This paper is the second installment of a two-part series on Initial Coin Offerings. In this paper, I explore what a good ICO looks like and identify the red flags that you need to look out for when considering an investment.
2.1. THE WHITEPAPER AND BUSINESS PROBLEM
A whitepaper is a central communication tool founders use to raise
funds and attract investors.
A well-articulated whitepaper should at a bare minimum, begin with
a problem statement and be followed by a proposed solution. It
can also include a number of options. The solution to a business
problem should detail how it will fix the problem and what new
product or service(s) it will offer as a solution. In the case of
a new coin, it should describe how the underlying blockchain
technology will disrupt a marketplace successfully. A strong
description of team member skills, qualifications and experience
should follow this. The whitepaper should also provide competitor
and market sector analysis.
Any whitepaper which fails to disclose these basics – and if you are
unable to summarize the project in a sentence or less – is one to
steer clear of. You need to be able to summarize what the project
aims to solve in one sentence.
Some examples include:
Blockchain – solves the Byzantine Generals’ problem of a
transaction intermediary and trust;
Bitcoin – solves the need for a financial intermediary in a
payment transaction;
Ethereum – provides a platform to launch new tokens and
apps on the blockchain;
STORJ – provides a cheaper alternative to centralized cloud
storage services; and
STEEMIT – provides a platform to publish articles without the
need for a publisher (third-party).
At a more detailed level, a whitepaper should at the very least
contain the following:
• a roadmap which shows how money will be raised and spent
• business benefits
• details of the proposed system architecture
• proposed interactions with blockchain technology
• data relationships and data dependencies
• growth expectations
• financial projections including assumptions
• financial projections comparable to industry benchmarks
• risk factors
• use cases
• blockchain governance
• technical requirements
• detailed team biographies and experience
The whitepaper should also be very clear why the project is going
to the public to raise funds (crowdfund). Is it to make the founders
quick money, or is it legitimately going to be used to fund a multistage
development of the coin or token?
Whilst the whitepaper is the key document entrepreneurs use
to raise money to help develop a new coin or token, it is just as
important to look beyond the whitepaper.
Everything can sound amazing in a whitepaper with promises
to innovate and solve a problem, but the reality is that the vast
majority are ultimately documents full of empty promises and
unsubstantiated claims.
2.2. THE ROADMAP AND MILESTONE
A roadmap should be clearly divided between pre and post-ICO
milestones. A pre-ICO roadmap should describe how target funds
are to be raised – when, how and by how much. The post-ICO
milestones should confirm how the money raised, will be spent.
Early investors will be keen to know how funds will be allocated
to IT development and when the coin or token will be listed on a
cryptocurrency exchange.
A roadmap should be a clear timeline of key milestones.
Common ICO milestones can include:
PRE-ICO MILESTONES – SAMPLE
• Social marketing launch date
• Token information published date
• Website launch date
• Pre-sales targets (private token sales) – how much?
• Pre-ICO coin or token distribution terms and conditions
release date
• Token design release date
• Token distribution – will any tokens be deferred or released
in batches?
• Investor pre-ICO registration targets – how much?
• Date coins or tokens are allocated to early supporters
(investors, partners, advisers)
• ICO or crowdfunding launch date (public token sale)
• Wallet launch date
• Crowdfunding targets – how much?
• Exchange listing date
• Beta or Minimal Viable Product launch date
POST-ICO MILESTONES – SAMPLE
• Token security audit dates
• Product or service launch dates – often multiple
• Final design protocol – completion date
• Final design operating model – completion date
• Mining configuration – completion date
• Development or Build – completion date
• Pilot or Proof of Concept – release date
• Testing – completion date
• Implementation or app deployment on blockchain platform –
completion date
• B2C and B2B launch date
• Full product integration – completion date
Milestones are not exhaustive and should be tailored for each
individual project. Many milestones will centre around IT release
dates and funding allocation. It is usually a red flag, or at least
makes a coin or token less desirable, if Pre-ICO milestones
are changed mid-fundraise. For example, if an ICO raises its
funding target or changes its closing date mid-fund raise,
this may indicate that the project is not properly understood
or that the founders are primarily in it to make money.
