What is an Initial Coin Offering (ICO)? An ICO is a method of raising funds in which the startup project involved sells a portion of shares of their company in the form of cryptocurrency tokens. These tokens are usually the unique cryptocurrency created as the fuel or the payment vehicle for the smart contracts to be developed by the project, using a platform that supports such smart contracts. Upon completion of the ICO and attainment of the targets set for the fundraising campaign (soft cap and hard cap/minimum and maximum targets), the tokens are listed on an exchange where investors who did not get the tokens during the ICO can acquire them. ICOs fast became the top-rated method of raising money for startups in 2017, overtaking fundraising by venture capitals and angel investors by a mile. ICO records are being broken almost every month, both in terms of amounts raised as well as speed at which soft and hard caps are reached. Just a few days ago, the YieldCoin (YLD) ICO was reported to have surpassed its soft cap of $1.5m in less than 24 hours of launch. That is how much the industry is growing. In terms of cryptocurrency investments, ICOs are the hottest property among crypto investors. However, investors who buy into ICOs are basically sailing into uncharted waters. Companies that are launching their own ICOs are untested companies without any history. All they have to show is potential, and nothing more. Most ICOs will eventually end up as dead-in-the-wood products. An example is the Mycelium ICO, where an employee quit and exposed some misuse of the ICO funds. There is also Coindash, where ICO funds were stolen in a 15-minute heist that involved a redirection of payments to a hacker’s wallet instead of the Coindash address. However, there have also been successful ICOs that have returned mind-blowing returns on investment. Neo, OmisoGo, Ether, Revain and DragonChain are examples. The question is: how can an investor sift out the good from the bad when it comes to ICOs? Here are a few tips on how to evaluate and buy ICOs, without all the highfaluting language that may end up confusing rather than help you.
Evaluating The ICO
Please note that ICOs are not regulated investment products and so are extremely risky. You can lose your entire investment, or the creators of an ICO may decide to buy a private jet with your funds. So you should only invest money you can afford to lose without losing sleep or peace of mind. This article will not bug you with details you cannot apply. For instance, it is useless telling an investor in a far-flung region of the world to start researching the team behind an ICO. How much of such research can such people really do? It is better to stick to the basics. Here are the basics points you need to use in evaluating in an ICO.
- Existing Product/Service Line
An ICO of a startup with a product or service that is already in the market and has thousands of customers with plenty of opportunity to add more customers is likely to be a winner. Look at the examples of DragonChain. DragonChain had a defined product and an already established customer base, and solves a definitive problem that has been identified with protection of user data within the blockchain ecosystem.
DragonChain (DRGN) ICO Statistics. Images courtesy of ICODrops.com Furthermore, plans are under way to construct an incubator as well as an architecture blockchain platform that is capable of running without a server. This new technology is therefore strategically primed to take advantage of the growth in the cloud computing ecosystem. So you have a sound product that is about to take advantage of a market opportunity, which adds substance to the token. At an ICO price of $0.0663 (about 6 cents per token) and a current price of $1.50 per token, DragonChain would have returned to an investor who spent $663 to acquire 10,000 tokens, a yield of $15000 within 2 months!
- Partnership Agreements that Will Add Value to the Startup
Partnership agreements that add value to the startup are likely to add value to the price of the token. DragonChain is a Disney incubated firm. This was a solid backing by a company with a known, solid history. Such affiliations usually speak volumes to investors about the viability of such projects, and the investor interest typically causes a demand-driven short-term appreciation of the value of the token in question.
- Lower Market Cap Creates Greater Value
Look at the market cap of the token. A valuation of market cap below $100,000,000 means that the token has ample space to grow. The lower the market cap is below $100m, the more space it has to make good returns. It is easier for a token with market cap of about $10m to grow X10 to hit the $100m market cap range. However, a token with a market cap that is way above $100m (say about $500m) will need to see a lot of growth in its fundamentals to see a X10.
