how to distinguish the good ico, ico scam
HOW TO SPOT A GREAT ICO (AND LEAVE A BAD ONE ALONE).
The ICO phenomenon has started to play a significant role in the crypto-startup world. Lately, more and more experts are looking to decentralized crowd-funding methods with interest.
But, the absence of legal guidelines in the operation of these ICOs has resulted in more than a few scams. This is hardly abnormal for an entirely new, unregulated field; but, would-be investors, nonetheless, find it difficult to discern potential opportunities from grab-the-money-and-run schemes.
If you look at lists of recent ICO campaigns it is really hard to come up with any sort of reasonable filter. There’s so much to be obviously skeptical of in this space that wealthier and experienced investors won’t even consider it — with good reason.
As with any investment, nothing in the ICO space can be predicted or proved with absolute certainty. Analysis of the team, style and quality of management, and even some basic managerial accounting data is not available in most case. Still, most ICO trackers try to combine lists of presumably relevant parameters such as: who holds the collected money (in many cases investors do not even know!), what kind of social network activity a given project can boast, and other seemingly disparate data.
Does this mean ICOs are all bad? Of course not. I prefer to apply some patience, best-practices and investment experience to avoid throwing the baby out with the bathwater..
I think I have a working solution to help make an informed assessment of a given product in this domain. Despite the fact that most of the important parameters are not measurable, we found a simple and transparent matrix by which to judge a given ICO:
• PRODUCT DIMENSION
Some people like to build parallels between ICOs and the IPOs of the modern technological era. But, this analogy is incongruent — the problem being that the great majority of projects behind ICOs can not present a functioning product or service. In older and less tumultuous times, one could probably make a good enough judgement by reputations of individual team members, e.g. “It’s not Tesla, but Elon is doing a new app…”. Such an approach doesn’t work in crypto-oriented startups because even if the product in question is projecting future success based on past achievements of one or more team members it will likely be a within different legal, work, and management structure as the previous product with no guarantees.
Another important thought to be aware of is that the amount of money raised by an ICO in no way directly translates to a corresponding quality of product. Marketing budgets, clever branding, great intro videos, SEO-wizards…all of these things can help attract attention, bring funds, and inflate perceptions.
With this in mind, we have ranked ICO projects into three tiers:
https://cdn-images-1.medium.com/max/1600/0*PIL8lCBWoXznLN2E.
1. Lowest tier. No product. These projects lack anything users can touch or test. The company (or just a team if there’s no legal entity) presents only the project pitch and promise. Most of such projects — if not all — have GitHub accounts with some code; but, you would need a few full-time analysts to do even surface-level due diligence.
2. Middle tier. Second/third/etc product. Example: Iconomi. The ICO result was also impressive: over ten million USD raised. Neither the Iconomi fund — the face product for the ICO — nor any clear full-scale technical description exists. Founders do not try to hide, though. They have Cashila — a great and well accepted product that has been around for a couple of years making many bitcoiners’ lives easier. The existence and usefulness of the team’s previous product seems to be enough of a promise for Iconomi investors.
3. Highest tier. Functioning product. Rarely, does a project fall into this category by offering a usable iteration of their product during the ICO. Example: Ethereum, Swish.
• COIN DIMENSION
The middle and most important word in the ICO acronym is “coin”. We’ve written about how difficult it might be for a project to “coinify” itself. Sales of “coins” didn’t become the new type of crowdfunding overnight. The first appcoins were merely trying to repeat the success of Bitcoin and were mostly clones of it in technical sense. Later deviations became greater, alternative coins got transformed from cryptocurrency to “application coins” and this is where things got really mixed up.
The basic borderlines, however, remained where they were from the very beginning. Thus, projects can further be judged through a second set of criteria and fall into these three categories:
1. Lowest category. A senseless app coin claim made. Examples are numerous, unfortunately. It is very hard to explain why KimDotCom’s project is okay with bitcoins while Steemit, Incent, Chronobank and dozens others are not. These coins have very little chance of success due to a) being fundamentally superfluous and b) trying to survive under strong speculative pressure.
