It’s no secret that there’s a surplus of ICOs at the moment. And for those new to the ICO investment game, it can be a complex and crazy world.
The recent legal turmoil surrounding Tezos and the threat of the world’s fifth largest ICO Bancor failing is sending shockwaves through the communities, making ICO investors feel particularly on edge and wondering whether ICOs are worth investing in after all.
It’s true – the ICO market has always been a lively one, but it’s also multifaceted with many intricacies. This, together with the widespread uncertainty around ICO regulation makes it even more crucial to look at every angle before jumping in and investing your hard earned cash.
It’s also true that the doubt and wariness surrounding ICOs is at an all-time high, but this doesn’t mean that all ICOs are in danger. There are still some robust and secure ICO projects out there, and it is still possible to make huge profits.
But at the same time, it’s also important to remember that there are also many ICOs that are deemed to be a bad investment and ultimately fail. Inevitably, it is these projects that will lead to substantial financial loss.
So, is it all doom and gloom for ICOs and potential investors? Has the ICO bubble finally burst? Was the thought of making bucket loads of cash without really doing anything too good to be true?
Skeptics would be quick to answer ‘Yes’. However, it is possible to make a profit through investing in the right ICO – ‘right’ being the operative word. This is why, it’s more important than ever to spend a little bit of time researching various ICO projects and what they have to offer before jumping in head first.
They say size matters, but this is not the case with ICOs.
Busting ICO Myths
It’s time to cut through the bullshit!
They say size matters, but this is not the case with ICOs. There’s long been a common misconception that the bigger is the ICO the better. This couldn’t be further from the truth.
From the outside, it might seem that a ‘big’ project that manages to haul in a huge hard cap will bring in a solid profit once it moves to after-hours trading… not necessarily true at all.
In a way, this attraction to ‘big’ things is normal. We’re born with an innate sense of competitiveness. We’re also petrified about being the one to ‘miss out’ on something. Everyone hates FOMO! These feelings are only heightened once huge sums of money are involved, especially when it engages a community. But you need to remember big doesn’t always mean better.
This increased desire to fit in has a knock on effect – the more people invest the more investors it will attract. In other words, as soon as potential ICO investors see everyone else investing in a project, it’s quite probable more will follow. It’s a classic case of trying to keep up with the Jones’s.
We’ve all been there, done that. The combined notions of staying up to date, remaining competitive and the possibility of hitting the jackpot without little effort are enough to push us towards making impulsive and sometimes irrational decisions.
Why do Bigger ICO Projects Often Fail?
We’re not saying that all ‘big’ projects fold, but it’s important to note why they do sometimes fail.
One of the number one reasons why some of the bigger projects flop on the aftermarket is because there are proportionally less regular retail buyers, unlike there are in the smaller projects.
The buyers/investors in big ICO projects are considered to be large buyers, which are also known as ‘whale’ investors. These larger investors are the ones throwing in huge sums, which can range anywhere between $1million USD and 5. Their substantial investments usually earn them a few lucrative perks, such as generous discounts. Of course, this means that your regular buyers or the so-called small fish are at a disadvantage.
How is this so?
It’s easy. In tougher times or when it’s evident a loss might be made, whale investors, also known as bulk investors, are able to get rid of their tokens. To many, it would seem that they’re making a loss, but in fact this isn’t the case at all because they did get their original tokens at a heavily discounted price to begin with after all.
A case in point would be an investor that gets their tokens at a crazy discounted price of a 70% bonus. Let’s say that the project, which he or she invested in, drops by a cool 40%. To the average ICO investor, this would mean a 40% loss, but to the bulk investor, they’ve still made a considerable profit of 30% due to them purchasing at a lower price in the beginning. The incentive to offload a fair portion of their tokens once they hit the exchanges, is high, and this can drive the price down significantly.
Unlike the whales, the average retail buyer will spend only around 3 Ether when investing in an ICO.
The Big Fish vs. The Small Fish
Unlike the whales, the average retail buyer will spend only around 3 Ether when investing in an ICO. So if we go by the current Ether value, it equates to approximately $1000 USD. This is a fraction of what bulk investors are spending, therefore it’s both impossible and illogical to offer such small-scale investors any discount incentive. This means that when the project experiences a drop in value, investors are less likely to sell. Instead they’ll sit on their initial investment in the hope of making a profit somewhere later on down the line.
So before you go searching for a big ICO project to invest in, think about it carefully. Remember the bigger the imbalance between the two investor types is most likely going to result in sizable value drops, which leads us to the first golden rule when investing in ICO projects – don’t go big (or at least too big)!
1. Don’t Go Big
Focusing on those large ICO projects that are surrounded by publicity and hype is most likely going to end in disappointment and loss.
Instead, look at investing in those smaller to mid-size projects and focus on their value as opposed to their stature. And if you’re wondering what the ideal project size value is to make a profit, history tells us it’s between the $2 million to $20 million USD mark.
It’s important to remember that ICOs are startup companies. They use the initial funding earned through the project to help prove their concept and therefore bring their project alive.