© Coinmarketcap. Market cap of DRGN as at December 2017 This chart shows the market cap of DragonChain as at early December 2017, when it stood at about $56.8m. By January 2018, the market cap had increased to nearly $1bn, representing an increase of X20.
© Coinmarketcap. Market cap of DRGN as at January 2018
- The White Paper/Proof of Concept
Study the white paper. Does it describe a clear proof of concept? Is it clear about the ICO fund utilization? Does the white paper communicate a clear blockchain-based solution to an existing problem in an ecosystem, or is it all fluff? Is there an alpha version of the project that can be evaluated on a site like Github? There has to be relevant discussion of the proof of concept in the white paper as well as an alpha that can be evaluated for an ICO to be worth investing in. DragonChain was created by Disney in 2015 with a clear proof of concept, which was to become Disney’s private blockchain platform that could deliver blockchain integration of business applications and business data protection. About 20 applications and use cases were examined and later documented on the W3C Blockchain Community.
- Token Limits/Cap
ICOs may come with a hard cap or an open cap. A hard cap puts a limit on the number of tokens that are available. Open caps mean there is no limit to tokens being issued to the market. Supply restriction that occurs from a hard cap will more likely lead to a short term price appreciation if there is demand on that token.
- Subtle Central Endorsement
Is there a subtle endorsement from a central government? NEO had this from China and we can all see what it did for Neo’s price, apart from the fact that Neo had a very good concept. NEO has colloquially been called “Chinese Ethereum”. This speaks volumes about the Chinese government’s support for this altcoin, even if this has been done covertly. There are other factors that must be considered in evaluating ICOs, but these ones are some of the most important.
ICOs typically begin with a pre-sale period. This is more like the private placements that occur in companies, where large portions of money is raised by offering stakes in the company to high net-worth investors. So with ICO pre-sales, the typical scenario is that entry limit in terms of purchasable token quantity is usually quite high. So while the capital commitment on the part of the investor is high at the pre-ICO stage, the benefits that can be accrued are also enormous. The pre-ICO sale is where you can get tokens at the cheapest possible rates, and many ICOs present bonuses to initial investors at the pre-ICO sale. By the time the sale moves to the ICO stage proper, the value of the tokens would have risen appreciably. So the pre-sale ICO investment stage is the best possible entry point for an ICO investor. However, not everyone will be able to get in on the pre-sale. So the next best place to invest would be the ICO itself. In order to participate in ICOs, you have to take note of the requirements. These are described below.
Some ICOs require that investors submit their government-issued IDs (International passport or drivers’ license or national ID card) as well as their proof of address documents (utility bill/bank statement). This is done as part of the Know Your Customer (KYC) requirements. Some ICOs will also require that the intending investors signify interest even before the ICO commences so as to be part of a whitelist. Those in the whitelist get preferential allocation of tokens during the ICO especially if the hard cap is exceeded and refunds need to be made.
There is a soft cap and a hard cap. The soft cap is the minimum threshold of funds to be raised for the ICO to proceed. The hard cap is the maximum amount of funds that are to be raised in the ICO. Any funds in the hard cap are usually returned. It is important to know what the soft cap and hard cap are, and to revisit these figures after the ICO as they are a good judge of how much demand these tokens will have once listed on exchanges. This has been discussed earlier in this article.
- Token Purchase Floor/Ceiling
Most ICOs take Bitcoin and Ether as the currencies for purchasing tokens. A few will accept fiat currencies. You should have a ready source where you can convert your fiat currency for BTC or ETH. Usually, the minimum purchase amount (floor) in BTC and ETH will be listed.
- Start and end dates
Every ICO has a duration during which tokens can be purchased. Please note that if an ICO has strong demand, it will make it more likely for the hard cap to be reached before the end date. In this case, sale of tokens will be stopped even if the end date is still far off. It is hoped that you can use these tips to get yourself some good ICO investments in 2018.