2. Middle category. There is an app coin and it is really needed, it is part of product’s essence. Example: Ethereum. This kind of project is very rare. They are generally less attractive compared to straight-forward DAOs or DACs (distributed autonomous organization or corporation) because it is extremely difficult to keep your inner currency, the blood of your product’s organism, in the needed temperature range under the pressure of free markets filled with short term traders (and hackers too).
3. Highest category. No appcoin claim. Projects in this category do not try to create an “inner currency” proving this way or another that normal money (or even BTC) are not good enough for them. Such projects are basically incorporated companies or stable teams transforming their organization into a formalized form of a DAO with voting, petitions, and budgeting put on safe, distributed, rails. This case is the closest to “normal” IPO when companies just change their form of ownership via a general public offering for individual ownership of equities. Examples: Iconomi, Swish.
• MAPPING THE ICO SPACE:
https://cdn-images-1.medium.com/max/1600/0*qYvf0RtN-WTBeDIb.
Our map divides the space into a nine-slot matrix with positive and negative spaces determined at various intersections. An interesting application of this map is measuring the risk parameter of your portfolio if you own a bunch of coins. There’s a simple set of rules we suggest:
- Comparing two assets both in the negative territory: the greater the amount of money already collected by a project in the negative territory the greater your risk associated with owning its coins; negative-territory projects — lacking solid grounds in the first place — become even less stable when they grow larger.
- Follow the contrary rule when comparing two assets that are both in the positive territory: the greater the amount collected by a project in the positive territory the lower your risk associated with owning its coins.
- And, it goes without saying, one should avoid investing in ICOs with negative characteristics at all. Of course, sometimes there are factors that prevail, such as large “early-bird” bonuses making speculative investment more worthwhile.
***3 WAYS TO IDENTIFY AN ICO SCAM
1. The Developers Are Anonymous
The first and most blatant sign of an ICO scam is that the token’s developers are anonymous or otherwise-unknown. While it’s true that the creator of Bitcoin — a pseudonymous individual or group operating under the name Satoshi Nakamoto — did not reveal his true identity, he was able to this because he created a network that did not depend on the trustworthiness of a central authority. This is not the case with ICOs and TGEs. By holding an ICO, a startup is asking token buyers to trust that the developers will deliver a working product instead of running off with their money, so the team should be willing to back up its promises and claims with verifiable identities.
If a team is unwilling to identify itself, token buyers should be very cautious about contributing to the project. While there may be valid reasons to desire this privacy, it is far more likely that their purposes are nefarious. PlexCoin, for instance, declined to reveal the identities of its team members, obfuscating the fact that one of its organizers had run afoul of securities regulations in Quebec on several occasions, both before and during the PlexCoin ICO.
2. The Token Does Not Have a Clear Use Case
Another sign of an ICO scam is that the developers are unable to clearly articulate a valid use case for the token. The token should serve a key purpose in the startup’s platform. If it does not, the token will not sustain its value over the long-term. Related to this problem are tokens that advertise themselves merely as digital currencies without offering any real innovations or improvements upon existing cryptocurrency technology.
3. The Whitepaper Sets Unrealistic Goals
However, even if the token does have a clear use case, token buyers should be wary of startups that advertise overly-optimistic roadmaps. If the whitepaper sets an unrealistic development schedule, it either means the developers are using deceptive tactics to attract token buyers or they lack the necessary experience to give a sensible scope to the project. Either way, this does not bode well for the success of the project and its corresponding token.
To avoid falling prey to ICO scams, token buyers should educate themselves and conduct due diligence before deciding to contribute to a project. Strategic Coin offers numerous resources to assist token buyers with their research, including token analysis reports and exclusive interviews with startups conducting token generation events.
Strategic Coin is your go-to source for information about launching and participating in utility token ICOs. Whether you are a start-up or existing business that desires to enlist the help of a professional utility token ICO advisor or a token buyer who needs help navigating the blockchain space, Strategic Coin will provide you with the resources you need to take advantage of market opportunities within the crypto marketplace.
