An ‘initial coin offering’ (ICO) is the crypto equivalent of an IPO on the stock market, though they don’t function the same.
It can be better described as a type of crowdfunding where startups issue their own cryptocurrency/token to raise money which investors can purchase for fiat currency as a form of investment.
If the company takes off then these tokens can become very valuable, but the process is considered high risk.
Before you invest in an ICO, here are some top tips …
1) Analyze the White Paper
All ICOs will launch with a whitepaper, which outline’s the company’s aims and metrics and is basically their pitch to investors.
Everything you need to know should be in this paper and all of the information that is included should be fact-checked and queried.
If the white paper is poorly written, doesn’t contain much information, or you find that exaggerations have been made and statistics don’t add up, then this is a strong indicator that you shouldn’t part with your money.
2) Who is Behind the Project?
You can often get a good sense of a project and its likelihood of success by checking out the team behind it.
People you can trust will have a good track record, possibly been involved in similar ventures that were a success and have a positive public profile online.
You should also check if they have the skills and experience to be taking on such a project.
If you can’t find anything about the team, or worse, they have been involved in failures or scams, then you will know not to invest.
In reality, their track record will usually be somewhere in the middle and you will have to make a judgement.
Tip: Even if somebody means well, it doesn’t mean their idea will succeed. Look for competence and past indicators or success, not sincerity.
3) Do Their Tokens Have Added Value?
All ICOs launch by selling tokens, but some are inherently more valuable than others.
At the base level are tokens that are simply sold to raise money and their only value is tied into the success of the company. You cash them in later when the company is worth more like shares.
Others will allow investors to buy the services that the company offers (or will do when it gets off the ground). This gives you a bigger stake but also assumes you have an interest in the company beyond financial gain—though this also has its own resale value.
You need to see the big picture and make a judgement as to whether the tokens will be valuable in the future.
4) What Does the Community Think?
Since this all evolved from the web the ICO community is a bustling place and you can soon learn whether a company is up to scratch by seeing what everyone else thinks.
Don’t just swallow the marketing hype, seek out independent experts who will give their honest opinion—especially if you don’t know much about ICOs or the crypto startup space.
Facebook has banned ICO and cryptocurrency advertisements on its platform stating that many of them were “not currently operating in good faith.”
Scams have and will be carried out, so never go in blind.
While the white paper might seem legit, you also need to gain insight into how your funds will actually be spent. Companies should let everyone know how many tokens will be released, all of the dates and times, and a breakdown of how funds will be used—i.e. x amount to marketing, that amount to development etc.
This also applies after the ICO and development commences. If the company isn’t posting regular updates and being seen to progress, you might want to cash-in and cut your losses.
As long as you employ some common sense and keep these tips in mind, you will be in a good position to judge an ICO, though there will always be some risk involved like any investment. Never put in what you can’t afford to lose!
Have you invested in an ICO that went well or perhaps didn’t? Let us know your experiences in the comments below!