan Larimer with Steemit, or ARK’s Mike Doty with Lisk). If you can’t find anything about the leadership team, chances are this project may not be the strongest. If a team’s leadership seems at all evasive of deceptive, it’s best to avoid them altogether.

The team behind an ICO is important because these are the people to whom your money (Bitcoin, Ethereum, whatever other crypto coin they accept) is going. You’re crowdfunding their efforts. You have to decide if you believe that the money you risk on this project will really go to good use in the hands of these individuals.

Community Support

Another useful way to determine an ICO’s quality is to look at the community that surrounds the project. Blockchain communities live on forums and platforms like Reddit, Bitcointalk, Telegram, Slack, etc. An active community will be vocal and engaged. Healthy communities feature members who work to develop or otherwise benefit the platform with their time, money, and skill.

Slack logo

Sometimes communities are little more than hype mobs. These communities are typically inhabited by people who want to make huge investment returns, though they probably don’t understand the underlying tech all that much. These communities may seem more like a drunken mishmash of sports fans than a set of sober investors.

We’re not saying that a crypto community can’t be enthusiastic. However, enthusiasm must be balanced by sophistication. If a community is unconcerned with educating new members, learning more about the tech, engaging with the company behind the blockchain/ICO, etc., it may be producing more heat than light, as they say.

Other times a community may simply be tiny or nonexistent. This doesn’t mean that the tech behind an ICO is bad. Maybe the community just hasn’t had time to develop yet. More often, though, this is a sign that an ICO is not well advertised, that the team behind the ICO doesn’t communicate well with its potential user base.

An ICO needs marketing to build interest, which in turn drives demand, which in turn drives up prices and profits. Without healthy community support, an ICO probably won’t do very well.

Technology Roadmap

Just like the Whitepaper, the Technology Roadmap is a fairly standard piece of content for a new ICO. The Roadmap shows a clear plan for how a blockchain technology will be updated, and when these updates will actually occur.

The Roadmap typically communicates this by quarter (as in quarter of the year). Q2 2019 might be the quarter when the company’s mainnet (their tech product) goes live. Q4 2020 might be the time they plan to introduce Proof of Stake as an alternative to Proof of Work (like Ethereum is doing).

ICO Roadmap

The Roadmap can include any sort of future development milestone. As an investor, you have to decide if you think the Roadmap is exciting and realistic. Would these developments be valuable for the ICO’s blockchain tech, and the world? Can a team of 5 developers really promise to rival Twitter by 2020?

A good roadmap will convey ambitious but attainable company goals. Typically, a Roadmap will limit its projections to a couple of years in the future, though some look farther into the distance. As with the whitepaper and ICO team, it’s up to you, the investor, to decide if you think the Roadmap is legit. After all, by investing you’ll be providing the funding for the attainment of these goals. Choose wisely!

 

Partnerships

Partnerships represent ways that a new blockchain company is going to connect in the real world with other businesses, technologies, services, successful individuals, etc. ICON, for example, attracted attention by promising to integrate with numerous South Korean universities and businesses. Ethereum demonstrated real world adoption when the Canadian government started using the platform to issue granted and store data. There are many other examples.

It’s not uncommon for ICOs to flaunt lame partnerships (say, with other blockchain companies no one’s ever heard of) or for frauds to make them up entirely. It’s very uncommon that an ICO is going to have a Triple A partnership right away. This is a brand new company, after all.

Look for ICOs that demonstrate reasonable, authentic partnerships. These partnerships should be a valuable asset to the ICO company, and should not be exaggerated to impress. Of all of the criteria so far listed, partnerships are probably the least significant. But they can still tell you a lot about an ICO’s ambitions, and about the way it chooses to present itself.

 

Investor Requirements

Not every investor is allowed to invest in every ICO. Many ICOs conducted in China don’t allow American investors, for example. If you want to invest in an ICO, you must submit at least some personal information. This may be as simple as an email or wallet address, or you may be required to submit a picture of your passport. It just depends on the ICO.

It doesn’t take long to figure out if you qualify for an ICO. Some people have even figured out ways to work around restrictions (though we don’t recommend it). In most cases, you’ll be able to participate in an ICO no matter where you live, but there are some significant exceptions.

 

Coin/Token Distribution

This is an important one! There are basic economics to ICOs that every ICO investor should understand. Basically, how many coins are there? How are they going to be distributed? What do they do? We’ll deal with each one of these questions individually.

  • How many coins? Every ICO will release a coin that has a Total Supply and a Circulating Supply. The total supply represents the total number of coins that can ever exist. For Bitcoin, this is just under 21 million. However, because many Bitcoins remain unmined, its circulating supply is only 17 million+.

