Key points to tick off before investing in an ICO
Ever since cryptocurrencies proliferated into an established multi-billion-Dollar industry, the search for a reliable framework to determine a token’s value has become increasingly intense.
Similar to the early days of Initial Public offerings (IPOs), ICOs are primarily a means for funding a venture without the endless red tape and regulations that are known to bog down other funding methods indefinitely.
While cumbersome regulations are frowned upon, they normally serve as an additional safety net for investors. Malta has gone out of its way to be the first to regulate DLT, but seeing as how most countries haven’t, the risks are still there. With this uncertain reality in mind, it’s safe to say that few have the experience and patience to publicly and meticulously assess the probability of economic growth for a new asset class without putting their reputation on the line.
This is made all-the-more difficult when one realises that there are precisely zero industries whose historical market data directly correlates to the growth of cryptocurrency, blockchain and the broader distributed ledger technology (DLT) sector. Some analysts attempt to draw parallels between the dot.com bubble and crypto, but this doesn’t do the space justice – not by any stretch of the imagination.
The lack of publicly available financials or formally regulated information also means that reliable data is hard to come by, making the task to discern high quality projects from their vaporware counterparts a difficult one.
With that doom and gloom out of the way, it’s still is possible to get a foothold in this speculative sector, and in so doing one-upping the competition.
The crypto sector isn’t lacking in its utopic dreams. In fact, project claims infallibly imply a revolutionary substrate in their very nature – set to bring about heaven on earth. This is all good fun for the hype train, but after sifting through the surface waffle, a clear, stated purpose for the coin’s existence – which gives it intrinsic value – is a must.
Here are a couple of question to ask when considering an ICO’s potential:
- Is this blockchain-based asset solving a problem?
- Will the proposed solution have an effect?
- Is the token of fundamental importance for the solution to be implemented?
- What are the tangible benefits?
- Does the company have a history of success?
Fundamentally, the development team is what makes or breaks an ICO’s prospects. More specifically, cohesiveness, synergy and leadership are important markers of a team’s prospective success or failure.
These building blocks will impact overall progress and whether targets are reached according to the initial development road map. In other words, the dev team and its attitude directly dictate the degree to which the venture is successful.
As such, a prospective investor could consider the following questions:
- Has the core leadership been involved in previous projects, and were they successful?
- What’s their reputation in the space? Are they in good standing or pariahs?
- What does the chain of command look like? Are the managers, leaders, software and marketing teams up to standard?
- Are any of the private or pre-sale investors known for choosing high performance investments?
A token may have its uses, but only if the demand for that token is high enough. This is to say that due to the open-source nature of this space, it’s that much harder for tokens to stand out. If transaction volume on any given token is on a steady increase, then that’s an additional tick box for the digital asset’s success.
For a more generalised idea of market potential, it’s useful to look through various social media channels to gauge the community’s support.
When gauging an ICO’s market potential, consider the following questions:
- Are there enough users actively engaged with this token or coin?
- Is the company well positioned and have other companies done it better?
- How timely is the idea; does the firm have a competitive advantage?
Tokenomics is in large part a fancy word for the design of a token, wherein a set of coded rules, limits and standard operating procedures set the tone for the token’s economic ecosystem or model. Fundamentally, a token with great “tokenomics” is one that becomes desirable by every kind of stakeholder, be they clients, users, sponsors, suppliers and investors.
In a nutshell, good tokenomics should:
- Provide advantages to users of the token relative to others.
- Incentivise users to become early adopters of the token.
- Incentivise stakeholders to bring new users to the ecosystem.
- Appeal to buyers and speculators, partly by convincing them that it will appreciate in value as it gains traction.
Adoption game plan
As French romantic Victor Hugo once noted: “Nothing is more powerful than an idea whose time has come.” While nobody doubts the sincerity in such claims, poets aren’t exactly known for the logical consistency.
Needless to say, a brilliant idea being penned on paper is meaningless without any follow up. For a project to have the potential of success, each stage of the process must satisfy the necessary criteria that would take it one step closer to widespread adoption. This is to say that a project’s success becomes more elusive as it lags against its competitors and lacks consistent user interest, among other things.
That said, it’s easy to fall victim to a scam coin which often enough rests solely on witty marketing and a fancy road map. So it’s crucial to view this within a larger lens that encompasses a project’s academically written white paper, financials and all of the above. And even if all these things check out, many ICOs fail to deliver on time, and when they do deliver the results are sub-par.
Here are some questions one should consider when judging adoption potential:
- Is there a clear, unambiguous and practical road map outlining a growth strategy?
- Does the marketing strategy cater for each phase of the ICO plan?
- Has the firm delivered on its road map thus far?
- Does the team have a track record of failures, successes or are they rookies?
Room to grow
Young companies which have only just started releasing their test-nets, BETA products and services primarily rely on short-term speculative financial investment. Without the cut-throat support of the financial markets a blockchain startup will have a hard time achieving its goals unless it secures alternative backing. Things get even trickier when the company secures stakeholders who then expect to be involved for the length of the project, which could potentially stretch out for years.
Presently, short-term cryptocurrency market moves are largely speculative. Predicting market moves is a nightmare not dissimilar to the early days of the stock market. As such, using the guidelines laid here-under to gain a solid understanding of the fundamentals is all a prospective investor has to go on.
To evaluate whether an ICO or coin has room to grow, consider the following questions:
- Based on the above steps, is the currency undervalued?
- What’s the status of the trading volume, and how’s it looking in the medium to long term?
- What’s the relationship between trading volume and public interest?
- Will milestone achievements outlined in the road map increase hype and demand?
- If the company were to achieve its objectives, what would a fair market cap look like?
- Is the token integral to the company’s success or is it just a means for raising funds?
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher
Nothing said in this article will be construed as investment advice.