With headlines screaming “THE MOTHER OF ALL ICOS IS HERE!”, self doubt and FOMO* are natural human emotions that can take hold when you hear a smooth talking marketeer shilling** the latest coin.

What are the questions to ask when you hear about an ICOs and what is the number one question to ask?

Over the last few months there seems to be no end to Initial Coin Offerings (ICOs), no longer just the playground of the Silicon Valley Elite or early Bitcoin Millionaires, everyday people are increasingly being asked to invest in ICOs.

ICOs

ICOs began bank in July 2013 with Mastercoin (now Omni), next came Ethereum in 2014 and since then ICOs have been gathering pace.

They concept was born as a way to raise Bitcoin for a project. Ethereum raised $2.3m worth of Bitcoin in just 12 hours.

Before Omni and Ethereum you needed a blockchain to launch a token. With the launch of these it became possible to create tokens on top of other Blockchains. For the first time you no longer needed your own blockchain to issue tokens and the concept of an ICO became much more accessible.

• Some ICOs are no strings attached ways to raise money for a project, the selling point here is that the token will have some sort of utility on the future network, hence the name Utility Token.
• Other ICOs offer ownership rights in a company in a similar way to traditional shares. The advantage here is you get better settlement times, improved custodianship and transparency but nothing about the nature of the security changes compared to traditional securities. In particular these are still bound by national laws and may be in breach of those laws unless they are issued accordingly.

There is a fine line here between the two characterisations and the legal status is not well defined so investors and issuers need to be careful before getting involved.

---

I have seen many pitches, promises of great ideas, life changing technology giving power back to the people. At an event in a Blockchain Lab in Dublin one of these “sales” people was even called out as a Snake Oil Salesman.

In this age of disillusionment and despair what are these people really selling and what should you be on the look out for?

I am not a professional investor and this post should not be relied on for investment advice or even considered encouragement to invest in ICOs but I will share with you some concepts that are a useful starting point for discussion.

What is the Vision for the ICO?

There has been only a handful of people that have had a vision that has lit a spark and changed the course of human history. In recent memory Steve Jobs is probably the best example. I still get chills every time I remember that I found out he had died on an IPAD.

The original vision with Blockchain has been the vision of Satoshi Nakamoto and a small group from the cypherpunk days in the 80s and 90s. There are only a small number of ICOs who are adding something new to this vision, most are just regurgitating aspects of it without any real innovation. This may be great marketing but is lacking in substance.
If you cannot get a clear innovative vision, particularly from the leaders of the project then what is the point in it?

Does it need a Blockchain?

Blockchain is a buzzword at the moment. It sounds cool, and if you throw in that word few people will challenge you about it afraid they will look stupid. In my opinion Blockchain offers little that a much cheaper and easier relational database does not offer, that is if your using it as a database. Of course Blockchain is more than a database, another killer aspect of Blockchain is decentralised consensus. Without utilising this feature in some way there is little point in using a Blockchain for your business.
Ask yourself why is this ICO using a Blockchain for their product?

Is the Token Necessary?

In the last year there have been many ERC20 tokens which are the preferred way at the moment for raising money for an ICO. In some cases there is a need for them to use the token to run the network (Utility Tokens). For these ICOs you are mainly speculating on the product and the vision.
Many other ICOs don’t need the token to run the network and instead use this platform just to raise money to fund development. They may not even be promising you a share in the company profits (Security Token). The investment here is not just speculation on the product but it is a question of trust. What are you really speculating on?

What will the money be used for?

Raising money funds development and marketing but return on capital is an important well established metric. Having idle capital sitting by is not an efficient use and may create additional risks and pressures on a project. The idea of mercenaries coming in and taking control of a project for short term gain is a real possibility.

Will additional funds be raised?

ICOs may have a stash of pre mined coins at their disposal. Companies have a similar mechanism with Authorized and Issues Shares, but these entities are regulated and there are restrictions on their use. What are these pre mined coins going to be used for and will there be further rounds of fundraising?

Will the team be able to execute?

The team will be a key factor, maybe the most important in the success of any project. A track record as well as suitable incentive structures are key here. The classic combination of skills; Hacker, Hipster & Hustler are reassuring to see.

The Senior Team

Looking at the senior members of the team is a great way to understand motivations and the ethos of an organisation.
There was one recent pitch I heard for an ICO but upon further investigation there were question marks over the motivation of some of the senior members of the team.

Advisers

• Are the advisers actually involved in the project at all, and if so what expertise do they bring?

An effective method of building trust for a product is to use household names to market it. Many advisers in the ICO space don’t really "advise", but just take a fee for lending their celebrity status to the product.

