People who have been following me on Instagram, Twitter, and elsewhere have been asking me some variation of the same question: ‘Which ICO should I invest in?’ Some people even go a step further and tell me how much money they have to invest and how they should allocate it across different ICOs – audacious! Recently, I put out a video where I explain six key factors I consider when evaluating ICOs. In this blog post I’ll go over those six factors but with more detail than I shared in the video. Let’s have it!
The Project Use Case and Idea
When evaluating an ICO, I think about the use case and ask if the project is providing a solution to a real-world problem. Is the idea disruptive? Does the idea fundamentally alter an existing non—blockchain business model? Can the idea scale and transcend a particular demographic or market? Those are important considerations when evaluating a project. That’s not the only thing I consider and, sure, I invest in plenty of ICOs that aren’t aiming to be the Amazon of blockchain, but it’s definitely a factor that I contemplate.
The next factor that I look at is the team. I want to know who these guys (and gals) are. What have they done in the past? Is there a track record of success? How did they meet and decide to work together? Why are they choosing this particular challenge at this time in their lives?
To help in my due diligence efforts, I expect that a project will have its team members’ bios prominently displayed on their website, preferably with a link to their LinkedIn profiles. Some projects fail to do this and I count that against them. I see no compelling reason why such information should be absent from the project’s website.
Under the same umbrella of teams, I look to see who the advisors for the project are. Big name advisors don’t make up for a weak team, and there have been instances where I chose not to invest in a project due to the idea not resonating with me, in spite of the fact the project had a good set of advisors. However, it’s a signal when someone who has a reputation, status, clout, and something to lose, vouches for a project.
Another factor that I look at is the community. I check to see the size of a project’s community by visiting the platforms the project uses to engage with its supporters (i.e. Slack, Telegram, Discord, WeChat, etc.). I also look at the projects and see if they have a Twitter account, and if there’s real engagement and not simple bots. I also look at Reddit and the Bitcointalkforum to see what people there are saying about the project. Community size and engagement are important in helping a project achieve “network effects.” Tokens are to be as widely distributed as possible (in as many hands as possible) to achieve great network effects. ICOs are not only disruptive in being a new way for startups to raise capital, but it’s also disruptive in that the ICO participants are the project’s initial user base. This is the reason why you are now commonly asked for your name and your email address when you register for a token sale. The project will update you on the status of the project long after the token sale ends because you are considered part of their user base.
An extremely crucial factor to consider are the token economics of an ICO. I look to see how much money these projects are trying to raise. If they’re trying to raise a lot of money or they’re having an uncapped ICO that’s not good for someone who’s looking to use the ICO as an opportunity to make money, which is practically everyone. The reason being is what happens in these token sales is a concept known as “network value.” A great illustration of this concept was the ICO held by Bancor, which raised $150 million in three hours. Bancor captured all the network value and kept it for the project. Additionally, they had no product or prototype, which ensured that there would be nothing for speculators to trade with when the tokens listed on the exchanges. What happened next? The valuation of Bancor plummeted immediately after the tokens listed on the exchanges, falling below the ICO price. Therefore, projects that are looking to raise ridiculous amounts of money should be avoided at all costs. Under the current market cap for cryptocurrencies (approximately $150M), I find that projects which raise between $15-$60 million are in the sweet spot, considering other factors as well. Otherwise, you’re betting on the long-term future of projects which is even riskier than flipping an ICO in the short term.
Now, the opposite example of Bancor is an ICO like Civic. Civic is ID verification on blockchain; one of the better use cases out there. Civic’s very prominent founder, Vinnie Lingham, had already enjoyed real world success, and only sought to raise $33 million for Civic’s token sale when he could have sought a lot more. What happened next? Well, Civic didn’t take long after listing on the exchanges to accomplish around an 800% return for investors, and it’s not done yet! This means that there was excess value not captured by Civic that was available to speculators like yours truly. What I loved is that Vinny tweeted afterwards that one of the best lessons he learned is that it’s not how much money a project raises but how much they earn for their investors. That tweet really signalled to me that there was a “gut alignment” with my decision to back Civic, largely on the strength of Vinny Lingham.
Another point here to look at is the token supply and how much is available to the public. Ideally, you want at least 40% of the token supply available to the public. For the portion that’s available to the team, it’s preferable that the founders have vesting contract, delayed liquidity, etc. Some of the more credible projects can see the founders having no token liquidity for three years. That signals to investors that the project is committed to delivering on the work they are promising because they have an incentive to see the value of their tokens rise.
Another factor that I look at is whether the project has a product or a prototype. An MVP is even better. These are important factors to consider in the sense that at least a prototype lets you know that the project is committed to open source and is willing to have their code scrutinized by the developer community. Developer engagement is crucial for blockchain projects because if the projects are to succeed then the tech must be sound.
Now, this factor isn’t often considered by many when evaluating an ICO but it’s important. This factor is called the China factor. After all, China has over a billion people and relatively very few of them know about cryptocurrencies. But the people that do are very energized by them and consistently show frenzied speculative behavior that can see tokens board rockets to the moon! With such a large population and an enormous appetite for cryptocurrencies, the room for growth in China is nearly boundless, only contained by occasional government intervention. But in my view, the Chinese government just likes to ensure that the money flying around is filtered through their preferred channels. Once they have their ducks in a row, it’s back to business. The recent ICO ban in China is temporary in my view, just as the previous ban on bitcoin years ago was short-lived. For the China factor, I evaluate whether the project’s website has a Chinese language option or a white paper available in Chinese, or a WeChat (popular Chinese messaging platform). Having these details signals that the project is serious about engaging with the Chinese market.
Well, there you have it – Hen Global’s six factors for evaluating ICOs. If you liked this post, please share with your friends. Be sure to subscribe to my newsletter and follow me on Instagram, Facebook, Twitter, Steemit, SoundCloud, and subscribe to me on YouTube.