2.3. QUALITY OF THE TEAM AND PAST SUCCESSES
The quality of the team behind the ICO is perhaps the most
important aspect to consider when assessing an ICO. It is no
surprise that some of the best coins and tokens have some of
the best teams behind them. Ethereum (ETH) has the most active
developer community by far with Joseph Lubin (ETH co-founder)
claiming that it has 30 times more developers than the next largest
blockchain community: Fabric.1 It is also supported by some of the
biggest names in Crypto.
When evaluating an ICO team, look at the experience of their
specialists. Also look for variation and complimentary skill sets in
team members. Look for a bloated adviser group - a potential red
flag. Ensure that the whitepaper has detailed individual biographies,
which fully outline accomplishments and experience and which
also stack up to other sources, such as LinkedIn profiles. Look
for thought leaders. Look for any of the specialist fields such as
blockchain technology implementation, cryptocurrency, good
quality coders and people who have relevant experience. Good
project management skills should also be at the top of your list.
Google their names, visit their LinkedIn profiles, check their Twitter
accounts to assess authenticity and perform Companies House
checks. Usually, if a celebrity or famous person is marketing the
coin it’s another red flag.
Team members with prior success on similar projects or with
similar product technologies are usually a good indicator of future
success. Reputation is very important and how previous success
has been achieved should not be overlooked.
It is also worth noting a team’s age. A study by The Kellogg School
of Management suggests that tech start-ups are more successful
the older the founder and founding team. This debunks the myth
of the Silicon Valley wunderkind. For example, the study found that
an entrepreneur aged 55 was 3.4x more likely to succeed than a
25 year old.
An indication of future success can also be potentially derived from
the quality of ICO advisors and leadership team. OMG is being
advised by Vitalik Buterin (Ethereum founder), Dr. Gavin Wood
(Ethereum co-founder) and Julian Zawistowski (Golem founder) – a
strong cast indeed! Waltonchain (WTC), which uses blockchain
and the Internet of Things (IoT) to manage supply chain logistics, is
being advised by their Chief Scientist, Kim Sukku – a former vice
president of Samsung. Both founders are former directors and have
extensive experience in logistics. IOTA (IOT) and Cardano (ADA)
also have a number of leaders in their field with a mix of academics,
professors, technologists and PhD experts. All are regarded as
having strong leadership and advisory teams.
Where there are doubts, gaps in biographies or potential unknowns,
it's worth investigating and challenging. In many cases, advisors
are unqualified and are literally in it for self-interest and greed.
Founders or advisors who propose to sell all or the majority of their
holdings soon after exchange listing, is another red flag.
ICOs that provide little information on the team members are an
obvious red flag.
2.4. RESEARCH THE FOUNDERS EXPERIENCE
It is important to research the founders proposing an ICO thoroughly.
Check whether the bios on their website stack-up. Independently
validate experience, career history and qualifications. Perform
an audit by googling their names and look for gaps in their work
history. Do a Companies House check and compare claims to
LinkedIn profiles. And ask yourself the question: "Do the founders
have the necessary experience and skillset to manage such a large
project, successfully?" – many will not.
2.5. LOOK AT THE ANNOUNCEMENT (ANN) THREAD ON BITCOINTALK.ORG
Bitcointalk.org is the oldest and most active cryptocurrency forum
on the internet. It is basically a large website of discussion threads.
Most crypto enthusiasts including developers, miners and investors
have an account here. And, almost all new projects use this as
a platform to announce the launch of their new coin or token –
using the annotation of 'ANN'. Investors use these threads to find
information, review opinions and ask questions. It's a red flag if
developers avoid answering investor questions on this website or
are inadequate, inaccurate or slow in responding.
The website also ranks published responses and the older more
experienced writers are the ones with more credibility – it's worth
monitoring their responses closely. Search for words like 'scam',
'fraud', 'con', 'legit', 'hodl' and 'mlm' (multi-level marketing).
Beware of MLM as this can indicate false claims of high return
investments.
2.6. A STRONG COMMUNITY IS CRITICAL
After a strong team, comes a strong community. It is imperative
that the ICO project builds a strong community. This helps early
adoption which ultimately drives success. Dogecoin which
started very much as a joke meme ended up being a successful
cryptocurrency. It can largely credit this to its large community and
a focus on philanthropy. It even appeared on Fox News. Chairman
of Dogecoin, Brock Pierce, claimed community was everything to a
cryptocurrency. The philanthropy component to dogecoin provides
a valuable lesson to bitcoiners and the wider community that good
deeds can breed support.