• When you look at the team, and the advisers ask yourself is this person actually involved hands on in the project, how long have they been involved and what is their motivation?

Developers

A Blockchain project needs a strong technical team or infrastructure behind the project. I came across a project some time back that had outsourced building their blockchain and now they will be using it going forward. This is a red flag in the sense that this technology is evolving and needs constant development.

A few years ago is the dark ages in Blockchain technology. We are still at the bleeding edge. Without a strong, and competent CTO and team of developers the project will likely not go very far.

Government

You cannot ignore government and regulations. If the company is trying to launch a product a key to success in the short term at the very least is staying one step ahead of regulations and keeping the right people on side.

Rating Websites

There are three or four rating websites that are widely relied upon for Crypto ICOs. From a data science point of view the methodology for giving ratings is very thin and relies heavily on superficial and easily gameable metrics. This is not a great cocktail when money and information asymmetry is the currency of the day. In general place little weight on rating websites.

What is the Marketing strategy?

“Buy the hype sell the news”
The purpose of marketing and bounty programs is to Shill the coin. To get people excited for the project. Remember great projects may be flying under the radar, their people may not be shouting the loudest.

Was there a Pre Sale?

Often ICO’s raise money by having a discounted pre sale. To start if you know anything about Crypto you will know that gains and losses are denominated in X times rather than % so getting a 10% discount isn’t that meaningful to begin with but it is much worse than that.
Investors who get in at a discount have an incentive to sell as soon as they can to take their profits. This leads to a spike in price shortly after ICO then a big drop. There have been some attempts to lock in early investors but I am not sure how effective this strategy is. In general I would say pre sales are a red flag.

Has this been done already?

I have come across many ICOs presenting their idea as ground-breaking. The fact is there have been countless projects in the past few years with varied use cases. Many things have been tried already. There is no reason why a fresh approach may not be more successful but at the very least understanding the history of existing projects, the challenges and the triumphs will help you ask the right questions about a new one.
It’s often a cheeky question to ask at events, but the reply of the presenter could be very revealing.

Who else owns the Coins?

Coins may not give you ownership in the company or product but will in some way allow you to participate, influence or share in the ecosystem based on your holding.

• Who else has a share and how much do they have already?
• Even if there is no investment at this stage how much is the project looking to raise?
  These questions will give an indication of what the ICO is trying to achieve.

Why the ICO route?

I always am sceptical of a company going down the ICO route when alternative finance could be available for their project. There has to be some reason why the company is choosing an ICO over traditional finance. Maybe it’s simply because there is more money available however that is not a good enough reason on its own. A company opens itself up to extensive regulatory political and market uncertainty.
Have they considered the risks and made a deliberate cost benefit analysis or are they chancing their arm?

All ICO no No Product

Are the team working in parallel to develop the product or just working on the marketing and sales. It is easy to sell a dream but reality can be much more difficult to sell. Echoing a video I saw this morning by @julianhosp, companies can be worth much more if they don't have a product!
Beware of any ICO with no minimum viable product!

Conclusion

Ignore the Hockey Stick

A well established method of projecting revenue is to assess the market size, then talk about getting a percentage (say 1%) of it. This classic top down valuation approach is often used in finance, but it is not always a suitable approach to use, particularly for ICOs.
If you have no track record, if your team cannot execute their plans and indeed if the plans don’t even include a sustainable revenue stream then using a top down valuation method is not meaningful at all and should be completely ignored.

This following is a quote I saw on a chat a few days ago and it sums up ICOs very succinctly (even good projects).

In response to delays in the release of a particular product a commentator cynically responded
"This is because the XXXX people have made their millions. They are in no hurry to launch a project that risks landing them in jail and being someone's boy. Who can blame them?"

So what is the number one question to ask about ICOs?

I would say does it need a Blockchain?

Whats your number 1? I would love to hear what your top questions and considerations are upon investment in ICOs. Do you invest in them at all or do you have another philosophy?

If you haven't seen this video of investment in ICOs, check it out

• FOMO - Fear of Mission Out
  ** Shilling – Creating Hype about a Coin to drive up its price.

References

• https://hackernoon.com/12-questions-to-ask-yourself-before-investing-in-an-ico-ffbb2169a893
• https://en.wikipedia.org/wiki/Initial_coin_offering
• https://github.com/OmniLayer/spec/blob/master/README.md
• https://medium.com/multicoin-capital/new-models-for-utility-tokens-d26c12ec00c5

---

Thank you for reading this. I write on Steemit about Blockchain, Cryptocurrency and Travel.
Image Sources: pixabay.com