How to Perform Due Diligence when Investing in Crypto ICOs

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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 scams. 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 Ethereum, EOS, NEO 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.

Read The Whitepaper

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.

Signs of Weakness

  • Confusing, incomplete or vague descriptions that demonstrate a rushed or poorly considered concept.
  • Little to no information about the project token, why it is absolutely necessary, and how it can be expected to appreciate in value.

Signs of Strength

  • Few projects get it right the first time, those that regularly update their whitepaper with developments and improvements demonstrate a commitment to the project.
  • Patents, technical descriptions of the project and a feasible solution to major challenges.
  • A practical reason for tokenization, with a strong use-case.

Check for an Alpha Product/MVP

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.

Signs of Weakness

  • Lack of MVP or alpha product that demonstrates the feasibility and competence of the team and its project.
  • Over-reliance on hype words, exaggeration and flashy designs to sell the product.
  • Incomplete MVP that fails to address the technical challenges of the project.

Signs of Strength

  • A strong team with experience in development projects to fruition.
  • An MVP or alpha that accurately captures the core of the project and demonstrates the technical prowess of the team.
  • Excellent reviews and rigorous testing by impartial third parties.

Check the Team Thoroughly

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.

Signs of Weakness

  • A team with little to no experience in blockchain-related technologies
  • No links to the team LinkedIn or advisor social media profiles
  • If the project has no public-facing team at all and is not a privacy coin, be extremely suspicious.

Signs of Strength

  • A highly experienced team with a history of successful projects.
  • A renowned development team, experienced in blockchain technologies such as smart contract development.
  • Fully transparent team details, including links to the team’s LinkedIn or other social media profiles.
  • The project is launched by a legally registered company.

Evaluate the Token Distribution

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,’ 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.

Signs of Weakness

  • A high proportion of the total supply remains under the team’s control after the ICO.
  • Team allocation has no lockup or vesting period, indicating a lack of long-term commitment.
  • Lockup period or vesting schedule not enforced by a smart contract.

Signs of Strength

  • Several publicly available independent audit reports.
  • Long-term team lock-up period or vesting schedule, this should be coded into the ICO contract.

Avoid ICO Rating Sites

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.

Signs of Weakness

  • A suspiciously high number of positive ratings, despite the project being somewhat average.
  • Generic reviews that do not detail the particular features of the project, indicative of a bulk paid review.
  • High reviews on ICO rating websites, despite poor community reviews elsewhere.

Signs of Strength

  • Positive ratings from highly trusted individuals in the industry, including CEOs of respected projects, impartial review services, and genuine experts.
  • Partnerships with well-respected brands or other ICOs that have been proven trustworthy.

Check for Artificial Hype

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.

Signs of Weakness

  • If the community is filled with a majority of bounty hunters or airdrop hunters asking generic questions about distribution or exchanges, then steer well clear.
  • Evidence of suspicious activity, including forcefully adding hundreds or thousands of people to the group, or automatic messages from a bot to simulate activity.

Signs of Strength

  • An active community showing a keen interest in the project, including asking technical questions and discussing their experiences.
  • Regular project updates, interactivity with the community and effective spam control measures.

Have Realistic Expectations

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! 


All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.
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After obtaining a Masters degree in Regenerative Medicine, Daniel pivoted to the frontier field of blockchain technology, where he began to absorb anything and everything he could on the subject. Daniel has been bullish on Bitcoin since before it was cool, and continues to be so despite any evidence to the contrary. Nowadays, Daniel works in the blockchain space full time, as both a copywriter and blockchain marketer.

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