Beyond Bitcointalk.org it is worth observing whether the ICO has
open and active communication channels, which provide readily
available access to developers and team members. Common
channels include: Telegram, Slack, Facebook, blogs/videos,
YouTube and Twitter.
It is also important that an ICO has an active website which provides
regular news updates. This includes videos and blogs. A good
website will provide a brief, informative video describing what the
ICO project hopes to achieve, including the problem it wishes to
solve.
ICOs should also provide accurate and reliable answers without
circumventing the questions. Common questions include how the
company intends to spend money raised.
Other social media chat forums like Reddit, Medium, Quora,
SteemIt can additionally provide good independent views of an
upcoming ICO. Do not under-estimate the insight that Reddit
can provide.
Large communities that are well-informed can indicate a positive
enforcement for an ICO. Well-informed community members will
also act as ambassadors for a project.
Things that can suggest a red flag include: low community
participation, hyperbole, irregular ICO communication, unanswered
or inadequate developer responses to questions, lack of information
on the ICO website, few communication channels and Twitter
bounty threads. Be aware of communication threads which hype
an ICO by rewarding users for spreading positive information. And
airdrops are a potential red flag, though some are a legitimate form
of marketing.
2.7. WHAT DOES THEIR ICO OR GITHUB REPOSITORY LOOK LIKE?
Has the ICO posted their committed development code on GitHub?
Is the code complete? Is it of good quality? Has it been peer
reviewed and challenged?
GitHub is a web-based hosting service, which is really a big data
repository that brings developers together from around the world to
share ideas and build better software, through peer-to-peer review,
collaboration and data tools. A Github project is called a repository.
A good ICO will use a GitHub repository to save a copy of its
committed software code for others to review. Key information
about the project should also be saved here.
As of April 2018, GitHub had more than 25 million repositories
of source code and 10 million developers. Effectively a very large
digital storage space where millions of developers share code and
build businesses. And because these repositories act as opensource
software projects they can easily be audited by other
developers in the know.
Any ICO GitHub which is private, empty or lacking information is a
red flag.
2.8. STRATEGIC PARTNERSHIPS
ICOs that partner with well-established brands are naturally a
good early indicator of potential success. But beware of phony
announcements and scams. A recent high-profile example
involved BMW and CarVertical.5 BMW USA was forced to issue a
public statement and categorically deny any association with the
ICO project CarVertical. The project was effectively using a BMW
branded interface (accessible by any third-party), to lay claim that
it was partnering with BMW. So, it is important to question all
partnership announcements and do your own research.
Some of the best-known coins have strong brand partners. Bitcoin
has Microsoft and PayPal – both accept Bitcoin as payment. The
Ethereum Enterprise Alliance (EEA) partners with MasterCard,
Credit Suisse, UBS, BP, Reuters, Intel and Microsoft. Ripple has
over 50 financial institutions supporting its development including
American Express, Santander, MoneyGram, Royal Bank of Canada
– though it remains a private blockchain and most likely always
will. According to a recent report, Ripple has plans to partner with
over half the world’s financial institutions.6 Arsenal Football Club
also announced this year that they were partnering with a gambling
ICO.
And beware of the full-blown partnership scams after an ICO
launches. The price of Verge surged 66 percent in April when
rumours surfaced that it was about to announce a big partnership8.
It all started in Asia when a developer nicknamed Sunerok, posted
a YouTube video, wearing just a hoodie and baseball cap. He started
spruiking an upcoming brand partnership without providing much
detail and soon the news went viral. He managed to capture an
active audience and maintain an air of suspense over a number of
weeks and months. Somewhat inevitably, deadlines were missed
and observers became increasingly skeptical. Needless to say, the
partnership was never announced and all the hype surrounding the
coin subsided. In the end, it proved to be a classic pump and dump.
It is worth noting, that there are a number of websites that track
ICO announcements, including upcoming partnerships. Some of the
better-known ones include ‘trackico.com’, ‘icoalert.com’ and
‘coinschedule.com’.
