In 2017–2018, some of the most conservative and prudent players in the entire economic system entered the blockchain industry: venture capital investors. They bring in their fiat money, despite the high risks associated with volatility, and the lack of legal regulation.
Why have venture capital investors come over to crypto-currency projects? Simply because the crypto-industry itself is getting smarter. With each passing month, the crypto-currency market becomes more predictable. Investors learn from their mistakes, and improve their methodologies for analyzing ICO projects; screening out unreliable players becomes easier. The market is becoming more stable.
A positive factor influencing the attractiveness of blockchain projects has been trust from the government side. Forward-thinking governments, which recognize the inevitability and convenience of blockchain, are attempting to keep pace with the speed of the industry’s development and to regulate the area from the legal side.
In addition, blockchain can also be employed within the government system itself. Authorities are open to innovation, and generally look positively upon their activities having full open access. The first steps towards transitioning the activities of various government departments have already been taken.
For example, Estonia provides an e-citizenship program based on blockchain technology; Georgia is developing a land cadastral registration system using blockchain as its basis; Sweden plans to allow real estate transactions to be conducted with blockchain; and the UK plans to use blockchain to manage the distribution of grants.
I believe that, for the development of the industry, ICO projects must evolve in order to maximally protect the interests of both large funds and small private investors. It is necessary to reduce the number of fraudulent start-ups and give investors the opportunity to control the development of projects, the spending of funds, and to receive a share of the profits from projects.
The main driver behind these changes will be the introduction of a new framework for assessing the investment attractiveness of start-ups, which will help any investor accurately assess a start-up’s reliability. As a result, it is important to redirect the flow of funds from unreliable projects over to start-ups that are really passionate about their ideas, and who are able to lead their businesses to success. This will improve the industry as a whole.
I study existing methods for assessing ICO startups and I want to share insights from investors themselves, as they evaluate projects today and what makes them decide to invest their money into each particular start-up.
Why are they launching the ICO? Does it need its own cryptocurrency or blockchain — most don’t.
Do they already have a working product or at least a demonstrable MVP, and provable customers or partnerships– i.e. is there any incentive to spend money raised on the product and make it better? Again, most don’t.
Does the product have a real-world use — check with experts in that niche industry if it serves a real purpose and adds value, or is just optimistic marketing spiel and a good idea that realistically won’t be possible within the next 5–10 years? What would having its own crypto for their platform achieve, over using Bitcoin or fiat? Would people really buy that crypto to use it when there are similar services where they could just pay with credit card etc? Are the team and advisors real people, with actual experience? Be very sceptical over everything.
While there is a lot that blockchain can do, there’s also a lot that it cannot do, and most of the baseless ICOs and blockchain startups try to capitalize on investors who don’t know the difference and just like the fact that the company’s pitch has the word “blockchain” in it.
You should only invest in an ICO or blockchain startup if you actually understand what it does. Never let the glitzy websites and the grandiose buzzwords distract you.
There is a whole PR and marketing industry built around building meaningless hype for crypto projects that don’t actually do anything. Keeping that in mind, your objective as an investor should be to understand what blockchain technology does, how a given ICO or startup is using it in a unique way, and why this will translate into an ROI for you when the project launches. Without doing this research, you’re basically just buying a lottery ticket.
I evaluate an ICO by first evaluating the development team, second the underpinning crypto sub-community, and lastly the project’s roadmap and white paper.
As an early investor and supporter of both IOTA and Cardano’s Ada (ADA), I looked to the associated Github repositories to learn about the developers and project metrics such as commits per week, number of contributors, and issues resolved.
In addition to thriving and talented coders and developers, both IOTA and Cardano attracted me to the projects due to the quantity and quality of community member participation on Github, Reddit, Twitter, and Slack. It’s a good sign for the longevity of a project to see so many developers contributing to an open-source project without the promise of pay.
Finally, I examine the white paper and roadmap, checking for plagiarism against other white papers I have read in the past (plagiarized white papers are more common than one might expect). I ensure that the use-cases of the token and technologies are viable, that the project has an appropriate unique value proposition, and I pay especial attention to the percentage of raised ICO funds dedicated to future marketing.
Marketing is essential for the continued success of a crypto project and its continued success. Companies with large marketing budgets such as Ripple have used marketing to capture and control thought-share as well as market share.
With ICOs, there are two main investment strategies: invest in a company or invest in a coin.
When investing in a coin, I consider a few things. First, is there hype around the team, product or company? Will there be a lot of interest and demand that could create a price surge? Second, do the terms allow for quick liquidation? Third, will there be a place to trade so that I can liquidate them? When investing in a coin, there needs to be a method to manage and profit from the volatility. Some coins representing products and teams are worth holding, but an Ethereum or Bitcoin level spike is very rare.
When I am investing in a company, I am making longer term decisions. That said, I am not receiving equity, so I have to consider the opportunity for appreciation of the token. Fundamentals such as team, product and business model are important. Along with that, I have to consider the use cases for the token and the currency mechanics. Is there the opportunity for increasing demand and appreciation that will create an increase in value?
There is a very active conversation, right now, about whether these tokens are utility tokens that serve a function or securities that should be registered. Most ICOs make the case that their token is and has utility and is thus more like an arcade coin. There’s a wide range of coins from utility to security.
One thing to keep in mind is that the SEC or another regulatory body could deem these to be securities, and this could change the dynamics of token economics. Many of these token sales have a pay-to-play model — meaning, the token is used to purchase something. If a designed utility token is a deemed a security and a registration is forced, this could challenge that micro-economy.
