In this roundup, 10 experts share their insights on how to evaluate ICOs before investing in any new cryptocurrency.
- Braden Perry from kennyhertzperry.com
- Crystal Stranger from peacounts.com
- Jack Dwyer from 4trackcontent.com
- Mike Brusov from cindicator.com
- Jeff Stollman from Rocky Mountain Technical Marketing, Inc.
- Gary Nealon from usawa.io
- Kyle Fournier from CryptoManiaks.com
- Henry Stanley from ICOAxiom.com
- Kyle Asman from bx3.io
- Eric Kovalak from Vellum Capital
1. Braden Perry
Bio – Braden Perry, is a litigation, regulatory and government investigations attorney with Kansas City-based Kennyhertz Perry, LLC.
The Environment is Ripe for Wrongdoing. This is new territory where investors have made significant money. And where there is legitimate products, nonlegitimate products follow. The main reason is the lack of clarity on the regulatory structure.
The Regulatory Structure is Unclear: The major takeaway is the regulatory treatment is (still) unclear for cryptocurrency, including at the ICO stage. It seems as if every federal regulatory agency has chimed in on cryptocurrency, but none have taken the lead. The CFPB, SEC, and CFTC have all taken some action, but the legal space is still very confusing.
On Investing: As a former enforcement attorney and CCO and currently a financial services attorney who assists investors, including novice investors, I see many risks investors face when investing in cryptocurrency. So, what can an investor do?
Because these ICOs are not technically regulated by the SEC, the promotional materials for these investments have not gone through the same approval process as regulated products. So, what can an investor do?
First, investors should review everything and critical judgments and decisions in the investment process essential. Investors that utilize proper due diligence will not appreciate unnecessary surprises, especially when it comes to money or money management. There is likely no required disclosure of certain information on the company ownership, financials, business plan, and other information to protect investors, so the due diligence on additional detail on the business activity and specifics regarding the who, what, when, where, and how are critical. Potential investors will ask if there are compliance risks, regulatory risks, or legal issues.
Further, on the investment side, I advise clients on the due diligence related to cryptocurrency and these are generally a high-risk/high-reward and should be only for investors that can stomach the dramatic regulatory risk. The environment, with differing federal and state regulations related to cryptocurrency and the landscape, could dramatically shift with the individuals within the legislative bodies of those states. As always, transparency is the key understanding these novel risks that most industries don't have. Beginning investors should beware, but may be a great bet for a diversified and sophisticated portfolio looking for some additional return.
2. Crystal Stranger
Bio – Crystal Stranger, EA, author of The Small Business Tax Guide (Clear Advantage, 2014), wanted to help her tax clients who struggled when it came to bookkeeping.
Do pay attention to the team, are these really the people to pull this idea off?
Do research about competition, many of the popular use cases have many projects coming out.
Do join an investment pool to get pre-sale bonuses.
Don't judge based on ratings, most are paid for and don't mean anything.
Don't fall for celebrity endorsements, anyone can get Brock Pierce as an advisor, just give him 10% of the total tokens.
Don't buy any utility token that promises gains, this alone can make it a security.
As a specialist in marketing cryptocurrencies and advising on ICOs, I have first-hand experience understanding what a crypto-investor is looking for, and what makes a successful ICO.
Due diligence - An ICO is a cool new way to raise capital, but that doesn't mean there aren't bad actors. Research a company fully before considering any investment. Read through their white paper, check out their team, and understand their product.
Understand any pre-sale incentives - If you're excited about where a company might take their ICO, they often provide discounts for those willing to invest a certain amount early on. While there's always risk, this can be a great way to get in on the ground floor.
Consider an STO - Just because an ICO says it isn't a security doesn't mean it can pass the Howey test. A security token offering is a way of taking an asset like ownership of a company and making it tradable on a blockchain. Because a security token follows all government regulations from the beginning, these have the advantage of years of legal precedent on their side.