2.9. EARLY INVESTORS
Are there any well-respected or established career investors,
venture capitalists or influential people backing the ICO? A wellknown
early supporter of Bitcoin and Tezos included billionaire
venture capitalist Tim Draper. His support and people of similar
ilk helped propel Bitcoin into mainstream media. Other notable
influencers are Brock Pierce (investor and Bitcoin Foundation
board member), Chris Larsen (founder and CEO or Ripple Labs),
Barry Silbert (investor and founder of Digital currency group), Vitalik
Vuterin (Ethereum founder), Andreas Antonopoulos (well respected),
Marc Andreessen (early pioneer) and Roger Ver (angel investor).
If any of these people announce their support for an upcoming ICO
then it is worth your attention.
2.10. SUPPLY CONSIDERATIONS
Supply will impact the micro-economics of a coin over the longterm,
regardless of demand. Put simply, a coin or token with a large
supply, say 1 billion, will struggle to appreciate in value over time,
when compared to a coin with a supply of 20 million.
Coins or tokens with a low supply include: Factom (8 million),
Monero (18 million), Bitcoin, Bitcoin Cash (21 million) and Everex
(25 million).
Coins or tokens with a large supply include ETH (unlimited)9, IOTA
(2.7 quadrillion), Ripple (100 billion), Stellar Lumens (100 billion)
and Cardano (31 billion).
All cryptocurrency above are quoted in maximum supply.
It is also worth understanding the difference between circulating
supply, total supply and maximum supply. For example, Bitcoin has
a maximum supply of 21 million, a total supply of 19 million and
circulating supply of 16 million coins, as at March 2018. Maximum
supply is the total number of coins (or tokens), that can ever exist.
Total supply is the maximum supply, less coins lost or burned
forever (so is an estimate), and Circulating supply is the total
number of coins mined to date – coins in circulation. Bitcoin is not
due to mine its maximum supply until the year 2140.
Coin and token supply is also impacted by pre-mines and
instamines.
Pre-mined coins are mined prior to an ICO launch date and have
the effect of reducing the coin supply available to the public. These
coins are usually sold in bulk soon after listing on an exchange. It is
common for large coin holders to flood the market and manipulate
price. Large early coin-holders (who basically get the coin for free or
at a large discount) can dump at a high price and re-buy later at a
lower price later, making an instant profit, yet still owning the same
number of coins. This was symptomatic of many of the pump and
dump price cycles seen in 2017.
Pre-mined coins can also be used to pay legitimate costs such as
early development work, marketing, legal fees and advisory. And
they can also be used by the founders to assert control over supply.
Examples include Ripple which was 100 percent, pre-mined and
Stellar Lumens which was 97 percent, pre-mined. Of Ripples’
(XRP) 100 billion maximum supply, Ripple labs own 60 billion XRP,
meaning only 40 percent of XRP is in current circulation – mind
you, still a very large volume.
Pre-mining in large quantities can mean that more coins go to
fewer people. This can result in fewer digital wallets or nodes on
the network. This can lead to a loss of blockchain benefits. For
example, less nodes on a network means the blockchain is less
secure and more corruptible. NEO a platform coin, with its own
blockchain, was 100 percent pre-mined, but 50 percent of coins
were kept by the NEO council to fund further development and 50
percent were sold through crowdfunding to the public. Many would
argue that this is a legitimate and plausible use of pre-mining.
Some reports suggest that 60 percent11 of the top 100 coins by
market capitalization are pre-mined.
Insta-mine refers to coins mined in the first few hours of an ICO
launch and can have a similar impact on token distribution as a
large pre-mine. Dash insta-mined about 2 million coins out of
about 7 million available.
In summary, pre-mined or insta-mined coins reduce available
supply to the public, which potentially exposes an ICO to price
manipulation once a token launches on an exchange. This impact
is further amplified if ownership is concentrated and there is no
investor cap in place.
2.11. COIN OR TOKEN DISTRIBUTION
The planned token distribution after an ICO launches is important.
The company should be clear on how tokens will be allocated to
founders, developers, advisers, miners and other team members
once an ICO is completed. This also includes tokens offered at ICO
pre-sale to early seed investors. A large part of the money raised
at this point will go towards the cost of marketing the coins and
running the ICO. Running a professional ICO can often exceed
£1 million in expenditure.
A good ICO will raise funds progressively over time, aligned to
milestones in their development plan or roadmap. Each stage
of development should be aligned to a stage of funding or to a
token release date. This shows that money spent is aligned to the
development of a coin or token – a sign of good governance. A
poor ICO will distribute coins or tokens, to team members hours
after launch (instamine) and quite often up to 50 percent of tokens.
