In the last few months, an interesting phenomenon has occurred in the crypto market. Fueled by FOMO, excitement, enthusiasm and pure greed, speculators have invested millions into ICO’s (initial coin offerings), a capital-raising tool for blockchain technology projects. In fact, not long ago, ICO investments have surpassed traditional Venture Capital funding of startups.
ICOs have become one of the top industry debates as many experts express concern, and warn that the lack of transparency around the issuance of ICO coins has a higher risk of a non-accountability of founders or outright scams in worst case scenarios. While the critics often compare ICOs (and sometimes the entire crypto market) to the”dotcom” bubble, its proponents claim that this new way of funding blockchain startups facilitates innovation that could radically transform and disrupt many industries and business processes.
First, in compressed version, let’s take a quick look how ICO actually work.
A startup has a business plan of how to apply their solution to a certain problem. They present their solution to the public, usually through a document called ”white paper”, which is basically a report on how the firm intends to establish their solution. They issue their own tokens (coins) on a platform using blockchain technology and distribute them to their investors. They are now funded to realize their business goals.
Investors are so speculating on a possible future payoff, but how is that different from investing in IPO (initial public offering of a company stock) and what kind of legal arrangement between an investor and a company this actually is?
Well, in reality, owning tokens does not mean you own a stake in the enterprise like with stocks. Sure, investment in tokens might lead to future share in revenue, depending on how the deal is structured, but more often than not, it doesn’t.
For many experts, including us, this is a concern, because it means the phenomenon is in larger part fueled by speculation, not on (sometimes baseless or at least lack of proof) solid value driven ground. You must look at an ICO as a seed round of typical VC investment. This is the very first stage of outside funding where the majority of projects have no actual product yet. Sadly to say, the statistics show that failure rate for startups without any product when raising capital is very high. There are of course exceptions, companies that have real use-cases and a potential to become new googles and apples.
But, taking into account the complexity of those projects, how does a non-technical investor evaluate whether investing in a certain ICO makes sense?
In our opinion, such decisions are quite senseless, mostly driven by greed and lack of overall knowledge. Sure, unknowledgeable investors might get lucky and exploit the current hype, but in the long term, playing the game blind is a disaster waiting to happen.
With so many new ICOs out there it is almost impossible to know, which project will survive, let alone thrive and succeed.
So what is the right way to approach investing in ICO? How do we do it?
The most important thing is to do your homework – research, research, research! It takes a lot of time, but if you don’t do it, you might as well play roulette.First, read the ”white paper”. With that, you should be able to grasp the problem the project is trying to solve and the approach they are taking to solve it. Be aware of the coin distribution model as it contains clues to the transparency of the project. The most important thing for a value of the coin is their use case. Why is bitcoin so valuable? Well, there are more factors, one of them is that it has established as means of payment, people gave it value by consensus. People accept bitcoins as payment for their goods and services. It is true that it is more so in the digital world, but more and more traditional businesses are adopting it also. The use case should be very clear because it is fundamentally connected to the demand for the coin. Higher demand means higher value, and this is what will make your investment pay off.
The second thing you should look at is the industry. Ask yourself what is the general state of the industry, how disruptive the idea is inside the industry? Will it change the status quo among the current market leaders of the industry?
Then you research the team behind the project. You take a look at their references and try to assess their competency. Search their background and see what they’ve been up to in the past and how successful were those projects.
Do not overlook the competition or similar projects! Cross compare similar projects and teams to get a feeling of which one of them has a better chance of taking over the leading role in the market.
If there are more, line them up against each other, and you will quickly get a feeling on who to bet on.
If the project already has some traction, try to find out what kind of developer community the project has, is ti growing, how are they resolving technical issues, what is the general mindset, etc.
I know, for many people making sense of all this technical blockchain stuff is very hard. It takes a lot of time to get to a point where you can be at least 70-80% confident about the success of the project and consequently on the investment you make.
What I am trying to get at is, for all of you ICO frenzies, you shouldn’t be excited about a new coin per see, you should be excited about a new business model enabled by a coin that will produce real value.
ICOs biggest flaw is still the lack of transparency and regulation, so don’t believe everything you read on social media or flashy promising websites. Your research needs to go deeper than that.
One thing is sure, ICOs are making big money for the entrepreneurs and developers that are launching those projects, for the rest, I guess time will tell. ICOs can make you money, but my bet is this kind of frenzy will end by the end of the year. Then, hopefully, people will actually start to look at what they are throwing their money into.
I advise everyone to be really careful in what they invest their hard earned money in.