You have spotted an ICO that might be worth a punt. So how can you determine exactly whether to go through with your investment? Below, we outline four aspects to an ICO that we ourselves look into before deciding to proceed with an investment of our own.
Before going further, we will just point out that we are working from the assumption that the ICO is not fraudulent. Our tips for avoiding fraudulent ICOs are outlined here. Naturally, that should always be your first point of call.
Next, we cannot emphasise this enough – never invest in any ICO more than you are willing to lose. Lastly, we once again point out that we are not professional investors. We do, however, invest quite regularly modest amounts in a range of ICOs that we have assessed to demonstrate real potential.
We share here some of our own approaches with readers. We encourage you to research rigorously before making any investment decision, particularly given the unregulated climate within which ICOs currently operate.
The Four Pillars of A Good ICO
We perform our analysis on each individual ICO in two steps. The first step involves looking into each of the following aspects of an ICO which we have designated ‘the four pillars‘:
- The Business Concept
- Functional Token Value
- Execution (Engineering and Marketing)
The Business Concept
This is generally outlined in the white-paper which you should be prepared to read cover-to-cover, noting down any questions you may and then reaching out to the team behind the project for clarification.
Novelty Does Not Imply Success
We emphasise here that the concept put forward by a white-paper does not have to be a revolutionary one. An established business model that simply seeks to expand its products and services to the blockchain can be just as attractive a proposition as any other – if not more so.
It is our view that future Blockchain successes will in the main arise on the back of existing businesses seeking to migrate to a distributed model to take advantage of the inherent properties of the Blockchain – essentially an un-hackable framework which offers a full guarantee of data integrity that no traditional, centralised model can offer.
Generally speaking, the more revolutionary proposals within the ICO universe carry a higher measure of risk as they also need to overcome Proof-of-Concept.
White-paper Clarity and Detailed Road Map Should be Considered Compulsory
We have pored through literally dozens of white-papers in just a little under twelve months. One thing we have picked up on is a general lack of precision in some of the documents that we have read. That is not necessarily a problem in and of itself. If the team makes itself available to provide adequate clarification on the white-paper, that is all well and good.
However, we have been finding that a white-paper that remains a little bit too vague in some respects generally implies a project path that is likely to be just as woolly. If your follow-up with the team results in no real improvement in this respect, that is a red flag – no matter how attractive otherwise the general proposition.
A clear white-paper with a clear road-map is paramount.
It is difficult to over-emphasise the importance of transparency here. Here are some specific recommendations:
Zero Tolerance For Anonymity
- If any members of the project team proceed on the basis of personal anonymity, walk away.
- If the whois result of the domain name(s) associated with the ICO sits behind an anonymity service, walk away.
Does the project team make itself readily available? Do the answers that they provide appear coherent? If the project team appears to struggle with communication, you may want to re-think about investing.
Our reasoning is simple – when there are issues in communication, that generally implies issues with trust. Open, accessible, responsive and respectful project contacts generally correlate with better project management.
Functional Token Value
So, you have got this far – which implies that (a) you like the idea, and (b) you like the team.
Next, however, we need to determine if the token associated with the ICO will appreciate in value over time. That, of course, is the whole reason for taking an interest in the ICO in the first place.
That is also where we find more than a few ICOs falling down; naturally, there are more than a few opportunists out there who are keen to jump on the ICO band-wagon, proposing a business model with little thought having been applied to the token itself.
If there is no clear mechanism in place within the business model that implies inherent value for the token, then that should be a cause for concern. If an ICO, for example, issues a token simply as a payment currency for its own products or services – when Bitcoin or Ether would have sufficed, for example – then, generally, we don’t expect the token to take on value. In other words, there needs to be added-value to the token.
Look Out For Token Economies
It is our view, at this very early stage in the whole ICO phenomenon, that the most successful tokens will likely be those that underpin an internal economy as opposed to those that represent access to a single product or service.
Look out for ventures such as
- Enjin: proposes Enjin coin as cross-platform virtual currency within online gaming.
- KICKICO: its white-paper describes an ICO-launchpad platform which is underpinned by an economic system whose products and services are accessed with KickCoin. Fees on services are levied and sent to a reserve fund which is then leveraged to stimulate demand for more products and services within the same economy.
- Enigma: designed to be a platform for other ICOs which need to solve a specific transparency problem that neither the Blockchain nor centralised servers can solve on their own. Enigma proposes a half-way house solution for the many business models out there that may require this. This implies a potential Enigma economy.
In each of the above cases, you find a common theme – a token which serves a purpose over and beyond that of one which gives access to a single product or service. This is not to imply that single-product or single-service tokens are liable to fail. We are simply outlining our belief that tokens with a wider horizon are more likely to prove successful.
At this stage, we have now determined that (a) we like the concept, (b) we like the team, and (c) we think the token carries potential for real, future demand and which therefore implies, one hopes, a corresponding appreciation in value. None of this, however, implies success unless there is a talented team to see the idea through. This is where you now need to focus your energies on the two most significant aspects to the project’s overall execution – Engineering and Marketing.
ICOs, almost by definition, tend to be engineering-heavy. The question now is whether the engineers behind the scenes have the talent and the skills necessary to bring a successful product to market. That, naturally, requires its own assessment. Are the engineers generally post-grads? This occurs a little too often for our liking. Industry experience, in our opinion, counts for everything – if there is significant absence of this, you may unfortunately have to walk away.
Many ICOs seem to struggle here. What you often see within many ICOs are hoards of engineers multi-tasking between development, admin, marketing and communication. That is nearly always a bad sign. What you often get, as a result, are maladroit interlocutors who struggle to understand that marketing and communication are specific business skills that need to be learned.
All too often, we have seen boys and girls who spend their days and nights developing network nodes off the back of UML patterns that exploit Python’s syntactically-closed inheritance protocols (I’ve simply invented all of that) and who, consequently, seem to think that every other skill in the universe is therefore beneath them – implying that they are above them, with the result for all to see.
Finally, check the budget. If an ICO does not spell out a clear marketing strategy, or if it does not allocate an significant budget for one (we get suspicious of marketing budget allocations that comprise less than 30% of the ICO windfall), then that probably means that we have a project that is about to fall at the last – and probably most important – step.
It Does Not End Here…
That’s right. This has all simply been a template for how to approach an analysis of any ICO. What tends to happen, once you start digging into a given ICO project , is that other questions get raised – and you’ll have to go off and conduct research in relation to the specific context in which the ICO operates. And since that is all context-specific, we can’t provide any real concrete guidelines here.
We will finish by repeating our two most important maxims:
- Never invest on a whim – do the research
- Never invest more than you are willing to lose