While ICO as a model has been around for a few years now, it’s the last year that saw such campaigns multiply at a rate that could put bacteria in a Petri dish to shame. By the dawn of the next decade, there can be millions of them as long as the world’s regulators don’t ban initial coin offerings altogether.
There are, of course, pretty solid reasons why regulators can be worried. Tokendata stats suggest that 59% of all projects that had held an ICO, failed to some extent, or even proved to be scams. Thousands of articles, blog posts, and statements from officials and crypto industry stakeholders stress that crypto is, at very best, a very young industry and still an experiment, so the risks involved in crypto investment are huge.
Still, the apparent easiness of increasing your investment tenfold overnight attracts lots of people to such projects. The problem is that there are so many of them that even seasoned investors may feel confused. Is there any way to determine if a project can make it? In fact, there is more than just one method.
Is It a Scam?
That’s probably the first question potential investors should ask themselves. There is a pretty high probability that at least some ICOs you have heard of today are run by dishonest people who cared only to develop an attractive landing page without even thinking about creating an actual product.
So, how do you tell a real ICO from a scam? There can’t be 100% certainty in anything, and everything can potentially have a different explanation, however, there are certain red flags any potential investor should heed when evaluating an ICO.
- Whitepaper: It’s a very important part of any project. While it usually doesn’t have any legal weight, and, technically speaking, is nothing more than a glorified prospectus, this is the exact place where the project’s team explains what they’re after, and, most importantly, how and when they’re going to accomplish it. If there is no whitepaper, that is a very bad sign. If there is one but it is sloppy, offers unrealistic profits or timelines, and drones on and on about the same thing without actually answering any questions, it’s also a fair reason to doubt the project. Finally, some projects even go as far as to plagiarize someone else’s whitepaper, which basically should dispel all the doubts: if the project steals someone else’s text, it might as well steal something else.
- The team: There can be very good reasons for a team to remain anonymous. However, in most cases it should look a little suspicious when people who ask you to give them money don’t even introduce themselves. However, scammers don’t usually opt for staying incognito. Instead, they find little known pictures of some foreign actors and place them on their landing pages under different names. While a honest team may want to stay beyond the spotlight for some reason, it will not lie to your face about the team’s identities. So, make sure that the people the projects tells you are its team are real, and their credentials check out, which includes their social media accounts.
- The technology: Blockchain is a real buzzword for many industries, so there are lots of companies who claim they apply the tech in their operations. But ask yourself: is it really necessary to add blockchain to this particular use case? Is it possible that it could have worked great without distributed ledgers? At very best, you’re looking at a project that seeks to ride the hype. At worst, it’s yet another scam. The same goes for the project’s source code: if it’s not available, not being developed, or just doesn’t make much sense to anyone who has relevant expertise, the project is probably a scam.
Will It Work?
While those measures are just about basic reason, they cannot insure you against falling for a scam. The bad guys are aware of the red flags as well, so they devise new techniques to fool people.
Still, scams aren’t the only danger when it comes to investing in ICOs. Some projects are honest but fail due to unrealistic expectations, unsound planning, and other issues related to the team’s proficiency. Is it possible to tell such projects from those that can succeed?
The short answer here is no. Any professional investor or venture capitalist will tell you that almost 99 per cent of all projects they have invested in have failed. Keep in mind that those people are really good at telling the wheat from the chaff. When it comes to business in general, there are too many factors that are reasonably beyond anyone’s control, so there can be no certainty.
However, even if the certainty isn’t an option, is there a chance to detect projects that are more likely to make it? The answer is yes, there is. The thing is that if you can’t rely on your own judgement, you’ll have to rely on someone else’s.
See if there’s a prominent and well-respected figure involved in the project. And it can’t be a celebrity that promotes it. It has to be someone who had been involved in the industry for years, someone who has done other good things that you know of. If such a person deems a project worthy of his or her involvement, that means the chances of eventual success go up a little bit.
Another option is quite specific to the crypto industry. Blockchain tech has enabled the creation of provably fair prediction markets, and, as it turns out, the collective wisdom of thousands of people returns pretty good results. There are at least three prominent and well-respected projects of this kind, namely Augur, Gnosis, and Wings, and each of them offers a decent functionality, though the first two focus on any sorts of predictions, while the latter is more about estimating the ongoing fundraising events in the cryptoindustry.
Basically, a prediction market works similar to ask the audience on Who Wants to Be a Millionaire? The difference is that they answer the questions to which nobody at the moment knows the right answers, such as ‘who will play in the next Super Bowl?”, “will it rain this time in three months?”, or “will project X become successful?” The answers coming from thousands of other people eventually draw a probability picture for a certain outcome, and, as it turns out, the most popular answers tend to be the correct ones in most cases.
There is no way to know f0r certain if an ICO eventually gets successful, and the project lives up to its promise. Any investment is a game of chance at its heart, and there can be no safety net except for your own reason. But investment is also a game of skill, the greatest rule of which is to never put in more money than you can afford to lose. No matter how you choose your winners, you should always keep that in mind.