Ignore your instinct - If it feels too good to be true, it probably is. That's been true since the beginning of investing, and it holds especially true to cryptocurrencies. Anything that guarantees returns or shows sky high projections is probably a scam.
Use an expensive exchange - There are a lot of exchanges to trade cryptocurrencies out there, and some cost a lot more per exchange than others. When looking for an exchange, keep in mind how many currencies they offer, user base and security measures.
Give away your personal key - This is a lot like giving someone the keys to your house, but in this scenario they just take your house and everything in it. Keep your personal key secure at all times, but don't lose it -- it really is the only way to access your money.
4. Mike Brusov
Bio – Mike ,Co-Founder, CEO at Cindicator
A. Check the founders and the team:
Does the team have the experience required for the project? E.g. data science for AI projects.2. Is it the founders’ first project? If yes, the likelihood of the project’s failure is significantly higher. If the founders abandoned their previous ventures, they likely won’t finish this one.
B. Is the hard cap appropriate for the team?
A project with $15mn hardcap, just 5 team members and 35 advisors is a red sign.
C. Who are the advisers?
Most are bullshitters. Good advisers stake their reputations and open doors by sharing their network. Check advisors Twitter feed, or even write to them to check if their connection is real.
D. Token economy is key – read the white paper even if it’s really long.
You should check whether the team needs the token. Are they doing a token sale just to raise funds? If yes, that’s a red flag.
E. Is there an MVP? That’s the bare minimum.
Ideally, there should be paying clients, the technology should be validated, there should be pilots with companies. Most startups fail, that’s just statistics. Supporting just an idea is too risky.
F. Check the bonuses – high bonuses that stimulate FOMO (fear of missing out) are a red flag.
G. If you see guaranteed returns, run – legitimate projects would always highlight that no returns are guaranteed.
For example, in December, the SEC halted a $15 million ICO PlexCoin that promised 1,354% profit in less than 29 days. There are several red flags that might help you spot a scam token sale. The first thing to look at is the team. If the founders or team members are anonymous that’s a big red flag. While the crypto community emerged from privacy-obsessed cypherpunks, anonymous team members could easily disappear with the funds. If the team is public, you should verify that team members are indeed real people by doing a Google search of their photos. Scammers steal photos or use photo banks.
Check if the project’s partnerships are fake. Major companies would announce partnerships -- if there are no press releases about this, it’s already a red flag. You can go further and send a message to the supposed partner’s press office, asking to comment on the project.
Media coverage on the project’s website could also be fake. Check if media logos are clickable and linked to actual stories. Read what’s actually written in the piece, maybe it’s a small passing mention and an endorsement of any kind. The low quality of the website and the white paper could also indicate a high risk of fraud.
Poor web design and spelling mistakes might indicate that everything was put together in a hurry.
If the project promises that you will make 2x - 5x returns, that is a big red flag. Legitimate projects would always highlight that no returns are guaranteed. Similarly, if the project claims that the token will be listed on the biggest exchanges, it’s a red flag. Listing on any centralized exchange is a lengthy, expensive, and unpredictable process. Also talking about exchanges is a huge legal risk that any securities lawyer would flag. Next, examine the bonus offered to early participants in the token sale. If it looks too good and entices you to jump right in, stop. Scammers structure the sale to maximise ‘fomo’ - the fear of missing out - so that people would send in their crypto before carefully researching the project.
It’s a good idea to also see what’s going on in the project’s Telegram group. If a lot of people are joining and there no discussion is happening there, it’s likely that members are bots or were paid to join. If the moderators can’t give straight answers to fair questions or would even delete them, that’s a sign of a project with excessive risks. Finally, you should trust your intuition. If something doesn’t seem right, it’s best to skip it even if the hype around the project is huge.
Bio – Jeff Stollman is a technology futurist who advises clients on the viability and strategies for exploiting new technologies. He has been designing blockchain solutions for clients for over three years and has four patents pending in the blockchain area. He also assists blockchain startups on strategy, business case, and whitepaper development, including whitepapers used to support Initial Coin Offerings (ICOs), emphasizing compliance with evolving WhitePaper 2.0 standards.
