One of the main premises of investing in an Initial Coin Offering (ICO) is to buy into the cryptocurrency at the reduced rate during the ICO and then see the value of tokens rise as they hit the markets via the exchanges. In this article, we will suggest a framework for performing due diligence and evaluating ICOs to separate the legitimate and good ideas from scams.
According to our ICO Calendar as of June 30, 2017, there are over 20 current and upcoming ICOs. While some of the ICOs will succeed in raising their targets and promoting their platform, others will not. Failure to conduct detailed due diligence before investing into a blockchain venture is one of the biggest mistakes of ICO investors. Given the lack of regulatory oversight, it makes it even harder to find reputable information about a given ICO. However, a thorough due diligence would help the investor avoid a headache and a loss on their investment.
Finding reliable and trustworthy information about blockchain startups could be challenging given information could be hard to find or may not exist. It’s also challenging to verify the source of the information. For someone with no technical background, it could be difficult to understand the technical information beyond the basics.
So how do you decide which one to invest into? Performing due diligence for a blockchain startup is not much different compared to the due diligence in a traditional startup.
Due diligence can be broken down into the following five areas:
- Read the whitepaper – the white paper is essentially an informative document issued by the company to promote the ICO and contains useful information about the startup. The following will be highlighted in the white paper: their value proposition, business model, use case scenarios, financial data, and specifics about their coin offering as well as information about the management team and board of directors. You will be surprised how many people invest in an ICO and then ask all sorts of questions required for due diligence after the fact. If you come across a document which clearly articulates the product’s value proposition, you should be asking the following questions at this stage:
- What problem is the digital currency trying to solve and what is the use case?
- What is the magnitude of the problem the company is solving?
- Are any other startups tackling the same issue or have tried to solve it in the past and are these alternatives more efficient?
- One of the key information you need to look for in the white paper is the company’s roadmap. A well-planned roadmap is key since it provides transparency and visibility to what the company will be doing a year from now, three years from now and five years from now. Has the company already started on the project and have a working prototype, or is the company planning to use the funds from the ICO to build the product? Does the roadmap seem aggressive or is it reasonable to achieve? Assessing if the roadmap is reasonable is not a simple task, however, a well-documented and explained roadmap provides clarity and transparency into company’s future achievement of goals. If there is no product roadmap or a plan, be careful!
- The core value of the coin depends on the use cases and the functionality of the coin. Therefore when evaluating the use cases and functionality you should be looking into what kind of technology the startup is developing – whether it’s new technology or something existing. What is unique about the idea and if someone can easily replicate it? How is the new technology being applied to create a more effective solution to the problem being addressed?
- Marketing is key for a successful ICO and it would be useful to understand how the team is promoting the ICO. Is it marketed through the various ICO websites and ads or through word of mouth and blockchain forums? The other aspect of marketing is assessing how well the coin is known among the cryptocurrency enthusiasts and how the team is planning to grow the network? Without having this awareness, it’s extremely challenging to grow the user network and gain traction for the coin usage. Look out for news and articles on the media covering ICOs – positive news and views add to the credibility of the coin. Also look at the Facebook, Twitter and Instagram accounts – how many followers does the coin have, what is the activity on their social media and have they been active recently? If they have a Slack channel and its users are active, check that out as well.
- Lastly, but highly important, research the founders and board of advisors – investing in an ICO is similar to investing into a startup at an early stage; therefore one of the most important factors is the management team behind the project and their ability to execute the idea. Look up the developers and executive roles on LinkedIn, GitHub, Reddit, and etc. If you have trouble finding information about the founders and management team this may be a red flag.
Keep in mind that when purchasing tokens or coins through an ICO, you are investing in the potential future value of the project at a discount. The next article in this series would cover the actual process and steps required for investing in an ICO. Happy Investing!
Disclaimer: CryptoCanucks.com is not intended to provide tax, legal or investment advice, and nothing on CryptoCanucks.com should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any asset by CryptoCanucks.com or any third party. You alone are solely responsible for determining whether any investment, asset or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation.