Ways to Spot a Good Token Offering.
The first four months of 2018 have been more successful for token offerings compared to all of the entire year before. With some statistics exclaiming that 99% of ICOs will fail, how are token investors supposed to identify which projects they can trust? Are you putting your money into the new face of the third web, or a bunch of hackers who will run up the price of the token only to let it crash and never be seen or heard from again?
As those questions percolate, this guide can serve as a reference point for how to identify some of the good projects compared to the ones you should stay far away from. Welcome to compilation of my research for how to identify a good token offering.
Who is on the Team?
The most important aspect of every project is the team, the co-founders, technology people and thinkers behind the idea. Since this is a technology-related area, each team member should have a well-developed Linkedin profile and provide their credentials, experiences, and associations. There should be some endorsements at the bottom of the page if the team member is involved for at least a year with any business activity. Obviously, if endorsements are missing, it is most likely that profile has been just created recently and/or this member has no significant business experience.
It is important to check if the team members has experience, which lists them on the ICO page. It is especially significant that team members have listed the project in question as part of their Linkedin portfolio.
Check their Linkedin activity page and see if they are supporting the project(s) in which they are part of. If the team member hasn’t at least liked one article or post about the project on which they are a member, this should be a red flag. They probably are doing something else and they are merely placed as a team member for the sake of image.
Check if team members specializations cover most important areas of business needs. Are there any blockchain experts, are there people who have done business in the past and know how to manage companies?
And last but not least, what is their experience in the technology they are trying to create or expend.
A Clean Project is Usually a Good Project.
The first sign of a good project is poise in grammar, design, and structure. If you can read the white paper, go to the website, hang out in the Telegram, go to the social media channels, and read the press releases, and you still cannot find anything “fishy” or off about the project, that’s a good sign. The best team takes a lot of effort to scrutinize (and pay people to scrutinize) their projects with a fine-toothed comb. Sure, you might find a debatable comma out of place somewhere on page 11 of the white paper, but if the project otherwise doesn’t have any Whitepaper or website design flaws, then you are on your way to scoping out a winner.
Make sure that company has a whitepaper.
Whitepapers these days have varying styles and they differ in structure. Yet no matter what the style, they should impress and present projects clearly. However, to the bad, some are missing market analysis and financial projections, others are missing the technical description of the technology they are working on. Almost all bad projects will miss one of the most important aspects of business building. If one had to go to borrow money from the bank, this component would be the most important one, yet many white papers miss this section. This shows that founders have no business experience and are not capable of presenting these analyses. They are simply hoping for the best. Watch for it.
Existence of the Community and Support provided by the team.
Any successful project has a community interested in the direction of the team. Not just entrepreneurs, but relevant people in thriving fields. Review a project’s channels and check how active conversations are, how many members are signed up, and the nature of those conversations. How old are their social network accounts and how many followers do they have? Check if Twitter follower are retweeting posts, commenting, and liking them.
Sure, there is always the project with 35,000 Telegram users (29,000 of which being bots), but usually if you can, again, go through the channels and see community support (especially sharing), then this is a really good sign. Social sharing in regard to the project is a particularly good sign because it is basically digital word of mouth. It doesn’t matter what kind of business owner you are, if you are getting genuine word-of-mouth referrals, then you should be eating well.
How’s the Code and is there MVP?
An often under-looked evaluator tool is the program’s code. Now, I know what some of you are thinking. Some projects will purposefully hide their code to prevent intellectual property theft. However, it doesn’t hurt to check the Github page anyway. Github is a repository where teams or individuals will upload code to public or private accounts. The teams can choose to make the code open source. That means the community can contribute. In conjunction with the points above, if a team has a very active Github, that is a very good sign for the future of the community. It means that the community is not only active, but programmers are spending time working on the project (when they can easily otherwise be making $100,000 + doing something better with their time).
This is by no means an end all list of characteristics to reflect on, as mentioned above, this is merely a reference point. In closing, don’t be afraid to trust your instinct. If something feels seriously wrong about a project, then it probably is. Our intuition is a gift, especially in sniffing out scam projects.
Having an MVP is a good indicator that a project is on the right track. This shows that team is already working on the project and that team has attracted properly skilled technologists.
Is there any sort of product already developed which could be considered an asset?
A business asset is basically something you have that you can give up for liquid cash. Since a project will always run into bumps along the way, it is good idea to have some liquid assets which can be used when needed.
Is there an existing business and/or are there customers?
The idea of selling to the general public is a weak model for startups. There are big corporations with deep pockets that can actually outprice and outproduce any young business. The bigger businesses will notice successful startups and aim their resources towards stealing its market. This is why it is important to have a customer base which can be utilized during the initial take off of the startup. If you can see an existing business, this team has already proven that they can deliver and that they can access other resources if needed.
Do founders have steady flow of income?
If the founder’s livelihood is based on what an ICO raises, it is possible that not all proceeds will be used for the right cause. Check if core members of the team have stable income already and could function even if ICO raised less than planned.
