You’ve probably heard the rage about initial coin offerings, or ICOs.
But are they worth the hype?
Some experts claim that you can make a fortune with these investments, but others say it’s a bubble that will burst at any moment, robbing the fortune of anyone who invests.
Who’s right? And is there a way to make money with this new kind of funding?
The answer is yes, there is a lot of money to be had. But you must play it carefully. In this article, you’ll learn how to inspect ICOs before buying, and the three pitfalls you must avoid.
This strategy will ensure you maximize your returns, while minimizing the risk involved in investing.
But first, why do we need other currencies anyways?
In 2008, Satoshi Nakamoto disseminated a document on the internet outlining a basic technological structure that could be used for a digital currency.
A few months later, Nakamoto mined the first Bitcoin. The rest, as they say, was history.
The idea behind this technology was to make sure that the government or central authorities like banks are no longer in charge of our financial transactions.
Bitcoin accomplished this with an innovative technology known as a blockchain. The blockchain is essentially a ledger of transactions maintained by a network of computers.
The blockchain allows for security and transparency at the same time, without the need for a governing body.
Less than ten years later, other developers invented alternative coins to Bitcoins, which are simply referred to as altcoins. Today, we have more than 1000 alternative coins.
Each of these altcoins is intended to seal a loophole of Bitcoin, making cryptocurrencies friendlier in addressing specific challenges and needs.
The total market capitalization of all combined cryptocurrencies hit an all-time high record of $150 billion this year, with Bitcoin alone trending at almost $96 billion.
There are a number of new cryptocurrencies in existence, but Bitcoin still maintains a strong hold in first place for volume, price, and market cap.
But if Bitcoin started with a paper distributed for free online, why don’t altcoins do the same thing? What’s the advantage of an ICO?
The answer, like many things in the cryptocurrency world, becomes apparent if you follow the money.
In 2014, the leading altcoin known as Ethereum came up with the idea of trading their coins, known as Ether, to raise funds in support of ongoing projects.
They called this approach an Initial Coin Offering, or ICO. In just 42 days, the Ethereum ICO raised over $18 million.
To raise funds outside the reach of the traditional financial system, altcoins use a method similar to crowdfunding.
Developers or organizations develop a concept built around altcoins or blockchain technologies.
The idea leads them to propose a new altcoin to investors. Any investors who like the idea give their contribution, usually in Bitcoin or Ethereum, to support the concept.
Once the project is ready, these investors become the first beneficiaries and are offered the the project’s initial coins at a discounted price. This price is agreed upon beforehand.
At this point, the investor’s hope is that other users of the altcoin will also become involved in the project.
The idea is that as they come on board, early investors will make profits by trading their coins. The model is simple, and hundreds of companies have used it to raise funds.
The success story of every ICO is measured on the basis of the total amount of funds raised. Some of the most successful IPOs have raised millions of dollars.
If an altcoin goes mainstream and becomes valued at millions of dollars, the earliest investors stand to make massive profits.
But of course, this is a speculative investment. How do you know which ICOs to choose, and how can you avoid risk?
Like a coin, every investment opportunity comes with two sides. You need to exercise caution before making serious financial decisions or commitments.
No one can fully guarantee that you’ll avoid risk, and that applies to both cryptocurrencies and other investments.
While cryptocurrencies were designed, in part, to prevent large organizations from defrauding individuals out of their money, it’s a concept that can’t be eliminated entirely.
With the explosion of ICOs in recent years, many fraudulent events are being created to swindle investors.
No matter how good a project sounds on a paper, its feasibility depends on a number of factors. Perhaps the most important of these, however, is the viability of the altcoin itself.
Guard yourself against scams. Plans that sound unfeasible or simply outrageous are probably just that.
A classic example of this was the Real Estate Coin, or REcoin ICO scam. It claimed to sell coins backed by real estate, then later diamond reserves.
To make matters worse, the management team claimed the transition from real estate to diamonds would be in the investor’s favor, giving contributors more value in diamonds than they had invested.
