How to choose an ICO for investment?

Initial Coin Offering earned the reputation as a legitimate way of fundraising. In this guide, I will explain the essentials on how to pick the right ICO investments.

In recent years the world has been overwhelmed by a wave of ICOs — startups one after another produce their tokens of millions of dollars. People buy tokens in the hope of making a profit in the future, thus providing startups with investments for development. However, no one is insured against the fact that the startup may close and all tokens will lose their value. Here’s our guide how to better understand and participate in ICO safely.

What is ICO?

The traditional way to raise large capital is to conduct IPO (Initial Public Offering). The company sells its securities through the exchange, thus generating a profit that often far exceeds its annual income. But IPO is quite an elitist form of raising funds. The stock preparation procedure costs a company a lot of time and takes up to a year. And there is also a high entry threshold for investors. Thus, only large companies can IPO, and only large sponsors are able to acquire their shares.

In the cryptocurrency market, by analogy with the term IPO, the concept of ICO (Initial Coin Offering) emerged. Companies that choose to raise capital in this way issue digital tokens instead of shares. In the future, investors can take advantage of purchased tokens as follows: either by paying them on more favorable terms for services inside the platform, or by waiting for these tokens to increase in price, to exchange them for other cryptocurrencies or fiat money, and thus make a profit.

Since ICO deals with token production, a project conducting such a campaign must work with blockchain technology. ICO mainly launched by fintech startups, which have the product itself only on paper so far. But even if, at first glance, some business doesn’t seem to have anything to do with information technology, it doesn’t mean it can’t do an ICO. All we need to think about is how we can implement blockchain technology in this particular project. That’s why blockchain was created to make life easier for people. A simple example: a farmer can create an Internet platform through which the company’s tokens can buy products on special terms.

At IPO, investors acquire a stake in the company, become co-owners of the company, while ICO sponsors receive only an internal coin. Nor is the legal status of ICO determined — investors are not legally protected in case of failure in the market of their object of financing. There are precedents where companies raise funds and the product is never released. Now the crypto industry is a kind of “Wild West” where everyone can set their own rules.

Therefore, when investing large sums of money you should carefully study the project and pay special attention to the development team. But you can also invest tiny amounts in ICO — prices for one token start from a few cents. This is another important distinguishing feature of ICO from IPO — anyone can become an investor, you just need to create a cryptocurrency wallet on any convenient platform, replenish it with any amount, wait for the start of token sales — a couple of clicks, and now you have purchased tokens of the company.

There is also the practice of holding Pre-ICO. This procedure is not mandatory, but more and more startups prefer to conduct closed presales. At the Pre-ICO stage tokens are even cheaper, but their acquisition also involves great risks for investors. The token pre-sale proceeds are often invested in a beta version of the product.

Thus, blockchain offers companies to attract investments to implement their ideas in a simple way, without selling the company’s shares. The ICO market is very young and is now in its formative stage. However, it has some growth problems, primarily due to the uncertain legal situation and the increasing number of unfair and even fraudulent startups.

How to participate in an ICO?

Most large ICOs are currently running on the Ethereum platform and therefore raise funds in ETH, so you should buy this coins first. You can do this by converting other cryptocurrencies to ETH via the exchange, and then send your cryptos to any ERC20 token-supporting ether wallet.

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Then, as soon as you start an ICO, the ETH address will be published on the site of your chosen project. All you need to do is transfer the desired amount to it, and then according to the terms of the smart contract, you will receive your tokens on your wallet supporting ERC20.

You can store or transfer the tokens received to other users, as well as place them on the exchange for further trading.

In the latter case, it is important to determine in advance on which exchange you plan to trade, as some tokens are represented only on certain exchanges, and tokens of some projects and can only be used within these very projects, it all depends on their purpose, so it is important to familiarize yourself with the conditions of ICO and the tasks set by its creators.

How to choose the right ICO?

Every investor should remember that participation in an ICO is not only a high return, but also a high risk. Selling tokens is largely similar to the traditional venture capital market, where players expect startups to grow 30–40 times, but regularly their investments do not meet expectations.

At the ICO stage, companies rarely have a finished product, often with a bare idea, a technical solution (in whitepaper format) and a visual prototype. They have yet to find clients and the right people to join the team. At this stage of development, companies could expect the very first seed round of venture investments. On the venture market this is the most risky stage of investment — on average out of 10 such rounds half of the startups bring nothing to the investor, 3–4 have small returns and only 1–2 show a tenfold growth.

So, what kind of ICO is worth investing in? In order for an investor to choose the right one out of the many projects on the market, he must answer the key question: “Why will a particular token grow in price and what is its potential for growth?