Having a steady source of income doesn’t mean having a job. It could be having investments that produce yields large enough to fund their lifestyle.
Check if the team is using an escrow service which will release the money based on milestones. There are legal services which for a fee will offer a controlled release of funds to the team based on deliverables and milestones. A controlled release will guarantee that founders are delivering on project milestones in their white paper. Any delays may cause a delayed release of funds until project is back on track. The escrow company should have a mechanism to refund remaining funds to investors in case deliverables are not reported for an extended period of time.
Security or Utility.
Based on an SEC assessment made some time this year, the majority of tokens are securities. The question is, is this bad or good. When you analyze the majority of projects, founders declare them as utilities. Based on my own familiarity with many projects, I don’t believe they are utility at all. Making a utility out of the need to access the network is not much of utility and it can’t be easily defended.
If after analyzing the project, you find that there is no utility in it and token is described like this, you may anticipate that there might be some problems in the future with the project. Various ICOs are avoiding selling of tokens in jurisdiction like USA or China because they don’t want to have troubles should those country notice the project and decide to act.
The problem with this approach is that those projects are not doing sufficient KYC or AML verifications, and quite often, only declaration is required that one is not the citizen of the restricted countries. In the eye of law (at least in North America), this is not enough. The seller of the token is required to ensure that a buyer is not the citizen of those countries. Should citizens of those restricted countries purchase those tokens and the ICO is successful enough to be noticed by authorities, it is possible that at some point in the future they might be questioned.
On the other hand if tokens is marketed as security, check if it follows security offering requirements in given jurisdiction.
Being an advisor to several ICO projects, I have seen “the good and the bad” of this space. I’m being contacted regularly by ICOs to rate their projects and some of them offer fees for that. I have also heard that some advisors were removed from some rating platforms for irregularities. But I guess this happens in every industry and this one being so young will have to go through this pain as any other industry would.
Advisors play an important role in the project.
They have been on other projects before and they can create synergies between ICOs so they work together and support each other either through finding similarities or ways to complement each other. At early stages of a startup, it is important to build alliances. This acts like an endorsement and also increases credibility of the project.
In my case, I can offer first-hand blockchain experience as I’m a developer myself and have participated in over 15 blockchain projects as Ethereum/Solidity developer to date. It is important that there are advisors on the project, who have first-hand experience with the blockchain technology. If you don’t see people on the team who have blockchain experience, you should instantly ask questions, particularly if the project offers utility tokens.
Each project should have business advisors who have worked with larger projects in the past and managed larger teams as well larger budgets. If you can see advisors who are CEOs of another successful company, this is a good sign.
There should be industry advisors who have understandings of a problem which the ICO is trying to address.
Further advisors from the crypto space understand how exchanges work and have intimate relationship with them. The success of the token will also depend on the fact if it is listed on time on important exchanges and this doesn’t cost an arm and a leg. It is not uncommon to see legal advisors on the team. This is also a good sign that a project is assisted by credible profession.
Smart contract code.
Check if the team has published their crowdfunding/token smart contract.
Knowledgeable developers can verify if a smart contract matches claims made in the white paper and if the logic of the contract has not built in back doors to manipulate tokens. Check if smart contracts deal with a situation when an ICO hasn’t reached minimum cap and the money can be refunded to investors.
Check if unsold tokens are being burned if this is the claim an ICO is making.
If such smart contracts are not available, shortly before the ICO, this should be big red flag.
Smart contract should be also made public once deployed on a mainnet. Etherscan provides options to make smart contract public and even allows adding a logo and other social links. This increases overall security of the token as contributors and token owners can see an actual smart contract address and can confront it with the code or other associated info available.
Check internet for articles about ICO.
If a project has done good job announcing the date of ICO, it should be listed on multitude of ICO calendars. Entering an ICO name and connecting it with word “ICO date”, should show you sites listing this ICO. See how many of those you can find. See if ICO has an active thread on bitcointalk.com and how many threads there are. Check if they have their blog and how many articles you can find there. Check if any of the important business/crypto publications are talking about this project and whether you can see any press releases. The more information related to the project you can find, the better job the team did with PR and promotion. The more people can find out about this project, the more money it can raise.
Also, check for the search of ICO in connection with word “scam”. There might be something going on in regards to this project. Even if it is not scam, but there is lots of negative publicity, you might want to know about it. Any negative news at the stage around ICO date can have a negative impact on the entire project.
Follow ICO research.
Based on a recent study Fisch, C. (2018). Initial coin offerings (ICOs) to finance new ventures. Journal of Business Venturing. doi:10.1016/j.jbusvent.2018.09.007 of 423 ICO projects, following factors have impacted amount raised.
- Amount of bug fixes of the code on Github contributed to more money raised (the more bug fixes the better quality of the product).
- Amount of commits on github (similar to above).