The days where all cryptos went up are gone. Regulation, competition and market saturation makes the crypto world a stock-pickers market. Most cryptos won't perform well.
And the old surrogate measure of picking a good crypto investment based on the team is also soon to go the way of the dodo. Team is important. But too many teams consist only of some great software developers with good intentions. They don't have a business model and the team lacks the skills to create and sustain on ongoing business. They may have been lucky in their first go 'round, but that isn't enough in the new, competitive market.
Accordingly, due diligence is necessary. Ideally, the information you need is in the white paper. But most white papers are merely technical explanations of some sort along with a description of the high-level goal of the crypto. You need more. You need a credible business model that explains how everyone (the project, their staff, investors, and users) will make money. This includes evaluating the competition and determining how much of the target market is actually addressable. Naive project teams assume that if they are doing something unique, there is no competition. But there always is. Amazon still has to compete with Walmart, and Target, and hundreds of others stores. Google has to compete with Microsoft and Facebook, etc. Is there a credible marketing plan, other than throwing xx% of the proceeds of the ICO towards marketing? How will that money be used. Finally, the team needs to have operationally credibility, not just technical savvy. Who on the team knows how to set up the accounting systems, evaluate partnerships, price the services?
Bio – President of Usawa, a digital currency, designed to help make an impact on poverty in underdeveloped and developing countries.
Don't focus on the hype. Do some due diligence and read the white papers. Find the coins that have a solid business plan, a practical use that solves a real world problem, and that has a solid team behind it. For a less risky investment, look for asset-backed tokens that have liquidity.
Bio – Kyle Fournier is Director of Content for CryptoManiaks.com
Cryptocurrencies have become famous in the last couple years, especially for making the individuals that choose to invest in them rich. While investing in the most established cryptocurrency, Bitcoin, has proven to be quite profitable, it seems that the largest financial gains are coming from investing in ICOs, short for Initial Coin Offerings.
During ICOs, - which can be seen as cryptocurrency crowdfunding events - emerging projects sell their first coins for very low prices. If the project seems promising and it receives a lot of positive attention, its coins’ price may boom; investors who buy its coins for cheap can sell them for huge profits in a short amount of time.
Any knowledgeable investor knows, however, that the potential for great reward comes with great risk. Even though investing in ICOs may seem like an easy way to make money, it may be an even easier way to lose money.
To help you come out ahead, here are the Do’s and Don’ts of Investing in Crypto ICOs:
DO take the time to do your research to fully understand the project
If you can afford to invest money in a project by buying its coins, you should be prepared to invest time into the project as well by doing your research. Scour the project’s website. Read its White Paper. Examine its Road Map. If you don’t understand why the project is being developed and what it will accomplish, you have no business in throwing any money at it, regardless of how persuasive its marketing may be or how many of your peers are investing in it.
DO take an in-depth look at the project’s Team
Launching a cryptocurrency is a huge endeavor that requires a massive effort, usually from a large group of individuals. Almost all reputable projects list their contributors on their official websites. It’s worth your time to go through each member and try to get a feel for their skill and experience. Look for information about their past successes and failures, too. Often, the same individuals are involved with multiple failed projects in a row. The involvement of individuals with this type of track record is a really bad sign.
If a project’s team has chosen to remain anonymous, this is another really bad sign. You need to ask yourself, “Why would the team want to remain anonymous?” There are more concerning answers to this question than there are encouraging answers.
DO get a feel for Public Sentiment about the project
Any cryptocurrency that has a real shot at significantly appreciating in value will have a large community of people discussing it in various internet forums. Bitcointalk is a popular message board where most prominent ICOs are discussed, but a quick Google search of the project’s name should return plenty of results for you to look through. Read what people are saying, but don’t give too much weight to any single person’s opinion. Rather, attempt to measure the overall public sentiment by evaluating the tone of the discussion.
