An ICO is a method of raising funds in which the startup project involved sells a portion of shares of their company in the form of crypto tokens or coins. These tokens are usually the unique crypto currency created as the fuel or payment vehicle used by the project. Upon completion of the ICO and attainment of the targets set for the fundraising campaign (soft cap, hard cap/minimum and maximum targets), the tokens are listed on an exchange where investors who did not get the tokens during the ICO can acquire them.
ICOs fast became the top-rated method of raising money for startups in 2017, overtaking fundraising by venture capitals and angel investors significantly during that time. Despite recent slow down in ICO funds raised, coins like YieldCoin (YLD) ICO were reported to have surpassed its soft cap of $1.5m in less than 24 hours of launch during the ICO peak of 2017.
Companies that are launching their own ICOs usually don’t have a working product/services or revenue. Investors end up relying on white papers, websites and communities to make their investment decision.
The unfortunate truth is that most ICOs will eventually end up as failed start up or in some cases – pure scams. For example, Mycelium was one ICO where an employee quit and exposed some misuse of the ICO funds. There is also Coindash, where ICO funds were stolen in a 15-minute heist that involved a redirection of payments to a hacker’s wallet instead of the Coindash address.
There off coarse have been extremely successful ICOs that have returned mind-blowing returns on investment. Ethereum, NEO, OMG and many more.
The question is: how can an investor sift out the good from the bad when it comes to ICOs? Here are a few tips that we recommend but most importantly, “Don’t invest money you can’t afford to lose.”
Team & Advisors
The most important factor in determining an ICO’s success is the makeup of its team members and its advisory board. Past employment history and experience in the industry is what you are looking for among the team members.
Within the board of advisors, you are looking for known and experienced individuals in either crypto or the niche within which the DAO plans to operate. This includes C level executives, engineers and VP’s of known companies and reputable investors within their respective fields.
White Paper/Proof of Concept
Read the white paper in full. Does it describe a clear proof of concept? Is it clear about the ICO fund utilization? Does the white paper communicate a clear blockchain-based solution to an existing problem in an ecosystem, or is it all fluff? Is there an alpha version of the project that can be evaluated on a site like Github?
DragonChain was created with a clear proof of concept, which was to become Disney’s private blockchain platform that could deliver secure blockchain services to businesses and enterprises. Huge target market with a reputable brand name backing makes a strong case for investors. Add in about 20 applications and use cases were examined and later documented on the W3C Blockchain Community and you have something.
Partnership agreements that add value to the startup are likely to add value to the price of the token. Dragonchain is a Disney incubated firm. This was a solid backing by a company with a recognized name brand. Despite recent decline, Dragonchain reached $1 billion market cap in early January. Such affiliations usually speak volumes to investors about long term viability and the investor interest typically causes a demand-driven short-term appreciation of the value of the token in question.
Look at the ICO market cap of the token. An ICO valuation of market cap below $100,000,000 means that the token has ample space to grow. Nothing is guaranteed off coarse but it is easier for a token with market cap of about $20m to grow 10x than it is for a token with a market cap of $200m to grow 10x.
This chart shows the market cap of DragonChain as of early December 2017, when it stood at about $56.8m. By January 2018, the market cap had increased to nearly $1bn, representing an increase of almost 20x.
Is there a subtle endorsement from a central government? NEO had this from Chinese government and we all saw what it did for Neo’s price, apart from the fact that Neo had a concept that dubbed the “Chinese Ethereum”. This spoke volume to investors and eventually led to a great run on Neo.
ICOs typically begin with a pre-sale period. This is more like the private placements that occur in companies, where large portions of money is raised by offering stakes in the company to high net-worth investors. So with ICO pre-sales, the typical scenario is that entry limit in terms of purchasable token quantity is usually quite high. While the capital commitment on the part of the investor is high at the pre-ICO stage, the benefits that can be accrued are also enormous.
Pre-ICO sales is where you can get tokens at the cheapest possible rates and many ICOs present bonuses to initial investors during the pre-ICO sale. Not everyone will be able to get in on the pre-sale. So the next best place to invest would be the ICO itself.
Some ICOs require that investors submit their government-issued IDs (International passport or drivers’ license or national ID card) as well as their proof of address documents (utility bill/bank statement). This is done as part of the Know Your Customer (KYC) requirements. Some ICOs will also require that the intending investors signify interest even before the ICO commences so as to be part of a whitelist. Those in the whitelist get preferential allocation of tokens during the ICO especially if the hard cap is exceeded and refunds need to be made.
There is a soft cap and a hard cap. The soft cap is the minimum threshold of funds to be raised for the ICO to proceed. The hard cap is the maximum amount of funds that are to be raised in the ICO. Any funds in the hard cap are usually returned. Revisiting these figures after the ICO is a good indicator of how much demand these tokens will have once listed on exchanges.
Token Purchase Floor/Ceiling
Most ICOs take Bitcoin and Ether as the currencies for purchasing tokens. A few will accept fiat currencies. You should have a ready source where you can convert your fiat currency for BTC or ETH. Usually, the minimum purchase amount (floor) in BTC and ETH will be listed.
Start and End dates
Every ICO has a duration during which tokens can be purchased. Please note that if an ICO has strong demand, it will make it more likely for the hard cap to be reached before the end date. In this case, sale of tokens will be stopped even if the end date is still far off and
We hope that this short guide helps you better understand what ICO’s represent and how to go about participating in them and what to look for. Despite recent decline in ICO funding, ICO’s will remain a staple in the way companies raise funds in the future and knowing how to evaluate them is going to be important for any ICO investor.