Traditional financial valuation tools are unlikely to help in this situation, and there are a number of reasons for this. Firstly, at this stage the project does not have any indicators, so it is impossible to estimate its cost. Secondly, a token is not a specific part of the project. It turns out that the exact numbers determine only supply and demand in the market, which mainly depend on the expectations of investors.

How, in this case, in practice, to estimate the token growth potential in price? Analysis will help here. The project is broken down into certain key points, each of which is assessed separately. This helps to identify the strengths and weaknesses of the company, its potential for development and its possible weaknesses.

How to analyze an ICO?

The key parameters of an ICO

1. A market that largely determines the scale and development potential of the project. The ideal situation is as follows:

• A market with great potential for development, which already has sufficient volume, or a unique market;
• Low level of competition or lack thereof;
• The project is expected to occupy a significant market share.

2. The product. The value and potential of an idea itself can only be assessed subjectively. Properties of an ideal product (at the time of ICO):

• Unique idea, correct use of blockchain, open source code;
• Solution of an actual market problem;
• The technical component is competently described in the whitepaper;
• The market is ready for the product now or will be ready within a couple of years;
• The problems of other block projects do not affect the performance of the product;
• Community speaks positively about the product, sees value in it.

3. The role of the token. It is an important point for any investor who directly influences the yield. Now it is difficult to identify the best token model, but you can describe the desired properties:

• It has a functional application within the network, which in turn can not operate without a token;
• Along with the development of the project, the demand for tokens among the network members is growing.

4. Current achievements. They will help you understand which team’s main goal is to launch a particular product or make money on an ICO, and whether the team can work without major funding. Significant achievements before the ICO reduce the risk to the investor. Examples of such achievements:

• The alpha version of the product is publicly available;
• Speeches at conferences;
• Valuable partnerships.

5. The road map. The information from the road map will tell the investor when to expect market activity. It is the achievement of key milestones that usually leads to a significant increase in token price. An ideal roadmap contains a detailed description of the stages of development with a financial component. In this case, the team is well aware of how it will move towards its goal.

6. The team. For many investors this factor is the main indicator of further success of the project. A good team can at least change a product or come up with a new one, and a bad team can fail even with the best idea. The ideal team for the ICO phase includes:

• People with experience or expertise in the selected market (it is difficult to make a product for lawyers without lawyers);
• Blockchain developers;
• People who will take over the business processes (operations, finance, scaling);
• CEO with managerial and entrepreneurial experience;
• Advisory board, which complements the team on the above points.

7. Terms of ICO. Here you need to pay attention to 3 components: the boundaries of ICO, conditions, distribution of tokens. The correct format is not available, and conditions may vary considerably depending on the particular crowdsale. Positive moments for each of the components:

• The minimum and maximum amounts that a project can collect correspond to its scale. This means that if the project does not accumulate the minimum amount, all funds will be returned to investors, and in case of full success will not receive “extra” money. It is a big plus if the command can justify the boundaries of ICO, and not just indicate the direction of distribution of the collected funds. It is even better if the funds are issued in installments, as certain stages are reached;
• The conditions prevent the concentration of tokens in the hands of the largest players (whales);
• Distribution of tokens is specifically justified by the team, the creators are given a small percentage (15–20%). The team will not be able to sell tokens for a long period of time.

After studying the project it is worth thinking about the investment strategy. There are two main ways: to sell tokens immediately after they are released on the stock exchanges or to store them in anticipation of the company’s future development and the token’s multiple growth. Both strategies will work if the investor realized during the analysis that ICO is worthwhile and the project has great potential. However, their specific results depend on different factors. Let’s list the ones that affect the price rise immediately after entering the exchange:

• There aren’t enough Tokens for all investors. Anything that potentially creates a shortage of tokens at the ICO stage enhances future demand when they appear on the exchange;
• Many investors believe in the project. The higher the total mass of investors evaluates the potential of a project, the greater the chances of price increase;
• The team conducts a quality marketing campaign (only if there is an upper boundary). Then more investors will know about the project and will want to buy tokens;
• The tokens won’t be available on the exchange right away. The longer the pause after the ICO, the better the chances of rapid growth after the start of trading;

Let us also list the factors for long-term price growth:

• The team is active. Investors evaluate a project higher if its creators are active in social networks, tell about current tasks and plans for the near future;
• The team is achieving results. It can be the implementation of conceived functions, new partnerships, clients;
• The project has potential for development. The more and faster a project can grow in the future, the higher the investor’s assessment of the current situation;
• Token plays an important role. If the functional (not speculative) demand for domestic currency is directly related to the development of the project, the token has high potential.

All these factors are closely related to the project analysis criteria (team, market, ICO conditions, etc.). They can be used as pre-investment control questions.

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