ICO Due Diligence

In 2017, ICO's made a lot of people a lot of money, and we don't see that changing much in 2018. In fact it will probably accelerate even more.

There are definitely some things that WILL change though.

First of all, ICO's are going to be a lot more competitive. More and more people are jumping on the ICO train and looking to get in early. This means that the most popular projects are going to either sell out in minutes, or will issue very small individual caps.

Either way, investors are going to struggle to get the full allocation they want in every ICO.

This is going to cause more problems down the line, because people will start to invest earlier in the pipeline, such as during pre-sale period, or they're going to start investing in ICOs that don't have a whitelist.

The information provided here is for informational purposes only and should not be seen as investing advice. Our opinions on this site are only that, if you are considering an investment into cryptocurrency or anything we speak about on this site, please advise a trusted financial professional first, before doing so.

Both of these situations poses a risk, because the earlier you invest, the harder it is to do thorough due diligence on the project, and you're more likely to get caught in a cash-grab, or scam ICO.

It's not all doom and gloom though!

Every day there are almost a dozen ICOs to contribute to, and this will be the case for the foreseeable future. If you can resist your fear of missing out (FOMO) on some of the more popular ones, then you'll still have plenty of opportunities to invest in something good.

Not only that, but increased competition means there will be more unmet demand when these coins hit exchanges. If you're one of the lucky people to pick up the coin at ICO price, you should be able to experience some pretty good gains later on.

That is, assuming you've invested in something worthwhile and not one of the increasing number of junk coins that is coming out.

The trick is to find something like ICON, which is now at about 25x only a few months after its ICO, or DeepBrainChain, which went 10x shortly after it hit exchanges, and was a clear winner from the start, and avoid something that doesn't even sell out, or worse, is a scam.

That's the hard part though isn't it? Unless you're doing this full time, then doing the research and due diligence on each project is going to be tricky.

Sure, you could just jump into projects without doing the necessary research, but sooner or later that will get you burned. If you want the big returns like we talked about above, then you're going to need to earn them.

Right now, you have a few options:

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    Spend all your free-time researching coins. If this is the path you want to follow, then this post is going to help you do it in the most efficient way possible.
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    Follow hype and fomo. This could get you some gains but you'll also end up feeling like you're one step behind, and will miss out on a lot of the biggest opportunities. Our best gains came from ICOs that a lot of other people didn't initially notice.
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    Subscribe to our email list so we can walk you through some of the best upcoming ICO picks, as well as our existing project picks as well.

It's also important that you learn how to actively find and follow the best projects as well, so you don't miss the whitelist announcements and end up missing out entirely.

So let's get started with the point of this post.

How To Do ICO Due Diligence

The biggest problem with investing ICOs is that many of these projects have very little history. They're often new companies that have started up a few months previously, with a team that doesn't have any reputation.

Going through LinkedIn profiles can offer some insight, but it's not exactly a prefect method. The recent Benebit ICO scam is proof of this, as they all created fake LinkedIn profiles.

The team behind the project is definitely one of the best ways of approaching ICO research though.

Yes, you definitely want to look at the white paper in detail, and study the tokenomics as well, but without a team that instills some confidence, you might be better off walking away.

Some of the more effective ways of analyzing ICOs revolve around creating ranking systems or ratings for them.

This is something which Ian Balina has helped to popularize (see his video below), but many other private groups do it as well. While it may not be perfect, it's a good way for filtering out the obvious junk ICOs from the potential quality ones.

Let's take a look at how it works. You can also check out Ian's video here:

A Data-Driven Guide To Analyzing ICOs

Let's take a look at some of the categories commonly used for rating ICO's, and then give our opinion on each one. Important note: not every category should be weighted the same. Team is much more important than project age for example, and having a working product is more important than how cool the idea is.

Also, these are just our metrics and opinions. You can use them as a guidance for doing your own due diligence, but don't take them as a science.

