Phil Glazer

Research at Bitwise Asset Management

Evaluating an Initial Coin Offering (ICO)

This piece won’t help you 100x your money by finding the next Bitcoin or Ethereum, but it will help you evaluate new ICOs and avoid investing in a scam. With so many ICOs launching, it is important to evaluate each closely before investing. As cautioned by Ernst & Young in its recent report on ICO related fraud, “We were shocked by the quality of some of the white papers.”

Read this article for more background on how ICOs work and why they are used to raise funds: https://hackernoon.com/understanding-initial-coin-offerings-icos-a61064170150

In this piece, I will cover how to evaluate some of the most important aspects of ICO projects. This is not an exhaustive list and great care should be taken before investing in an ICO.

Source

Important Components of Initial Coin Offerings

  1. White paper
  2. Team
  3. Community
  4. Progress
  5. Competing Tokens
  6. Funding Structure

White Paper

A white paper is a document detailing the stated purpose and need for a new cryptocurrency project. A good white paper will provide a convincing explanation for why the cryptocurrency should be created, what purpose it will serve, how it will incentivize people to participate in the network it creates, and how it will be implemented. White papers that do not sufficiently explain the need for the coin to be created or provide details on how it will be implemented are suspect.

Team

It is important to understand the background of the team leading the development of the project. Are they mostly engineers and do they possess relevant backgrounds? Look for LinkedIn profiles, Twitter accounts, Medium accounts, and anything else that can provide information on their background and how long they have been involved with cryptocurrencies. In general, having more experience with cryptocurrencies means that the team will be familiar with what is already available and what potential there is to improve on the existing offerings. If it is very difficult to find additional information about the team online this is generally a negative sign.

Community

Good projects will have a website that is able to succinctly explain the important takeaways from the white paper (why a coin is needed, how it will be implemented, etc.) and a means of communicating updates to people who are following the project (some combination of an email list, chat thread that can be joined, and a social account like Twitter or Medium). Does the development team do a good job of communicating updates and keeping followers in loop about new developments? If part of the value of the cryptocurrency is allowing developers to build on top of the network created, resources and educational materials should be made available for developers. If so, are the materials high quality and do they make sense? Search around for developers online who have commented on the project on platforms like Reddit or Twitter.

Progress

How far along is the project? Is it just a white paper or has meaningful code been shipped? Some project use GitHub to store and collaborate on code and this can be a good way to track a projects development progress. Good projects will have both a roadmap of future plans and also a record of previous goals completed. Has the team done a good job meeting goals that they set in the past?

Competing Tokens

It is possible that a white paper can make a compelling case for the need for the cryptocurrency and the details for its implementation but fail to acknowledge what alternatives are already available. It’s important to validate the claims that are being made (“novel approach”, “a new way to”, etc.) by being familiar with coins that already exist. A quick way to do this is to read up on and understand the 20–30 largest cryptocurrencies by market capitalization and compare what the new coin promises versus what is already available and well established. A quick Google and Reddit search for the key terms used in a white paper will also turn up relevant cryptocurrencies. If a coin acknowledges that a current cryptocurrency exists serving the stated purpose but the new coin will provide a superior solution because it is faster, more secure, etc. then these specific claims will need to be researched and validated. Technology is changing and it’s possible that this new coin is superior, but the project should describe very concretely how it will solve the problem better.

Funding Structure

How much will the founding team keep and what lock up (if any) will be placed on their coins? A well structured project will gradually issue coins to the founding team as they complete project milestones and it is a major red flag if the founding team gets a large coin stake upfront with no lock up. Linking the release of coins to project progress aligns incentives and keeps the team motivated to build, rather than to cash in on a successful ICO. Is the ICO unlimited or has a hard cap been set? It is important to know how many tokens will be issued and how this will change over time. If the team has the ability to issue new tokens at will, this can dilute the stake of original investors.

Conclusion

With so many ICOs being launched, it is important to evaluate each new cryptocurrency project by its merit rather than the hype and marketing surrounding it. Given how promising blockchain technology is, it is likely that developers have just begun to scratch the surface of what’s possible and many new ICOs will launch with great teams and technology behind them. There will also be many imitators and scams, however, so spend time researching a project before investing.

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