Good ICOs will develop their beta version before distributing tokens.
A good example was Ethereum, which waited one year after ICO
launch to distribute tokens. This shows honest intent and can help
build trust with early investors. This also prevents token holders
from selling out early and flooding the market.
It’s also worth checking valuation. If a company is valuing coins
high and is expecting to circulate billions – this is unrealistic. Also
look out for any bonus tokens that aren’t incentivized to align to
project goals.
Remember the majority of the founding team members are getting
their tokens given to them for free which are supposed to be a
reward for the hard work the team has put in to date. Many of
the founding members will not be receiving a salary during an
ICO project and will rely heavily on token allocation alone for
renumeration. Look out for early investors who cash out as soon as
a coin or token starts trading on the exchange.
2.12. IS IT A COIN OR TOKEN?
A simple distinction which often gets overlooked is whether the ICO
is a coin or a token. And, if it is a token, it is important to understand
what type of token it is.
A simple definition provided by the website ‘CoinmarketCap.com’ are
that Coins operate independently on their own platform, whereas
Tokens depend on another platform or blockchain to operate. The
majority of ICOs depend on the Ethereum blockchain. In fact,
according to CoinMarketCap.com (March 2018), Ethereum hosts
over 90 percent of all token launches. And from 1,600+ roughly
1,600 cryptocurrencies today, 60 percent are coins and 40 percent
are tokens. So based on these metrics, coins look like a crowded
market. Some of the best-known coins are Bitcoin, Ethereum and
Litecoin, whilst some of the best-known tokens are Golem, OmiseGo
and EOS. Coinmarketcap.com identifies all cryptocurrencies as
either a coin or a token.
Remember, the predominant function of a coin or a token is to keep
the network trustless by rewarding miners for their efforts. And the
coin is essentially a tradeable exchange of value.
Depending on what publication you read, tokens can vary in
definition and demarcation. According to the Swiss regulatory
body FINMA, tokens can serve three functions: Payment Tokens,
Utility Tokens or Security Tokens. Payment tokens are a currency
which are used to pay for things. Utility tokens are a service or
application. Security tokens are deemed to be issued equity or
profit share and are regulated by the US Securities Exchange Act
(1934).
And Brave New Coin, a respected cryptocurrency publication,
recognises payment cryptocurrency assets, platform
cryptocurrency assets, side chains and application tokens.
Taxonomy for coins and tokens are yet to be universally agreed,
but as a general rule, a coin or token are defined by their
relationship to the blockchain.
COIN AND TOKEN DEFINITIONS
Currency token or coin: can be used as money in the real world.
Examples: Bitcoin, Bitcoin Cash, Dash, Litecoin.
Utility or usage token: has a real-world value native to a platform
or ecosystem. For example, Binance coin has a specific use and
value to the crypto exchange it supports. The coin can be used to
pay exchange fees, is convertible/tradeable with other coins and
will increase in value as demand for the coin increases. Though it
has limited use outside of the Binance Exchange, the coin offers
greatly reduced exchange fees if used to purchase other currencies
on its exchange.
A utility token is like an access token – in order to use that
businesses platform or service, you need to own their token.
Example: Binance coin.
Application token (DApp): a token to be used for a decentralized
application or DApp, which sits on the Blockchain. These tokens will
be used to reward miners on the platform.
Example: Eth-Tweet (currently only available in Beta) is a
decentralized microblogging service, similar to Twitter, that runs
on the Ethereum blockchain. The DApp platform ensures that no
one can control or influence tweets. Users are rewarded with ETH
donations.
Asset token: also referred to as Tokenised Asset Offerings (TAO),
which link directly to the value of an underlying tangible asset. For
example, Goldmint which links to the price of physical gold. These
tokens are less popular with investors as they are deemed less
speculative.
Example: Goldmint (linked to gold price).
Security or Equity token: behaves like an equity, is an investment
in an ICO project and is governed by the Securities Act.
Example: tZero ICO which is a portfolio of a company called
Overstock Inc.
Reward token: is a token used to reward loyalty and users. An
example is SteemIt which is a publishing forum built on a public
blockchain that rewards users with Steem dollars, determined by
the number of readers they attract.
Example: SteemIt.
