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Blockchain-based initial coin offerings have raised a record-breaking $7 billion in 2018, despite the ongoing bear market and concerns over the long-term viability of many ICOs.
Investing in ICOs is risky business, with almost 80 percent of ICOs launched last year turning out to be It's no secret that the realm of Bitcoin and cryptocurrency are still in a bit of a "Wild West" phase.... More. Besides this, of the few ICOs that were not scams and managed to get listed on an exchange, the overwhelming majority are now trading at below the ICO price.
Despite this, a record-breaking number of ICOs were launched in 2018, all vying for a slice of an ever-shrinking investment capital pie. In fact, since the beginning of the year, over 1,000 ICOs have appeared, tried, and failed — as less than 30 percent of projects are successfully funded.
However, ICOs have also been associated with some of the most promising projects released, including, , and LISK — all of which have generated extraordinary returns for their early investors.
Since ICOs have historically produced some of the largest returns on crypto history, there remains immense interest from investors looking to identify and participate in the next big thing.
With the numerous scams and failed projects in 2018, it more important than ever to properly vet potential investments to rule out the bad eggs. To help with this, we have compiled a list of seven important points to add to your due diligence process.
We get it — whitepapers are long and often-boring documents that outline the value proposition of the project in relation to the current market and often competition.
While it might sound obvious, most typical investors will not actually read through the whitepaper in its entirety and, instead, default to the views of so-called industry experts or what they can gather from the project summary.
Despite this, whitepapers are also one of the most complete resources available for a project and can be one of the best indicators of its potential success (or failure).
Typically, teams that lack a deep understanding of the field they intend to enter will offer a rather vague view of their project, failing to describe the key elements required to bring it to life.
If you find yourself questioning the feasibility or value of the project after reading its whitepaper, you might want to reconsider your investment. After all, the white paper is intended to demonstrate a solution to a problem, if it doesn’t even do that, your attention is best directed elsewhere.
In the current market, exaggeration has become commonplace with many projects promising more than they can realistically expect to deliver. One of the best ways to separate the hype jobs from the truly dedicated teams is by looking for the presence of a Minimum Viable Product (MVP) or alpha release, demonstrating the feasibility and practicality of the project’s hypothesis.
According to research by ICOratings earlier this year, the vast majority of ICOs launch with nothing more than an idea to back up their claims, with 46.6 percent of ICOs lacking any tangible developments. Interestingly, this is the same percentage of ICOs that failed to live up to their promises, with a lack of an MVP or alpha product being one of the most damning indicators.
Projects with inexperienced teams and no MVP are particularly worrying cases and are usually best avoided. Flashy designs, websites, and documentation, while pretty, are not necessarily an indicator of success in the long-term — instead focus should be maintained on the feasibility and growth potential of the project.
When it comes to developing a working, profitable business, relevant experience is one of the most important prerequisites. A project without an experienced team is likely to struggle in a time where ICO funding is becoming increasingly challenging.
Working with blockchain technology is no simple task, and the industry is headhunting those with blockchain development prowess, leaving a relative drought in the freelance space.
Because of the complexities of developing with blockchain technology, having a developer onboard with significant experience in the field is a huge plus for the team, as only a developer will understanding the technical challenges a concept might encounter once it enters development.
Too often, projects attempt to rely on the experience of their advisors to see them through the tough times. However, with ICOs, advisors are often little more than names on a website, offering very little contribution or actual guidance, often because they are involved with dozens of ICOs at once.
That being said, having high-profile advisors does typically denote a higher quality project, as advisors like Roger Ver and John McAfee do not typically represent projects lacking promise, or at least a substantial budget.
However, you should also be aware that many scam projects falsely represent prominent individuals as their team. These projects will usually omit their LinkedIn or social media details, preventing you from easily checking if they are actually affiliated with the project.
Because of this, we recommend checking social media and/or LinkedIn profile of the questionable team member, checking whether they are in fact working for the project, or have at least mentioned it.
If the project you are looking to invest in will distribute tokens as part of their modus operandi, then carefully examining the token distribution, also known as the ‘Tokenomics is a combination of the word’s “token” and “economics’. Although there is no official definition of the term, it... More,’ can help to highlight any potential issues in the long run.