DO investigate the space the project competes in
Who does the project compete with? If you can’t begin to answer this question, you’re not ready to invest yet. There are new projects popping up every day, but too many of them try to accomplish the exact same goal. If the project is offering a way to transfer value between users quickly, for example, it should explain why it’s a better option than the dozens of other cryptocurrencies that promise the same service.
DON’T invest more than you can afford to lose
This is Rule Number One for investing, in general. Regardless of how excited you are by a project and how optimistic you are about its future, you must always be aware that your entire investment could easily be completely lost. If the thought of losing the total sum of your investment is unbearable, decrease the amount you plan to invest - or refrain from investing entirely.
DON’T send funds to any addresses you haven’t carefully verified
In a number of instances, ICOs have attracted scammers who see an opportunity to trick people into giving them significant sums of money. For example, a project named BeeToken held an ICO early in 2018. Scammers registered emails like email@example.com to impersonate BeeToken members, and then convinced investors to send their funds to the their crypto wallet addresses rather than the official ICO address.
If you invest in an ICO, you will have to send funds somewhere. Make sure you’re sending them to the right place!
DON’T get fooled by “shills”
For any ICO that is launched, there are a large number of people who hope to profit by a quick rise in its price. Often, many of these people plan to sell immediately after the price rise. Sometimes, these people even work together in a concerted effort. We call concerted efforts like these “pump and dump” schemes.
In order to artificially inflate hype surrounding a project and convince people to buy coins, raising its price, these people will swarm public forums and write overly optimistic comments about the project. If they’re sentiments aren’t genuine, these people can be called “shills.” Don’t get fooled by shills. Give more weight and consideration to carefully crafted logical arguments and avoid getting carried away by statements that seem too good to be true
DON’T invest in projects you don’t understand
This is essentially the inverse of the first DO, which was to take the time to research and understand a project. However, this idea is so important that it’s worth stating twice. “Pump and dump” schemes, shills, and scammers all prey on one type of person: the investor full of greed and ignorance. Be careful rather than greedy and ignorant - always, ALWAYS do your homework.
Bio – Henry Stanley is founder of ICOAxiom.com
First off I approach ICO investing like I approach traditional investing. Which is only invest what you can lose.
ICO’s are very risky just like investing in any start up is, so I spread my risk around multiple projects.
Don’t get consumed by the by greed or hype, if you only focus on the money that you can make you’ll ignore any red flags if there are any.
The second part of not being consumed by greed or hype is that you need to do your research, if your investing money into anything, why not spend some time researching the project.
Stay away from anything that promises a “guaranteed” return. There are many issues that can come up and impact that return so how are they offering a guaranteed return. Also many of those seem to be targeted by the SEC.
Bio – Kyle has extensive experience helping clients raise capital in the finance, banking, regulatory consulting space, and most recently, developed complex international tax structures in the tax advisory space.
* Investigate the team and their backgrounds- It is a good idea to verify their website or whitepaper bios against their LinkedIn profiles.
* Determine how the business makes money, If it isn’t going to be a profitable business or revenue-generating business you are unlikely to ever see return on your investment
* Check to see if there are existing companies providing the same product or service
* Invest in utility tokens based in the US- It can only lead to problems
* Invest in something you don’t understand, If you can’t explain it to someone else, don’t invest in it yourself
* Invest without having all of your questions answered.
10. Eric Kovalak
Bio – Eric is CEO and managing partner of Vellum Capital, a cryptocurrency and digital asset hedge fund based in Atlanta and Grand Rapids, MI.
I often tell people that investing in ICO's is similar to trading penny stocks. You must research each potential investment to build a solid thesis for why you're investing in that company. Never invest more than a small portion of your available capital. An ICO investor must limit their expectations to believe that only one in several investments will ever become profitable. Then it's a matter of the
profitable investments paying for the losers. It can be very rewarding investing in the cutting edge of blockchain's huge technology wave.