For all of the categories below, it's really up to you about what scoring system and weighting you use, because no system is perfect and we want you to learn to do your own due diligence.

With us, we prefer to give the highest weighting to the team and the tokenomics, as these are the most important for an ICO.

Lockup and vesting period doesn't have a huge weighting, but it does have more of a binary score. If the lockup and vesting period is over a year, then we are ok to invest. If it's less than a year, the other metrics better be perfect. If there's no lockup or vesting, we're out.

The easiest thing for you to do would be to give each category a score out of 5, but give team and tokenomics a score out of 10. That way, they effectively have a higher weighting.

Unfortunately, giving the actual scores can be subjective. For example, we might think a team gets 8 out of 10 while you may feel it's only 5.

Let's look into the things to consider when doing this due diligence. Even if you can't be bothered to give scoring, you should still assess each category.

Team

The team is the most important aspect of reviewing an ICO for a few reasons:

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    A good team is much more likely to sell out an ICO
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    A trustworthy team is (in theory) much less likely to scam you
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    A good team is also more likely to succeed with the project and grow the value of your tokens long term. We're not all looking for a quick flip.
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    It's also a self-fulfilling prophecy; a stronger team on paper makes the ICO more popular, which helps build hype, which in terms promotes long-term growth when the coin hits exchanges.

The question of course is, how do we go about analyzing a team? Here are some of our favorite ways:

1. How they respond to questions:

This is probably more important than many people realize. Looking how a team handles questions in their Telegram, Subreddit, or anywhere else is a great way of assessing their attitude and attention to detail. Yes, dealing with inane questions in your Telegram isn't the most important thing when you're running an ICO, but the tighter ship you are running, the more positive that is for the rest of the organization.

We've seen companies not pay much attention to their Telegram and still sell out, so it's not exactly a red flag, but transparency is still a good thing. We've rarely seen a company who is totally on the ball with Telegram do badly though.

It's not just whether or not they are active and answering questions that matters either. How is their attitude when doing it? Are their answers ambiguous and shady? Do they avoid certain topics repeatedly?

Do you get a slightly dodgy feeling in your stomach from them? Do you feel like they are amateur or out of their depth?

In short, do you feel confident that these guys are professional and legit?

2.) LinkedIn profiles

This is not a perfect science either, but it's still an important stage. Things to look for are:

  • Have they bothered to update their profiles and add the company to their profiles?
  • Do the advisors have the company mentioned anywhere?
  • How old are the profiles? Do they look newly created? Not necessarily a bad thing if they're brand new or relatively empty, but definitely worth considering as a negative.
  • Work history.

Now, a lot of ICO teams haven't got a super work history working for Fortune 500 companies, many of them are entrepreneurs who created/worked for companies you may never have heard of. That's not necessarily a bad thing, and can in fact be a good thing (see below), but you should at least check out these companies to see if they actually got anywhere at all.

3.) Marketing

How well the team market themselves is also a good thing to look at. Are they actively appearing on podcasts, doing AMA's, seeking press features?

The problem many ICO's face is a lack of marketing. Part of this is because they don't have a budget yet.

When we find an ICO with poor marketing, it doesn't mean the team is bad or illegitimate, but it does raise the question on whether or not this ICO will sell out. The better the team can market, the better the ICO will perform. Of course, marketing and hype alone isn't enough, which is why there are more things to look at.

For more lessons on analyzing a team, read this article: https://howtotoken.com/for-traders/research-ico-team/

Whitepaper

The next place to look is the whitepaper. It doesn't have to be super professional; we've seen successful ICO's launch with just a Google Doc.

What it DOES have to be though, is legible. It has to make sense. It has to go into details about the project and not just use ambiguity, technical speak, and hype to sound like a good project.

Some of the best projects have very clear, no-nonsense whitepapers.

A recent example we've seen is from Narrative.network, which nails it not only on presentation, but also on the content.

Take a look at their whitepaper as an example of what a quality one looks like here.