2.13. FIRST TO MARKET
Coins or tokens benefit greatly from being first to market, even
with inferior technology. Bitcoin benefited hugely from being first
to market in payments despite slow transaction speeds and high
transaction costs.
Ethereum benefited from being the first blockchain platform
other tokens could build applications and services from. OMG, NEO,
ARK, LSK, SXEM, EOS, STRAT and ADA all followed.
Siacoin, Storj and MaidSafe benefited from being first to market
in the decentralized cloud storage economy, now competing in
the $250 billion sector with the likes of Dropbox, Microsoft Azure,
Amazon and Google.
Monero, which uses CryptoNote technology, benefited from
being one of the first coins to the fungible and private
coins sector (also referred to as transaction anonymity or zero
knowledge transactions).
2.14. DISRUPTION, MARKET SECTOR AND COMPETITION
It’s important to understand what market sector the offered coin or
token will operate in. How many existing market participants exist
(future competitors) and what the ICO will do differently.
New entrants to a market sector won’t just be competing with the
existing established participants, but also other new entrants from
the Cryptocurrency and Distributed Ledger Technology.
2.15. QUALITY OF THE TECHNOLOGY
Understand which blockchain the coin or token will be launched
from, as roughly 90 percent of tokens are launched from the
Ethereum blockchain. Note what software language (C++, Golang,
Node.js, JavaScript) the developers have chosen to use and
whether it will be published as open architecture (transparent for
everyone to see) on GiTHub.
If a token is not launching from the Ethereum blockchain, then it’s
important to understand why.
2.16. PROVEN USE CASES, POC/BETA PRODUCT LAUNCH
Before a project team goes cap in hand to the public to ask for
funding, they should at least have some evidence of how their
proposed product or service will work. This should take the shape
of a pilot or minimum viable product.
This early stage of product
development can be referred to by any of the following terminology:
• Proof of Concept (PoC)
• Minimum Viable Product (MVP)
• Beta version
• ProtoType
A Beta of MVP version are considered to be further ahead of the
development curve than a PoC or Prototype. Consequently, a
more advanced product development, has a greater probability of
attracting potential investors. Use cases and user stories also help
investors understand how potential customers will interact with
the product.
Proven use cases and proof of concept don’t necessarily guarantee
success. DigiCash founded in the early 1990s by David Chaum,
a cryptographer linked to Cypher Punk movement, offered an
electronic form of currency with proven use cases. He had signed
contracts with the Dutch government and most major banks
including Deutsche Bank, Credit Suisse, Advance Bank, Australia
and Sumitomo in Japan. He was also in advanced talks with VISA
and Microsoft. It filed for Chapter 11 bankruptcy in 1999, citing
poor management decisions.
In June it was reported by The Financial Times12 that a Cayman
Island-based crypto company Block.one raised $4 billion without
a MVP, meaning it raised this capital on investor confidence alone
and also making it the largest ICO in history. The previous largest
ICO was Telegram, which raised funding of over $1.7 billion. Both
projects are now suspected of fraud and misgivings.
Any project that does not have evidence of an MVP before going to
ICO, is a red flag.
2.17. REGULATORY IMPACTS
With the SEC already closing down a number of ICO projects in
2018 and even publishing a fake ICO website13 in May of this year,
to help educate investors, it is paramount that you also consider
whether an ICO is complying with its regulatory obligations. Keep
in mind that ICOs are not yet regulated to anywhere near the
standards of an IPO.
An ICO needs to consider a number of regulations, when accepting
funds from clients, these could include:
• Anti-Money Laundering (AML)
• Know Your Customer (KYC)
• FCA, EU, US financial sanctioned clients
• General Data Protection Regulation (GDPR)
• US Securities Act (1933) – and the ‘howey test’
The majority of these regulations are designed to protect a
customer’s rights and legislate against fraud, including misusing
personal data. Any breach of these obligations could lead to the
project being shut-down and/or paying large fines.
Once the project is up and running it will also need to consider any
or all of the following regulations:
• Payments Service Directive (PSD2)
• MiFID II (OTF, MTF, TTR)
• FCA, Payment Accounts Directive
• IFRS
• IAS 38.
