Considering investing in an ICO? Here’s what you need to know
Investing in an ICO (Initial Coin Offering) can feel safer than buying cryptocurrency immediately, like dipping your toe in the kiddie pool before attempting the 10-metre high dive. But the kiddie pool can have a few of its own surprises, too.
An ICO (Initial Coin Offering) is an innovative way to fund startups using cryptocurrencies. Often the funding process is done through crowdfunding platforms, but we’ve seen the rise of private ICOs aimed at raising funding for cryptocurrency projects.
With an ICO, tokens are sold to speculators or investors in exchange for their local currency or other already-established cryptocurrencies, like Bitcoin or Ethereum. These tokens are promoted as future functional units of currency when (or if…) the ICO’s funding goal is met and the project launches.
Think of an ICO as a source of capital for young, plucky startups. ICOs are an attractive funding method to these companies as they don’t require the same regulatory compliance and intermediaries common in traditional fundraising methods, such as venture capital.
Sounds good, right? Well, the issues with ICOs arise when they’re used by bad players for scams and fraud. More and more we hear horror stories about people losing vast sums of money - sometimes their entire life savings. They invested in cryptocurrency projects created by teams that either lacked the know-how to bring them to fruition or never intended to do so in the first place. We delve a little deeper on below-board players in one of our Medium stories should you be interested to read more.
When you invest in a young project, which is what an ICO tends to represent, there’s usually no working product or service. This means you're betting on the team behind the project. If the team is strong, they have a higher chance of success (even if the idea isn’t groundbreaking) than an inexperienced team with a stronger idea.
At Luno, we always recommend assessing the team behind an ICO or blockchain project before investing. Super important: Investing begins with education, not buying. We recommend spending your time researching a project before you invest your money.
Here’s a guide to the questions we’d encourage you to ask about the teams behind fledgeling cryptocurrencies:
Who are they?
It should be pretty easy to find out who the team behind a cryptocurrency project is and what roles they play. We’d recommend checking their website or on LinkedIn to ensure you’re dealing with credible people. Craft.co lists the details of many major cryptocurrency companies, including the company history and names of leading team members. Put your best social media stalker hat on and get digging before putting your money where your mouth is.
What’s their experience?
What about the breakdown of the team? How big is it and does the amount of money they’re aiming to raise make sense considering the team size? Do they have a reasonable split of technical team members and those involved in marketing, PR, customer support, and legal? Do they have lawyers or former bankers on board, or engineers with experience in complex software projects? Now breathe. Again, the best place to find this information would be their website or social media profiles. If this information isn’t easy to find, you may need to ask yourself why.
What’s their track record?
Negative coverage in trusted publications (with strong evidence to back it up) is a clear red flag. You wouldn’t want to invest in a cryptocurrency whose team members have links to financial crimes, for example. It may seem like an obvious one, but when you’re wearing rose-tinted glasses, red flags look white.
Can you reach out to them?
Try directly contacting the team via social media or other channels like Telegram. Are they actively posting and nurturing a community? Do they respond to questions and comments? Does the website list more than one contact method? Do individual team members have their own accessible social media? Remember, the team behind an ICO is still made up of regular people, so being contactable shouldn’t be out of the question.
DYOR (do your own research)
We can’t stress enough how important it is to ensure you know who you’re dealing with when you’re parting with your hard-earned money. Remember, there are hundreds of ICOs available at the moment. You don’t need to jump on the first one you see. Take time to perform proper research and watch a few crowd sales happen to test your intuition, then start small.
Do you have any ICO stories you’d like to share with us? We always like hearing about your experience in the crypto space, so let us know how you do your homework on ICOs. Reach out to us on Facebook or Twitter.