In 2017, ICOs have raised over 5 billion dollars for hundreds of startups involving various implementations of Blockchain technology. According to Coinschedule, In 2018 ICO funding has already tripled raising over $15 billion up to June alone.
It is quite obvious by now, ICOs are going nowhere. While some skeptics hold their opinion it is just a new way to con naive investors, the truth is the phenomenon is enabling a whole new economic model, as soon as the market grows and matures.
Blockchain – Decentralization & Transparency to the Masses
Blockchain Technology solved a unique and difficult problem from the Game Theory, called the Byzantine Generals Problem: How do we create trust between two different parties (or more), with no central authority to oversee or mediate it?
Bitcoin was the first proof of concept we are able to do so, and it didn’t take the early adopters long to realize we can utilize the Blockchain, Bitcoin's technology, to create trust with no central authority in other markets and industries as well.
One thing that makes the Blockchain entrepreneurship and innovation so fascinating, is the process of becoming more transparent. If an ICO company wish to fund its project with investors money, it must not only create value and prove it is trustworthy, but must also remain transparent with its community, and usually have open source code.
Why are we talking about trust, you must be wondering? Well, most consumers love when middlemen bridge the trust gaps for them. For example, when you purchase a product through Amazon or eBay, they make sure the seller is trustworthy for you, they then contact the credit card company for you, and they basically do everything in their power so that you - as a user, will need to do as little as possible when you enter their website with buying intentions.
This process of bridging the trust described above, allegedly exists in the ICO markets as well.
Introducing Rating Agencies
Before we jump straight into ICO rating agencies, let's begin with understanding rating agencies' dubious history. Rating agencies are something investors & startups are very familiar with. That is probably because they pretty much control which stock you will buy. Their job is to assess and evaluate the risk of companies & governments making financial loans proposals to retail and commercial customers. Moody's, Fitch and Standard & Poor's (S&P) are the most familiar credit rating agencies nowadays. They control about 95% of the credit rating market worldwide.
Credit rating agencies had a huge role in the global financial crisis, the subprime crisis, of 2008. According to the Financial Crisis Inquiry Report, the leading credit agencies were key enablers of the financial meltdown. They've attached their seal of approval (the highest one – AAA) to terrible investment opportunities, knowing it will lead investors into losing their money. "The crisis could not have happened without the rating agencies" said the report.
This is just one showcase of the power of centralization. The rating agencies highly rated terrible investment opportunities because it made them money, and solely for that. "The large rating agencies were catastrophically misleading yet enjoyed their most profitable years ever during the past decade." Said the commissioner of the U.S. Securities and Exchange Commission, Kathleen Casey.
ICO Rating Agencies & Trackers
The cryptocurrencies and ICO markets keep evolving, and rating agencies & trackers have become an imminent part of the growing ecosystem. ICOrating, ICObench, ICOdrop, and ICOMarks are just a few of many rating agencies and trackers established in the past year or two. Their job is to analytically asses ICOs using computer algorithms and experts. Each agency has their own rating system. Some rate an ICO on a scale from 1 to 5 (where 1 is the lowest and 5 is the highest), some rate it from A to E and some just write plain and simple what their rating is.
How are they analyzing and evaluating the startups? Well, according to ICObench's FAQ for example, their computer algorithm analysis is checking for information availability on four subjects, including team members and information about them, or their marketing and social media interactions. Their experts, on the other hand, are going deeper by analyzing the team's previous successes & failures, the status of the product, their business strategy and more. Eventually, they even review the projects' legal status.
Others even add parameters like hype score, assessing technical components and go even further with evaluating the potential role of the token within the system.
When you scan their website, their methodology and how they emphasize their expertise, you truly feel like you're in good hands. Like they should earn your trust. But should they?
To trust, or not to trust?
Alethena is a Blockchain-Asset Rating Agency located in Switzerland. Recently they have released a paper titled "This Is How Easy It Is to Buy ICO Ratings – An Investigation". They decided, due to the non-transparency, dubious practices, and scams of the ICO projects, and because of the deceptive and dysfunctional behavior of ICO rating agencies firms, to launch an investigation on how the process is actually done – behind the scenes.
It unveils the methods of the ICO rating agencies. ICObench, for example, has a premium service in which, according to them, an ICO can pay for rating visibility. Is it only visibility? Obviously not. ICOs can pay not only for the location of the rating, but they even position the paying ICO's on the profile pages of their competitors! At the same time, these competitors will be blocked from appearing on the profile pages of paying ICOs. Meaning they deliberately include an ICO as "Top Ranking" (Sounds familiar?), and then shove it everywhere – so no matter what type of an investor you are, you will surely encounter it.
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Imagine how many investors will mistakenly think the ICO, that has paid to be seen so much and on the top of the front page, is there because it deserves to be there? Well… A lot.
Unfortunately, it gets even worse. Alethena has continued its investigation with understanding who are the experts these ICO rating agencies are working with. According to them, and to me as well, it has been a "public secret" in the crypto community that so-called expert ratings can often be purchased and are not independent at all. So Alethena went forward with their plan and registered an ICO on ICObench. Shortly after they did that, one "Vagiz" contacted them through Telegram with a great opportunity! Why don't you pay me, and I'll get the experts to rate you 5*?
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For just $500 they could easily be ranked 5*, while having no one truly evaluate their ICO. Not only that, they even negotiated a better deal! Why not make it two ratings (from two different experts) for $800? A piece of cake.
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The conversation went forward, they paid him 800$ and were actually included as a top-ranked ICO in a top place in ICObench, only through bribing their way up. Later, another fellow expert contacted them and even offered a better deal. That's how easy it is.
-Do Your Own Research
Surely, we were discussing ICObench alone. However, it is pretty safe to say mostly all ICO rating agencies and trackers behave the same way. That is why you should always DYOR – Do Your Own Research. Sure, it isn’t easy. Of course, it requires time and knowledge but a proper investment is one we understand, know and even love.
-Warren Buffet, Peter Thiel, and Peter Lynch, probably the most famous investors, are known to deeply understand the product, stock or even cryptocurrency they're investing in. They're doing it without the help of a rating agency.
How Do We Evaluate an ICO Then?
First, check out our blog post on how to evaluate an ICO where you can find in-depth fundamentals.
Long story short, you need to take the following into consideration:
-Make a general first impression through the project's website and product maturity. Sometimes the first impression is so bad you can stop evaluating the ICO right there.
-Study the project's Whitepaper, team and business strategy. This way you can understand their vision and how they intend on reaching it.
-Consider the token allocation, and the ICO's soft & hard caps (regarding how much money they are trying to raise). A rational hard cap means the project actually took time to evaluate the funds necessary for their development.
-Feel the hype: How big is the community? Is the ICO popular? Are people discussing the project on forums like Reddit or do you see the support of the Mega influencers backing the project.
These four criteria, written in plain language, makes it look easy. However, studying an ICO isn’t easy at all. It requires understanding the technology, it involves investigating the smallest details, and it takes time, lots of it. But to put in perspective – considering how small the market is, one good "catch" should be enough.
Conclusion
The ICO rating agencies & trackers industry is growing on a daily basis. Greed and the pursuit of easy profits are all over the place. Sadly, it is a part of every new industry or market. That is why we, as investors, must be careful and aware of where we gather our information, and who do we trust. Your general attitude from now on should be to disbelieve unless proven otherwise and always to do your own research.
Be safe, be smart!