Parity Technologies, Cointouch and Localbitcoins were all
forced to shut down recently, with the introduction of GDPR, due to
its new stricter laws for personal data14. Parity Technologies provides
automated KYC/AML checks through an Ethereum wallet. Under
new GDPR rules, which are aimed to protect the ‘digital rights’ of
EU citizens, storing personal information on the blockchain presents
new challenges; remember blockchain information is irreversible.
All future ICOs will need to be GDPR compliant and consider new
client data regulations.
It is important to closely monitor regulatory developments relating
to ICOs.
2.18. USEFUL WEBSITES
Reddit.com – a great reference tool for varied
opinion. Not to be under-estimated.
BitcoinTalk.org – one of the most reliable places to
get information on ICOs. Often the first place an ICO
is mentioned including its whitepaper.
CoinGecko – provides information on Liquidity,
Developer rating (referenced to GitHub), Community
rating, Public interest rating (references search
engine results) and makes an attempt at a Total ICO
rating.
ICORating – professional ICO rating service.
Coinist – historical data, ICO return on investment.
CryptoCompare, CoinmarketCap – coin
comparison and price, market capitalization
monitoring websites.
ICOStats – similar to Coinist.
ICOAlert – monitors upcoming ICOs.
ICODrops – ICO calendar.
ICOBench – ICO ratings.
TokenMarket – good assessor of tokens.
Coincentral – review and analysis.
2.19. COMMON ICO RED FLAGS:
• Celebrity involvement (suggests a large spend on marketing
and advertising).
• Twitter bounty threads (which reward users for tweeting about
an upcoming ICO).
• A planned high token distribution to the founders (>50 percent
indicates a red flag).
• No individual investor limit – exposes the project to a whale and
price manipulation.
• ICO funds not stored in an escrow wallet or multi-sig wallet
(one key must be held by neutral 3rd party).
• No ICO hard cap – indicates the founders haven’t done their
homework or prioritize personal gain.
• High coin or token supply (1+ billion is high).
• Developers leaving inadequate or unanswered questions.
• Poor team bios on the website or bios that don’t align to other
sources (e.g. LinkedIn).
• Unfavorable reviews by experienced publishers on
Bitcointalk.org.
• A coin or token which is entering an already crowded
market sector.
• A poorly structured White Paper which is missing key content
criteria and/or is plagiarized.
• Few, infrequent or poorly managed communication channels.
• Poor online presence.
• An empty GiTHUB (code, ICO info) repository.
• Plans to pre-mine or Instamine (they often won’t tell you).
• Promotional offers and Airdrops – not always the case, but
be wary.
• Founders who have a chequered history including former
bankrupts (research them thoroughly).
• No roadmap or an unrealistic roadmap.
• Any promises of getting rich quick from an ICO.
• A White Paper that details a solution without a realistic problem
or no problem at all.
• Failing to disclose how all the funds will be spent and not
linking it to milestones on a road map.
• Anonymous developers.
• An ICO project which is not clear on it’s purpose and objectives.
2.20. A GOOD ICO WILL:
• Set token purchase limits per individual investor – reduces
market influence and potential for price manipulation.
• Set fundraising limit for overall ICO – indicates good intention.
• Keep token price consistent pre-ICO.
• Solve a current business problem.
• Provide “intro video” of key features of the ICO.
• Be fully transparent.
• Be open and communicative with their community.
• Provide detailed and accurate bios.
• Fix bugs quickly.
• Provide professional audit (smart contract, software bugs).
• Implement Blockchain governance.
• Publish a crisis management plan.
• Ensure open architecture of blockchain software code
on GitHub.
• Publish a live token counter on their website to track
tokens sold.
3. CONCLUSION
A large number of ICOs in 2018 will not be worth investing
in, simply because of the large number already out there,
and historical failure rates.
Indeed, more than half of ICOs from 2017 have already failed.15
However, it’s important to appreciate that these failure rates are
broadly in line with venture capital failure rates, so some ICOs will
still be worth investing in.
To identify the ICOs that can potentially succeed look to the quality
of the team, team members with previous success, community
strength, active communication channels, evidence of an MVP,
token distribution model, token economics, a realistic roadmap, and
essentially, that the project is solving a problem for someone!
And remember, if you can’t summarize what the project is doing in a
sentence or less, then it’s probably not worth investing in.
The success of an ICO is ultimately dependent on long-term
community support, early user adoption and continued market
penetration, which isn’t hampered by scaling issues.
END