The white paper actually has to present a good case for the project too. The idea has to make sense and has to justify the need for a token as well.

Most of us are beginners and have no real idea if a project NEEDS its own token or if it even NEEDS to be decentralized, but some projects present a much better case than others, and the more of these you read, the better you get at identifying them.

Try to read 1-2 whitepapers per week, even if you don't invest or don't understand them at first. You'll get better very quickly.

There is possibly too much emphasis on how unique the idea of a project is among many ICO investors. It doesn't need to be revolutionary in order to succeed, in fact, being too ambitious can sometimes be a bad thing.

The most important thing is that the idea makes sense and doesn't sound like finding a problem to fit a solution (in other words, they wanted to do an ICO, but had to come up with an excuse for one first).

The Idea

Speaking of the idea...it is still important enough to get its own category. The idea behind the business, and the progress they've made so far, is important to consider, but in the current market is not the be-all-end-all of ICO success. Pretty much anything with a "decentralized" tag has the ability to make money, because there is so much hype in the market, and so many hungry investors.

With that said, you have to look at the idea and think, "Is this decent? Or is this complete BS?".

Let's take a look at this example we saw yesterday:

There are some projects which look or sound cool, but are either cash grabs or just ideas that won't necessarily take off.

Many projects failed to raise money on AngelList or even Kickstarter, and decided to do an ICO instead. There's even a kickstarter for ICOs ICO.

Again, there is no real way to know which of these projects will pan out and which won't, but just because cryptocurrency is revolutionary and amazing and decentralized, that doesn't mean you need to throw logic or common sense out of the window.

If you look at the current top 20 projects on coinmarketcap, most of them either add liquidity to the crypto world, are some form of currency, or are a platform for launching cryptos. There aren't any mind-control projects in the top 20. Weird.

The Prototype

The best performing ICOs have at bare minimum an MVP when they launch, and even better if they have a prototype. While "whitepaper ICOs" can still be successful, you're going to have a lot more faith in a project if it already has a working product or customer base.

It just makes sense.

Now, you can't expect them to have the full product yet, because the whole reason most of them raise funds is to get the money to build their product, but you should at least see evidence of progress.

Not a single scam ICO has had a prototype either, so that's another great way of protecting your investments.

The Tokenomics

We could write an entire post on the ideal tokenomics for an ICO, and perhaps we will someday, but for the meantime, let's summarize it like this:

If the project is trying to raise too much money, is keeping the majority of tokens for itself, is not vesting or locking the founder tokens up for a decent period (1 year or more), or has some other questions around the numbers in its token sale, you may not want to jump in.

One of the single most effective ways of guaranteeing a return on your ICO investment, is seeing a lot of people unable to invest because there isn't space.

When we invested in DeepBrainCoin, we were one of only 1,000 contributors, because DBC only raised a small amount. This meant that when it hit the exchanges, it skyrocketed in price, because there was so much unmet demand.

As well as demand, here are some other things to look at in regards to the tokenomics (which basically means "token economics" or "how the details of the tokensale and token supply add up".)

Hardcap - How much money they're raising.

Generally speaking, any hardcap over $40m is not ideal, but it depends how well the company can justify it. Full-stack developers cost a lot of money per year, and people often underestimate how much money a project really needs in order to succeed.

It seems like $12m is the lowest raise we've seen recently, so we'd say $15m - $40m is the sweet spot. Depending on the project, being over $40m may be ok.

Also, the lower the cap (such as $15m) the more unmet demand there will be...if you can manage to be one of those people who contributes.

Whitelist - Is there one?

It's pretty standard these days that tokensales have a whitelist. If there isn't one, it may be a sign of a scam, but not necessarily. If you can get on a white list and that list closes before more hype builds, you're in for a good ride, especially if the individual cap allows you to put a decent amount in.

Individual Cap

Speaking of individual caps, is there a limit to the amount you can buy? This doesn't really make or break an ICO, it's just something to pay attention to. Lower individual caps mean more people can get in and therefore there is less FOMO afterwards, but it also means you're more likely to get in as well.

