How to evaluate ICOs? – The Basics
Wonder why you need some skills on how evaluate ICOs before investing? Well, the Cryptocurrency arena is transforming from hype-based to value-based. For example, if a currency has speculations that it might go big then it would work as people think it is the next big thing.
Similarly, ICOs in the early 2017 and before were so few and so successful. But, Nowadays ICOs are becoming mainstream, and they are coming up like weed plants. Having a little understanding of how to evaluate an ICO is vital.
There are elements like the concept behind the ICO, marketing efforts, community outreach, token metrics, etc. Let’s look into each aspect.
If anybody is doing an ICO, nobody will participate if there isn’t substantial product or service behind it. Much similar to IPO, but still has its clutches.
You have to wear the venture capitalist hat, and must ask, how this product is solving a real problem? The problem could be anything. Addressing privacy issues, security threats, cutting costs, or increasing the availability of a service. Remember that being a new concept doesn’t always mean it is giving an efficient solution to a market problem.
A major mistake is to assume that if a crypto-project has no similar rivals in the blockchain space, then it’s going to triumph with a monopoly. Often, these blockchain projects do have services already operating.
For example, there are many freelance platforms available, but blockchain based projects are coming up with the same concept saying they’d reduce transactional costs, and would not take service fees as other platforms would do.
One thing you have to keep in mind is with every token generation event the team behind will allocate themselves a chunk of coins. So, the team gets some profit when the token gains value. If not, they can just abandon the project with just an announcement.
Marketing and Community
Open blockchain projects rely on communities that engage. Bitcoin would be worth nothing if there no community around.
The ability to evaluate ICOs allows you to see determine which coins have a good community. If a product has an active community, and discussions are going well, then it indicates the project would perform well. And that will in return rise the value of the token.
Marketing If well done, can attract bigger industry bodies. For example, Ripple – a banking solution – has done good marketing, and the efforts paid off attracting and partnering with huge institutions like American Express, UBS, Santander, and others counting over one hundred.
When thinking about participating in an ICO, it is essential to understand the token stats and facts.
For example, how many tokens are being created? Is there a supply cap?
If there isn’t a limited supply, it is something you should dig deeper. But not a red flag though. Understand inflation rate, and how it might affect if you’d participated.
On the other hand, you should also understand what the token distribution timeline is. Let’s take a case; the token sale will have multiple stages with the different discount rate. The first phase has a massive discount of 80%, and the following two stages only have 10% and 5 % respectively. When the first phase finishes and the tokens are distributed immediately, then the participants in the first stage can sell them in the secondary markets like hand-to-hand, or on decentralized exchanges like EtherDelta, at a lower price than the other stages and the seller could get profits.
This kind of situation can hurt the token, and it eventually leads to complete dumping of the token.
So, understand situations, and metrics like these if you want to avoid pitfalls.
In addition, how the token is going to be used on the service or platform is also important. If there are no good use cases of the token, it is better to look somewhere else. All this requires some strong skills on how to evaluate ICOs, and tell the good from the worthless, from a technical viewpoint.
Lasts, but not least, the team is a significant factor.
If the teams consist of rock star blockchain developers, superstar entrepreneurs, and renowned advisors, then the project is going to do well, and it can create good traction in terms of buzz and hype.
In the end, it seems like the ability to evaluate ICOs is all about value investing. But it’s not. Understanding the crypto-market direction is another factor to pay attention. And diversifying your positions well according to the knowledge you have.
All the above factors do not weight in particular order. They depend on the various circumstances of the initial coin offering.