Colossal ICO projects are often overloaded with hype. These are the types of projects whales love to pump their money into. But if you make the conscious choice to avoid the larger ICOs, you’ll also lessen the risk of those whale investors pumping their cash into the projects at discounted prices and then dumping their tokens as soon as there’s a hint of uncertainty.
Not only will you better your chances at making a profit when investing in a smaller to mid-size project, you’re also less likely to get involved in a project that becomes embroiled in regulatory problems.
The short of it is this – the bigger the project the higher the risk, both financially and legally.
And if you’re wondering what the ideal project size value is to make a profit, history tells us it’s between the $2 million to $20 million USD mark.
2. Check Out the Team
Are we advocating you to become stalkers? Kind of, but not in the creepy sense!
It’s important to also do your homework on the faces behind the project; in other words the team!
Who is the team? What’s its experience? Are they already successful?
You wouldn’t believe how many inexperienced people try to start up projects. It’s their greenness, together with their empty track record, that should also act as a big red flag.
There are so many people out there looking to make big money quick, and this also includes team founders. Without any evidence of their prior experience and achievements within the market, there’s little to go by, and you’re just increasing your risk even more.
Ask yourself the following questions: are the people behind the project business-minded? Do they already have a number of successful projects under their belt?
If the answer’s ‘no’, ditch them, because at the end of the day, do you have the extra cash to simply throw away at a person’s pipedream of a project that may or may not succeed?
What’s more, the more experience the team has the less likely it is they’ll risk getting involved in any dirty business. After all, they do have their already strong reputations to uphold.
Therefore, it’s a great idea to look for a team of leaders with blockchain experience, or at least some experience with building an open-source platform or community.
A good team is run by good leaders – the same rule applies for every single kind of successful business. It’s these leaders that paint a compelling vision and go on to recruit a strong community to help execute the project and get it off the floor running.
So, what’s the moral of the story?
Do some snooping first!
Check the potential ICOs developers’ LinkdIn, GitHub and Twitter handles from the ICO website. Find out as much as possible when it comes to their professional experience and dedication to the cause. It’s time to get googling!
Waiting for a year or two is simply not a good use of your available capital.
3. Be Wary of Gaps and Dark Periods
When researching your potential investment opportunities, you also need to pay attention to the project’s roadmap or projected timeline. Are there any ‘dark’ times or ‘black holes’? What is the lockup period for the token? 2 weeks, or 2 years?
In an ideal situation, you should be able to use or trade the tokens very shortly after the ICO ends. Waiting for a year or two is simply not a good use of your available capital.
Waiting for a year or two is simply not a good use of your available capital.
4. Check the Project’s Progress
Is the project in its infancy or is it more developed?
A project that has a whitepaper is obviously a good thing, but if this is only what they have, you might want to dig a little deeper. Without anything else, it’ll be difficult to evaluate.
When you delve into that crazy world of ICOs, your head will start to spin. There are projects that have nothing, projects with only a whitepaper; there are others that may just have a beta version and so on.
Basically, the newer the project the more limited its functionality may be, so you will have to scratch below the service.
Even though there are a number of ICOs out there that have experienced massive success without any code written, it’s often easier to narrow your search down to those projects that have at least a few lines of working code.
If you’re interested in a project that’s still in its infancy, look for the ones that have VC (venture capital) support, as many big venture capitals such as Fenbushi and Blockchain Capital seek out newer projects that show promise. This information can usually be found on the project’s landing page of its website.
In the past, there have been cases of prices skyrocketing to an increase of value of 500-1000% like Ethereum and NEO – imagine that!
5. Check the Hard Cap
To understand this rule, you need to understand what a Hard Cap actually is. Generally speaking, it’s defined by the maximum amount of USD a crowdsale (the sale of a token that will eventually be utilized in the business) will get. The majority of projects go about setting an excessively high hard cap, which is usually unlikely to happen. In fact, many projects never reach their hard cap; examples of such projects include Brave Browser and Status.
To the novice investor, you might question why the majority of projects can’t meet their hard caps.
The answer is simple. There are simply so many ICOs out there and there’s too much competition.
A project not reaching its hard cap is not always a problem. If it reaches over $2 million USD, it’s usually okay. But the amount of money it has also must be analysed together with the team – a smart team could do a lot with just $2 million whereas an inexperienced, incompetent team with $200 million could achieve nothing.
All token projects should therefore make it their goal to destroy any unsold tokens straightaway upon the completion of the token sale. This in turn will help keep the markets steady and in balance.
Another thing to be cautious of is future offerings. Make sure it’s impossible to make any kind of offerings in the future on the same tokens. A block on future offerings will ensure that you’re more protected against the market being infiltrated with an oversupply of tokens.
Nothing is ever guaranteed, however, when there are no future offerings on tokens, there’s more of a chance of the prices dramatically increasing within a year. In the past, there have been cases of prices skyrocketing to an increase of value of 500-1000% like Ethereum and NEO – imagine that!
6. Look Out for Projects that Need to be on the Blockchain
Once you start digging and carrying out research on potential project investment ideas, you’ll soon discover that there are a shocking number of projects doing ICOs that don’t need to be on the blockchain at all. They simply want in on the action and don’t require blockchain technology to solve the problem they are presenting.
This is why it’s absolutely essential to read the project’s whitepaper prior to making a decision whether to invest or not. A company that doesn’t require blockchain technology should set alarm bells ringing. Because if they don’t have it, it means that they’re creating an ICO for the sake of creating an ICO.
Blockchain technology is a uniform part of an ICO project. This is what adds that extra-special something to it while also giving it a highly competitive edge.
7. Ensure the Project’s Founders are Engaged with their Community
When you go for that mid-sized project there are many benefits. Another one of these is that the project’s founders are generally going to be a lot more available.
Again, when researching, look out for the founder’s engagement. Are they connecting with the community? Are they accessible via their community channels?
A good CEO or founder will make sure they’re committed to their community by engaging with it. CoinFi’s founding team are a great example of this, they’re very active in their Telegram community.
When community managers are brought on board to run the ship, it’s very difficult to get in contact with the people you might need to communicate with to get the right answers or advice. In this case, you could potentially waste a lot of your precious time going through various channels to get to the people you want and more often than not, such attempts prove to be fruitless.
Remember a community manager or another person under this guise doesn’t care. They’re just employees doing the job they’ve been hired to do – to filter comments and vaguely respond.
An investment in a project, whether it’s big or small, should be a personal one. Not only does this give the investor more faith, it also minimizes risk.
With regards to the founders or the CEO, you also need to look at their personal investment. Are they committed to making a handsome profit through their own tokens or are they just interested in the potential Ethers they’re going to make throughout the ICO?
If it’s just the latter, it’s another sign you shouldn’t engage with the project and look elsewhere. At the end of the day, you need to know that the founders’ interests and core values are in line with your own. You also need to see that the founders have faith in their project. Essentially you and the founders should have a common goal.
8. Don’t Put All Your Eggs in One Basket
They say that with any type of investment you shouldn’t put all your eggs in one basket – it’s better to spread the risk rather than just investing in one coin in the hope that it’s going to rise significantly.
During your initial ICO project research, select five of them and then eventually narrow it down to your top three based on the above criteria and ICO investment rules.
9. Follow what the Media and Community have to Say
The internet is packed with good information, information that will be of great value when assessing whether an ICO project is worthy of your investment or not.
With any ICO project, transparency is key, as this is one of the tell-tale signs a project is trusted or not. Remember transparency creates trust. Therefore look out for public communication channels, Telegram, Slack, FB, Reddit, YouTube etc. Enter the community with a neutral stance and try and gauge its atmosphere while paying attention to the actual size of the community in question and the amount of activity.
Other than the Slack community, sources such as Twitter, Facebook and Reddit can all play an important role when assessing the validity of a project. A good example of a project showing such openness is Iconomi, which publishes its monthly AMAs on Reddit without fail.
But despite the plethora of information out there, there’s still a heap of fake news or ‘modified’ news surrounding some projects. Unfortunately, with the popularity of ICOs, many bounty posts have popped up. Such threads encourage and reward its users to spread positive vibes and words about a project, ones that may possibly be unfounded. This in turn creates hype thanks to the extra media coverage and exposure it receives. Not all posts are regulated and many aren’t objective, so it’s definitely necessary to explore as many media channels as possible without buying into the hysteria.
The Bottom Line
It’s wise to show a little bit of skepticism in this type of market.
It’s true, there’s a great deal of fear and doubt regarding ICOs. But it is possible to have a positive ICO experience and make a profit. It’s all down to your research. Pick the information you choose to read wisely, read online forums with other people’s honest experiences and of course make sure you do your own homework.
At the end of the day, there are always going to be some ICOs out there that you need to avoid. If you take the approach that 98% of ICOs could be rubbish, make it your goal to find the 2% that are worth investing in.
All the negativity aside, there have been a number of ICO investors that have been successful when buying coins and as a result duly rewarded. Continue being vigilant with your research and weeding out the flaky projects, because as this type of technology develops and becomes more mainstream you’ll also notice more ICO offerings appearing out of nowhere.
As you’ve already learned, there are a number of criteria or things that need checking off before a project is deemed worthy or not. But once you get into the swing of things, you’ll soon find those ‘smaller’ projects with real human interest that have engaged with the community and proved themselves in a number of business fields are more worthy of your time and money.
A great recent example of a mid-sized project checking all the boxes is CoinFi, which is an exciting project with a professional team that boasts a business background and offers professional and curated research, analysis, trading algorithms and signals as well as the latest in market news amongst other things.
Being an established project, which is now in the latter stages of crowdsale, CoinFi has built up a trusted community. Who wouldn’t want to be a part of a project that promotes a real-time algorithm that has the ability to detect abnormal price movements in the market while making a profit?