    ICOs are typically organized by companies who forgo the “mining” route. They “forge” all of their coins at once, and distribute them as they see fit. The rules of supply and demand determine price. If they release only 25% of their total supply, for example, demand may drive the price up. But if they ever release the other 75%, this would inflate the supply and deflate the value of each coin. Something to think about.
  • How are the coins distributed? Most ICOs don’t just sell 100% of their total supply to investors. Many reserve a percentage to pay for development (as the price goes up, these coins made be sold to cover costs). Some coins may be reserved to serve as bounty, to reward people who do work that benefits the blockchain.

    Coin supply may be otherwise distributed. These distributions will be advertised clearly (if they’re not, stay away). When you understand who will own the coins, how many coins will not enter public circulation, and how long things will stay this way, you can better understand the true value of coins sold at ICO.
  • What do the coins do? Cryptocurrencies must have utility, otherwise they’re probably being sold by a company that doesn’t need a blockchain and just wants to make fast money. Coins can be used to represent assets, to give users voting rights, to pay for network transactions, to be money, etc. etc. It’s up to you to clearly understand the purpose of a coin before you spend money on it.

There are numerous other considerations related to coin supply and distribution. Is the company going after unlimited funds, or are they setting a goal limit? Does the company have restrictions on how many coins can go to one individual to prevent “whales”? When will the coins be delivered? To what address should you send payment, and when? Where will your new coins appear once they’ve been sent to you?

The answers to these questions vary greatly from ICO to ICO. Read all available materials and talk to other knowledgeable investors so that you aren’t left hanging if the ICO’s economics are faulty. 

 

Social Communication

One encouraging sign when evaluating an ICO is active communication with community. As we’ve discussed above, there will be a visible online community surrounding any qualified ICO. These people are investors, early adopters, developers, media reps, and more. It’s up to the ICO company to engage these people. They should answer questions, provide educational materials, calm concerns, and generally seem like a transparent and authoritative information source.

Fraudulent ICOs often mislead their community with flashy claims and promises. Others communicate in suspicious or inconsistent ways. Others don’t communicate at all. Beware of all of the above.

Among legitimate ICOs, those with poor communication skills often don’t “have what it takes” to create a successful business. Operating a business requires advanced communication skills, and if these are lacking, or the company has not made community engagement a priority, this will likely be a major challenge for the ICO company in the months to come.

In the end, though, there’s no rule about how an ICO has to communicate. Some successful blockchains are terrible communicators and some failed projects have the gift of gab. It comes down to you and your gut feeling. Do the ICO’s communications make you feel confident or not? Find confidence. Follow confidence.

Developer Activity

A blockchain can’t succeed if no one is building it. Many crypto investors have no knowledge about technology development, but you should educate yourself if you want to invest in an ICO. A great way to find out about active platform development is to go to the GitHub page of the ICO company you’re interested in.

GitHub is a software development platform. Here, you can see how many developers are working on the code, how much work they are accomplishing, and when they hit certain milestones. Contributions are logged on GitHub with “commits” and other indications.

There are guides on Youtube that will help you interpret GitHub more clearly. At the very least, use GitHub to verify that development is active on the ICO you’re interested in. Development may not be performed on GitHub, but the ICO should make clear where else this information is available. Don’t invest in an ICO without active development.

Blockchain Platform

Most ICOs are conducted using another blockchain’s technology. For example, hundreds of ICOs have been run using Ethereum’s tech. NEO, EOS, and several others also conduct ICOs, or are preparing to do so.

Every ICO platform has advantages and disadvantages. Ethereum has been used by so many that there are well defined methods with which to build your own ICO using ETH. On the other hand, Ethereum is so popular that the network sometimes gets clogged, causing problems during the ICO.

For another example, NEO accepts only highly qualified ICOs (Ethereum takes everybody), meaning that those who pass muster have the “NEO stamp of approval”, and will likely get more attention than they would if they were just one of the hundreds of Ethereum ICOs. On the other hand, NEO requires high token balances in order to move forward. Also, NEO’s new enough that the ICO process is not as clearly understood as with Ethereum.

Ultimately, which blockchain an ICO uses to release coins is less significant than most of the previous posts. But it can tell you a bit about the priorities, competencies, and skills of an ICO you’re considering. It’s easy information to discover, so it’s worth finding out.

 

 

Tools to Invest

Now you have the criteria you should be looking out for when investing in an ICO, it is down to you to do the research behind prospective ICOs. Whilst there is no formula to picking a winning investment, as we've highlighted, there are areas you can look at to swing the odds in your favour.