- Amount of pull requests on github (it is considered as endorsement by third party and also awareness of the project, similar to above).
- Amount of technical information in the white paper increased money raised (more than 50% is technical) or additional technical paper, (yellow paper).
- Shorter duration ICOs raised more money (hyped project sold out quickly).
- Projects with higher total supply raised more money (lottery mentality amongst ICO investors, believing cheaper tokens will appreciate higher).
- Tokens built on Ethereum raised more money than native platforms or other platforms (ERC-20 standard is a commonly accepted standard).
- Projects with higher level of activity on Twitter raised more money.
- Longer whitepapers coincided with more money raised.
- Ventures located in the US had higher valuation than other countries (report doesn’t explain if these were people from US or projects were US entities).
- Higher fundraising goals were helpful in raising more money.
These below are factors which didn’t matter for the amount raised.
- Number of patents.
- Revealing of the code (without fixing activity, without commits and pull request).
- Token type (security or utility).
- If there was a presale.
- Bitcoin price at the time of sale.
- Sector of product (e.g. Internet, business, platform… this is contradicted in next section below by a different report).
Follow ICO reports from known token listing sites.
Recent ICO report from site ICObench shows top 10 sectors and their respective amounts raised. I’m showing here just the average raised:
- Infrastructure $26,593,585
- Cryptocurrency $24,125,845
- Banking $19,597,294
- Media $16,840,224
- Platform $15,116,220
- Internet $12,317,518
- Software $11,156,390
- Investment $10,763,172
- Smart Contract $10,155,128
- Business services $10,044,773
Choose your winners wisley.
How to Spot a Scam?
After the bull run that lasted throughout 2017 and culminated earlier this year, cryptocurrency went through a publicity crisis. First, it was the reports saying that ICOs are scams, Bitcoin is a scam, etc., you’ve heard the stories (if not from the news, then from your cousin who always wears clothes that are out of his budget at family gatherings). If those reports weren’t enough to scare people away, then came the advertisement blacklistings. Google, Facebook, Snapchat, and other major gatekeepers of digital marketing had all banned cryptocurrency from being advertised. This was like a deep, frozen winter for cryptocurrency. Even some long-term holders were scared and uncertain. Now, things are starting to thaw out once again for digital currency.
Yet, despite the thaw, there are still many, many scams. Let’s face it, it’s not like the tech companies had blocked ICO advertisements without warrant. A lot of people lost some serious amounts of money. Especially those people who didn’t hear about crypto until Christmas time 2017 or later when the market graph lines were moving vertically before the big pop. Tech companies were trying to protect us, or something like that. Yet, scams still persisted, and they still largely persist today. You probably see the posts about how 99% of ICOs are scams. Maybe that’s true, maybe it isn’t. But there is some truth to it.
It can be difficult to spot a scam, so I have created this guide that can serve as a way to identify projects that you can run away from.
The Speculated Return.
A second sign that a project should be avoided is a promised return. Every real investor knows that there is no such thing as a sure thing. If you think otherwise, or if a project tries to tell you otherwise, sprint away, don’t just run. 2017 was filled with promised returns before major SEC crackdowns started surfacing. Does anyone else remember tokens promised to be going to the moon?!? That still exists, although it is much less common now due to regulatory agencies. Remember, promised returns, run.
We’re the Next X, Y, or Z.
A third sign that we’ll leave you with is the noteworthy comparison offenders. These are the projects that say, we’re the next company X, we’re the next company Y. Don’t get me wrong, there are companies in the coming age of the Third Web that will almost certainly replace the tech companies that have invaded our privacy and personal space over the past 20 years. But those companies aren’t relying on dramatized statements in order to win over investors. There is just a fine line between wanting to replace a big tech overlord, and calling your company the next tech overlord.
There is no surefire way to spot a scammy ICO. However, this list is a small start that might serve you well in a time of need. Remember, follow your instincts with these things. If something seems wrong, then it probably is.
Registration of legal entity.
Each project which is raising funds, should have registered legal entity in one of the jurisdictions. Founders should be able to show their registration documentation and spell out the name of the business and jurisdiction out of which it is run. If this information is not available or not presented on request, the project most likely is a scam.
Feasibility of the project.
Exercise caution with various claims being made. Some project might be trying things which are not practically implementable at this time. This might be not scams, but they might be simply attempts by inexperienced entrepreneurs to create solutions for which world is not ready yet. For example, selling real estate for crypto has many legal implications, and although it might appear like a tempting idea, the banking industry is not ready to give up control of this market yet.
It will take much larger forces to allow purchasing of real estate and handling of land titles in exchange for cryptocurrencies. Not to mention volatility.
Check how realistic those claims are and don’t get easily impressed by flashy video presentations.
This is all for now. If you can suggest other aspects of good ICO or scam ICO, don’t hesitate to comment below.
If you would like to know How to start your own ICO when you are new to crypto — 12 proven steps read my earlier article.