The SEC has charged REcoin with fraudulent activities, and may be one of the first in a long line of ICOs facing intense scrutiny from the United States Federal Government.
A great place to understand the project’s viability is through ICOBench, which provides a standard on which you can base your investments.
It’s also a way to stay up-to-date with the hot and trending ICOs, along with their ratings by experts.
According to ICOBench, 310 ICOs have successfully been ended, 261 ICOs are ongoing, and another 163 are upcoming.
Each of these ICOs is listed with their relevant details of what the altcoin deals with, how long the ICO lasted, and how much money was raised or targeted.
You will also get to know the number of ICOs falling under specific industries. While it may seem like altcoins are similar, they actually have use cases in virtually all areas.
You must learn about the technological advancements behind the altcoin, especially when it involves the money you’ve earned.
But your opinion isn’t the only one that counts. You need to see what the community is saying about the coin as well.
Before you start putting cash into an ICO you’ve only heard about, you need to read and understand the opinion of the rest of the community.
No matter how savvy you are with your knowledge of cryptocurrencies, you need to learn from others in the field. Thankfully, this isn’t too difficult.
There are two primary resources that will guide you as you look to understand the hype around the altcoin. The first is the ICO Crypto subreddit.
This is a great source of news and other information surrounding up-and-coming ICOs. You can glean a lot just by reading current posts and comment threads.
Your goal in reading these threads is to get a feel for the pulse of the community surrounding new ICOs. Detailed posts with summaries behind different altcoins is a great place to start.
Another great resource is the altcoin discussion forum on Bitcoin Talk. You’ll learn a tremendous amount perusing the main page on a daily basis.
Warnings of scam ICOs, as well as potentially lucrative ones, are posted on a daily basis here.
Of course, with both reddit and the Bitcoin Talk forums, you can also ask questions and seek advice. If you’re unsure of an altcoin, post a question and see what the community has to say.
If you’re just starting, begin by reading the forums first, as the topic you have in mind may have already been answered.
Once you’ve seen that the cryptocurrency community is in favor of the coin, however, you aren’t finished. You need to understand the tech behind the hype.
You should also remember that hackers are always waiting for an opportunity to mess up an otherwise good project.
One of the best examples of this was the DAO, a fund holding up to 16% of the altcoin Ether.
The hacker(s) accomplished this by creating code that withdrew a certain amount of Ether every few minutes until the accounts were drained.
This event galvanized the altcoin community to action, and many new safe holds have been put in place to prevent this from occurring again.
However, there’s the possibility of hacking with any new cryptocurrency. You need to examine the potential vulnerabilities before investing.
Because the ICO environment is growing and evolving quickly, you can be certain that many new tools will be developed over time and self-regulations will take center stage.
But in advance, you should examine the code behind the coin. Any serious team is working on self-imposed restrictions to safeguard the trust of investors.
It’s for that reason that you should learn about the team.
The technology behind an ICO is only as good as the team building it.
Investors may often have great ideas they want to advance, but without a steady hand at the helm, any altcoin can crash and burn.
No one wants to entrust investments in the hands of a rogue technological team. Before you make any decisions, your first stopping point should be the company’s website.
Don’t be impressed with the page’s design. Instead, go straight to the developer page.
For any serious ICO developers, you will find that they’ve included real names and pictures showing the face of each team member.
But should that be enough? Absolutely not! For each of the listed team members, you should go to the next level and research their activity and experience.
Learn about their education and employment history, as well as any projects they’ve started (or quit) in the past.
If you are satisfied with your findings, then you should proceed to check out their work throughout the industry of cryptocurrencies.
And because you would rather take your time than be sorry, check on their website. Look for links to Twitter handles, GitHub commit pages, or LinkedIn.
If yes, view the general information here. Is it similar to what is said on the developer page?
What do their posts speak about their expertise and experience? Get as many clues as you possibly can.
If there’s a disconnect between what they say and their ICO page, be wary.
Finally, stay diligent. Since we are talking about your money and financial prowess in the future, there’s no shortage of information you should learn.
