An Initial Coin Offering (ICO) is a fundraising means – a form of crowdfunding activity – in which a company attracts investors. Firms partaking in this issue digital “coins” or “tokens” in return for a payment from the investors.
An ICO is very similar to an IPO; if you understand one, you can easily understand the other. The main and the only difference is that instead of selling shares in the company, startup companies using ICO to sell crypto-coins in exchange for money.
1. Understand the Team
You have to try to find out everything you can on the team behind the ICO. The more difficult it is to get information on them, the more suspicious the ICO. Try googling team members individually, see what kind of projects they have been involved in previously, what their experience is in other crypto-centric projects, and what kind of impact they have made on that project.
2. Usage of Funds
You must also look for information on how the funds will be used. Reputable cryptocurrency companies will present a detailed list of projected expenses. In contrast, a company that is seeking to defraud investors will never reveal details about how they plan on using the funds. And even if they provide the details, it would be too vague.
3. Community Feedback
ICOs will be announced on community forums whose members will include a large number of cryptocurrency enthusiasts and investors. You should look at how the members respond to the news. Are they excited? Or are they not even bothered?
A lack of interest is usually a sign that the company will not meet with any initial success. Visit the social media pages of the company and look at how people are responding. Now, be wary of fake comments and responses which will try to make the ICO look like a once-in-a-lifetime opportunity.
4. VC Interest
Venture capitalists are famous for lending their support for bright prospects quite early on. You will (or should) have access to the names of prominent investors on the company website. If you have some well-known names listed out, it gives you some reassurance about the project’s viability.
5. The Cap
When the whole crypto ICO wave began to take the world by storm, you really couldn’t make out the difference between an open or hard cap since the demand level was crazy.
An open cap simply means that investors are allowed to send an unlimited amount of funding to the project and get the corresponding investment value through a high number of tokens.
The downside of this is that it pulls the value of the token down south. When you have too many tokens in circulation, your token deteriorates in value owing to the fact that there’s less demand for it.
6. Beta Preview
Find out whether the company is offering a beta preview of the coin. It can be anything from a full-fledged beta client that you can download and test, to a simple YouTube video that shows the current stage of coin development.
Whatever it may be, a brief glimpse of the product is a good sign since it shows that the company is actually developing something and not just talking about a plan for a coin.
Investors who are looking for the next big crypto score are attracted by the companies by releasing their own digital currency in exchange for a crypto-coin or fiat currency. Being an investor, you need to be careful that you aren’t just falling for shiny promises.