If the issuer of the security receives the security after issuance, it becomes restricted. This would mean that the organization couldn’t resell it, and could challenge the business model fundamentals. When looking at long term ICO investments, I always consider if there is a business model that could adapt to a transition from a utility to a security.
· Team: Look at the key team members background, experience and reputation. Was the team formed a few months ago without any relevant experience to the ICO project? Or have they been working on the project for a long time and have a related experience?
· Community support: Check out Github to see whether the project is supported or criticized by the community. If a project community on Telegram or Github is showing no development progress, dead or closed, the blockchain project most likely has failed or is going to do so soon.
· Institutional support: It is a good sign if the project and innovation it offers is supported by older market players. For example, if a project sells airline tickets, it has to be supported by airlines. All large and serious projects get a lot of attention from the public and media.
· Investor interest: Talk to other investors and ask for their insight and opinion — have they already invested? Are they considering investing or not? Why? Good ICOs are very competitive, large funds do their research and take significant allocations of tokens before public distribution. If this is the case with the project you are considering, it is probably a good investment.
· Technology and project: It is highly recommended to understand the technology behind the project. Is it feasible? Is it innovative? Is blockchain necessary for the project? There are plenty of ICO projects on the market that try to solve a problem where blockchain is not needed. Investment in such projects doesn’t make any sense. Does the team already have a minimum viable product? On what stage is the development of the product?
· Build a portfolio: Never rely on just one project, be prepared that at least half of your investments will fail. The formula 20–80 works here as well: only about 20% of your top performing assets will bring 80% of the returns.
· Invest in what you understand: If you don’t understand the technology or its value for the project, just avoid investing, no matter how hype the space is.
We use an adapted stock-picking formula to select the best crypto projects for inclusion into the BostonCoin ETF.
The handy acronym COIN can be applied to each investment, and rates them based on four easy areas:
- C — CEO, CFO etc — check for bona fides on LinkedIn and other resources. Many scams have fake profiles; real ones should show up in many areas, plus have relevant industry experience.
- O — the Offer should be an innovative way of solving a problem. Many projects may promise to moon but unless they are solving real problems for real people, they will not get traction.
- I — Investors: who is backing the project? Friends, family, institutions? Do the founders have their own money in there? We are not looking for vacuous celebrities (sorry Paris Hilton), but for solid investors who have a wise head on their shoulders.
- N — Network: who’s talking about this project, and where? Telegram,
Facebook, LinkedIn, news sources etc.
The first thing to look for is whether the project’s support base seems to be growing. Twitter is a resource here.
Scroll back to a project’s earliest tweets and see much traction it’s gotten. If the project began work a year ago and hasn’t accomplished much since, it’s unlikely that the team is going to suddenly spring to life and work like crazy to start making things happen. But if the project began a few months ago and has a growing community of followers, it’s a good sign.
Search the internet for when the first press releases about the ICO were put out. If the project was first announced 6 months ago but hasn’t gained much traction since, it’s an indication that the founders were merely testing the waters to see if there was interest from the crypto community. If it looked like there was initial interest, the team would have decided to move forward with the project and put significant resources into it. If it looked like there wasn’t much interest, the team would have scaled back their efforts and put the project on hold. The best projects have grown steadily since inception, without any hiatuses or delays.
A final factor to look at it in determining an ICO’s chances of success is the extent to which prominent crypto influencers have supported the project. Google and Twitter are your friends here once again, and you should be looking for genuine support of the project, not just single a single tweet or shout-out. The supporter should be very vocal their praise, and it should be clear that they have a genuine passion for the project and team.
The market is very saturated with ICOs and the bar is now higher to raise money. What I look for are more mature companies so ICOs way past the idea stage and more at the implementing stage.
Just like with traditional VC investing, one of the most important aspects is the team. Does the team have experience in the sector that they are trying to disrupt with blockchain? Is the blockchain even needed for this company is another question I think about?
Also are there any partnerships the ICOs already have and are there any big names involved. One aspect that is slightly overlooked, but one of the most important from an investment perspective, is the token structure. Personally, I am interested in ICOs that are actually going to have a positive impact on society and also have founders who aren’t jerks.
Our investment strategy is based on the process of identifying projects that have a high potential to create value for the world community, economy and business.
We work from the hypothesis that every aspect of a project and each component can be a prerequisite for success as well as a weakness that will prevent it from reaching its goals.
We evaluate the problem that the project solves, the method of solving it, and the technical and business components of this solution.
The team is one of the most important components of the project. Their vision and motivation as well as the experience of the founders and managers, along with the high level of necessary skills and well-balanced recruitment, determine the ability to achieve those goals.
We must be sure that the token is crucial for the startup and its functions, and that the tokenomics is built to stimulate the sustainable development of the project.
We also analyze the target market and market potential, community support, funding structure, and marketing strategy — all of which are crucial elements.
Whether the investment in such a modern and rapidly growing sphere as cryptocurrencies will be successful depends on three major factors: the quality of the idea, its planning and further implementation.
Therefore, when an investor decides to invest some free money, he/she should pay attention not only to the quality of the website, the presence of white paper and other quite obvious details, but also think about the adequacy and relevance of the project as a whole. After all, more than half of the ICO will fail because their idea was not well-considered from the very beginning.
However, it does not mean that investing in ICOs is a hopeless decision. Meticulousness is a key here. Pay great attention to the presence of the project’s team on the Internet as it may help to detect something suspicious before it will be too late to change your mind about investing in it.