Large capital investors buy background checks. You don’t have that luxury, so you need to make up for it with extensive research.
Before passing judgement on any ICO, you should take time to read the company’s whitepaper.
This is where you get to read the mind and spirit behind the project. ICO whitepapers are simply documented plans of what the project entails.
They usually detail the money needed for the project, the timeframe, and how many coins will remain with the developers after the ICO.
In other words, whitepapers are like a self-conducted SWOT analysis by a company.
It may not be a very good read or appealing to the eye, of course depending on their content producer and designers, but either way you need read it.
After reading it, you will be able to assess the strengths of the project, find out any outlined weaknesses (if any), as well as discover real or imagined risks and opportunities.
A decent whitepaper should also point out at how the developers intend to use the money raised through the ICO.
Further, it should outline the privileges that come with coin holders. Will they enjoy any voting rights? How often will dividends be paid, if any?
By the time you are done with reading the whitepaper, you should understand why the project exists and whether the goals and visions are reasonable.
But while whitepapers will give you the general outlook of the project, remember your investment is not in whitepapers.
This is a general roadmap. Look out for warning signs, but focus on all aspects in moderation.
As mentioned earlier, the world of ICOs is ever changing in terms of technology and problem-solving.
Completed ICOs are measured against the amount of money raised, and over what period of time.
Fundamentally, you would want to know whether or not the number of coins generated is limited, and if not, what is the upper limit?
If the coin has already been launched and released to the market, you should find out how it’s trading against the major coins like Bitcoin and Ethereum.
If you’re looking for a competitive advantage, look for projects ranked amongst the top ten.
Another place of interest would be BitcoinTalk.org, where like-minded persons give their opinions on ICOs.
Ultimately, you must remain skeptical and reach a decision, as to whether you would want to keep your coins for the hopeful future, or you would want to sell them.
If selling them is your intention, then you will need to calculate your moves pretty well and monitor the market patterns carefully.
In evaluating ICOs, you may need to invoke the wisdom of an authority site like ICO Ratings, which investigates the risks and hype on a variety of ICOs.
And while you will be gauging the opinions of the community members, careful attention should be paid to the responses given by the developers.
Evaluate whether their answers are vague or detailed, and how promptly the answers are given.
Let’s face the facts: not all ICOs will succeed.
While it’s certainly a disappointment, it doesn’t need to be bad news for investors. If there isn’t enough support to make the ICO a success, the concept probably wouldn’t have gotten widespread usage.
This prevents investors from wasting money on a project that will ultimately never take off, meaning you can use your money to invest in another venture with a more hopeful future.
If you get your money back, that is.
That’s why the last step before investing in an ICO is researching the steps outlined if the project isn’t a success.
A great example of an ICO that did this well is Inchain, which announced that the ICO requirements weren’t met, and that they would refund all contributors.
In an ideal world, this is what should happen. If the developers are raising $20 million, and know the project will take at least $10 million to develop, what happens if they raise $5 million?
In that case, the project can’t move forward. The ethical choice would be to refund contributors, as Inchain stated in their terms and conditions.
But there are many unscrupulous ICO management teams who will pocket the cash if the project goes bust.
Before investing, ensure you will get your money back if the ICO doesn’t deliver on its promises.
There are also some common mistakes you need to avoid when investing in ICOs.
Just like you’d never invest money with a mysterious stock broker, you shouldn’t invest in an anonymous team.
As you go through communities or campaign pages, you must raise a red flag whenever you realize nobody is talking about a particular ICO in the community.
If they aren’t willing to risk their reputation on the project, why would you risk your money with them?
A humorous example of creating an ICO scam without effort is that of Bardo, nothing but a name and a brand without any substance or originality.
The fictional story illustrates just how important it is to understand the team behind the ICO to get serious returns.
It is absolutely important that you get to know where the funds you contribute are kept, and at what point the funds will be accessed. This should not be left to guesswork.