For the most part, projects with a long-term vision will allocate a reasonable fraction of their total supply to funding long-term partnerships, advertising, and client onboarding. This also means that over time they will be looking to sell these tokens to fund their continued development, which can adversely affect the token exchange value if not executed strategically.
It is also commonplace to allocate a small fraction of the total supply to the team, which is usually implemented with a lockup period, ensuring the team cannot sell or exchange their tokens for several months or even years. Ideally, this lockup should be as long as possible and should be coded into the token distribution contract, to be confirmed through an audit.
Projects with no lockup period risk having team members dump their tokens on the secondary market right after receiving their tokens, potentially crashing its value and making recovery difficult. Unfortunately, only around 48 percent of successful projects in Q2 this year implemented a lockup period, whereas only 6 percent had tokens locked for 18-24 months.
In 2017, ICO rating sites were all the rage, giving people the opportunity to quickly glance over expert opinions on an ICO rather than doing their own independent research. However, in 2018, the quality and reliability of these reviews have drastically taken a turn for the worse as the practice of buying and selling illegitimate reviews has become more commonplace.
In a recent experiment by Alethena, the Swiss Blockchain asset rating agency, it was found that ICOBench reviews could be purchased for as little as $300 each, allowing projects to easily generate a positive appearance for just a few thousand dollars.
On ICOBench, a staggering 81.7 percent of ICOs receive 4 out of 5 stars or higher, whilst more than 25 percent receive 4.5 stars or more. This, in a time where more half of all ICOs fail to reach their minimum investment requirement, and a significant fraction of those that do end up scamming.
Besides this, one of the main issues with ICO rating websites is that the visibility of a project is almost directly correlated with the amount of money they spend at the particular ICO rating site. By paying for premium slots, newsletter placements and listing within competitor profiles, the ICOs with the biggest pockets are able to buy their way into visibility and hence investments.
In 2018, generating substantial hype around a project is a very difficult task, typically requiring a groundbreaking idea, deep pockets and an enormous community behind the project. However, on the surface, it is not always completely apparent whether a project is genuinely sought after, or if the hype is artificial.
One of the most basic indicators of a successful project is its number of social media followers, with the largest projects typically having somewhere over 10,000 followers on Twitter, and the same on their main discussion community, usually either Telegram or Discord.
However, with the vast majority of projects lacking any real, funding or interest, there has been an increasing trend of relying on airdrops and bounties to generate apparently sizeable communities. Today, simply seeing a community of 10,000+ members does not necessarily indicate a strong project, instead, we recommend an alternative indicator — activity.
Looking at the social media activity of a project is a much more accurate indicator of its strength, this can include the number of comments and likes it receives on Twitter, the number of non-spam messages in its Telegram/Discord community, and the speed at which it reached its soft cap.
One of the surest signs of fake hype is a completely inactive Telegram community. Since Telegram has become the main mode of communication between the team and potential investors, many projects attempt to artificially inflate the number of users in this group. This, however, becomes painfully obvious when there are 30,000 members but a disproportionately low amount of activity.
When it comes to generating hype around a project, there is a tendency to overpromise and under deliver. While many might argue this is part and parcel of selling the concept to investors, it also makes it difficult to determine the weaker projects.
As it stands, the bulk of ICOs does not operate with the desired level of transparency many investors would like to see. This lack of transparency in the space leads to a deep mistrust between investors and the projects they support, often feeling left out of the loop, particularly after the ICO concludes.
Additionally, few ICOs support an automatic refund feature, with investors often being forced to chase to receive their money back when the soft cap is not met. While investors in successful projects are often left wondering how their investment is being spent, whilst typically having little recourse to reclaim their funds if the project goes rogue.
Because of this, we recommend only participating in projects that are genuinely outstanding on all fronts — as in the current market conditions, anything less than perfect will have a hard time achieving success.
Are there any due diligence steps you think are critical? Why do you think ICOs are generally failing to live up to expectations? Let us know your thoughts in the comments below!
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