In principle, all ICOs should have escrow wallets, a regulation mechanism adopted by legitimate companies.
Without this safety measure, there will be nothing at all that would prevent a malicious team from vanishing into thin air with your money.
Since escrow is gradually becoming a default requirement for online transactions, there is no excuse to skip this step.
This way, either of the transacting parties will have zero or minimal chances of defrauding the other.
A recent ICO for the altcoin Tezos has run into massive problems due to a lack of transparency about where the money should go.
The husband-and-wife team leading the ICO are embroiled in controversy with the Swiss foundation that manages the product after asking the head of the board to resign.
The huge financial incentives for the founders–an unheard-of 8.5% of the ICO proceeds in cash–present a situation that’s rife with perverse incentives.
You should also check to ensure the team will abide by a vesting schedule. This means that the management team can’t dump all their shares as soon as the ICO is finished. You’d like for management to have a vesting schedule of a year minimum.
A more safeguarded vesting schedule might break down the coins into separate sections, which are vested after longer periods.
If the vesting period is too short, the team may be intending to sell their coins early on. In addition to possibly harming the altcoin’s future, this also speaks of a team looking purely to turn a profit.
In June 2017, a backend developer for Mycelium parted ways with the Company, citing cases of deception with the ICO.
He went on to blame the company for misappropriation of funds, including a vacation to Spain using funds raised in the ICO.
The Useless Ethereum Token pokes fun at the lack of fine print that most ICOs use when they launch.
But could that be a case of æternity getting hacked post-ICO? While this could be impossible to predict, investors should do their research and leave no stone unturned, in their quest for going for the best!
You must see to it that you are cushioned against vulnerability. Do not fall for ICOs for what they appear to be. Look carefully beneath the surface.
Make sure you understand exactly what will happen after the hype around the ICO has died down.
The fine print you agree to can change the way your investment increases over the years. To really understand it, however, you need to look beyond the text itself.
It’s an understandable mistake, but a fatal one.
The ICO isn’t about a snazzy website, fancy logo, or impressive design. It’s all about the underlying technology, right?
Yes, in a sense. But you should also pay close attention to the detail that has gone into the peripheral assets. A legitimate company looking to raise millions has enough money to put up a decent website.
Look for red flags that indicate the team behind the ICO isn’t putting in the resources needed to deliver a top-notch first impression.
This is a purely subjective measurement of the validity of the ICO, but use your best judgement. If you’re not quite sure, compare it with other altcoin sites you trust.
The biggest mistake you can make when choosing an ICO to invest in is giving up too early in the research process.
It can get tedious very quickly, and you’ll probably want to give up. But that’s a major mistake. In order to guarantee the ICO you’ve chosen is worth your money, you need to follow each step.
I’ve found a technique that’s helpful when analyzing an upcoming altcoin. By creating a simple chart, you can record your findings in a way that’s easy to refer to later.
I recommend using a SWOT chart, standing for Strengths, Weaknesses, Opportunities, and Threats. This is where you’ll summarize all the main points of the ICO before you invest.
This will give you a firm grasp on what the ICO can accomplish and what it can’t, as well as a good analysis of the risks at stake.
If you skimp on the research step of the investment process, don’t be surprised if you throw your money at a lemon.
Instead, spend 10x the hours ahead of time so you can make 10x the money after the fact.
While most ICOs are doing well and built with the best interests of investors in mind, you must do your due diligence to ensure you don’t fall prey to illegitimate ventures.
By putting adequate security measures in place, you can earn generous rewards as an early ICO investors. Whatever you do, don’t rush to make an investment.
If you take your time to check for authenticity, professionalism, efficiency, and effectiveness, you’ll accumulate a serious amount of interest from your ICO.
It’s been said before that if you fail to plan, you’re planning to fail. There’s no more truthful statement when it comes to initial coin offerings.
If you don’t do your research, you could lose everything.
But if you choose the right ICO, invest wisely, and capitalise on the market early, you can make 10x you’re initiate investment.
With some careful research, you can make investments that change your financial future forever.