The ideal tokensale we've seen is where there's a decent sized individual cap. This means there is a good chance for you to put in as much as you want, without worrying about whales buying everything up and dumping it when the coin hits exchanges.

Bonuses

Bonuses are another thing which can contribute to whales. If there are big whales who bought up a lot of tokens in pre-sale for a large bonus, they won't care about tanking the price when it first hits an exchange, they'll just want to take their profits and move on.

So ideally, you want to see a reasonable pre-sale bonus, like 30-40% and if the pre-sale has an individual cap as well, that's even better.

Crowdsales tend to have smaller bonuses so they aren't much to worry about, but if you see a huge bonus during a crowdsale, it could be a bad sign. Especially if there's no whitelist and a huge hardcap. Scam alert.

Founder Vesting And Lockup

Ideally you want to see 1 year vesting and 1 year lockup (they're not the same thing, but equally important). If Founders are able to just take their tokens immediately and dump them, then that's the biggest red flag there is. Most ICOs will have an auditable smart contract to prove this as well.

Now, you probably can't read a smart contract, but you'll be able to see if others are talking about this. Absolutely do not invest in an ICO that doesn't have lock-up or vesting. This screams "cash grab".

Token Supply

Total token supply and the intial sales price is quite important too. For example, if an ICO is going to have 300 million tokens, and is selling them at 10 cents each, then that means they'll have a marketcap of $30million when they hit exchanges. $30m is tiny compared to other projects, which means there's a lot of room to grow.

Most people don't really understand marketcap and growth potential, instead they look at the price of the coins only.

We've seen people saying a $0.10 token is cheap, and a $0.50 token is expensive. Without knowing the total token supply, this is irrelevant. Ripple looks cheap, but it's actually super expensive, because it has less room to grow. Price is driven by supply and demand, so if there is a huge supply, it's a bad sign.

So what you should look at here, is what the market cap will be after the tokensale. Look at the coins in circulation, total token supply, and the price per token, and figure it out from there.

Percentage Of Tokens On Sale

Ideally you don't want to see founders taking more than 50% of the tokens for themselves, and if they do take that much, they should be splitting it up. For example, taking 50% is ok, if 20% of it is going to be used to grow the platform, incentivize developers, and so on. If a company is going to keep 60% for themselves just to grow their net worth, then that's another pretty big red flag.

Fortunately most companies understand this, and don't expect to keep too much.

Your Strategy

You also have to consider your plan and how that fits into the tokenomics. If you're going for a quick flip, then seeing a low hardcap, a lot of unmet demand (aka FOMO), and a solid project, that should be all you need.

On the other hand, if it looks like a lot of people are going to be able to contribute and there isn't a lot of fomo or hype around the project, you'll likely be holding it longer, until the project hits some of its milestones.

Neither strategy is wrong, but you have to match the data up with your goals.

Gut Feeling

Most of the above factors are the ones that you can check for every ICO, and you can give them a score, attach different weightings to different scores, and come to your own conclusion.

Or.. You can go on gut feeling.

Many times it is clear to see which ICOs will be rocketships and which will be slower burners. Now you don't necessarily want to only go for the rocketships and ignore the slower burners. It's the destination which matters, and we all have different strategies. Some people want a quick flip, others want to hold long term.

Many other projects have faired similarly.

Final Thoughts

Ultimately, even a data-driven approach is still going to have some degree of subjectivity. For example, Ian rates a team as good if it has three or more "All stars". His definition of an all-star is someone who worked for a prestigious company.

While that might be an effective way of filtering out ICO's, it's not going to really be all that accurate every time.

In OUR opinion, someone who has years of experience building companies and being entrepreneurial, such as a digital marketer, is going to put on a more successful ICO than somebody who once worked in the Paypal mailroom.

Entrepreneurs tend to have experience doing multiple roles, wearing lots of hats in their company, and are good at bootstrapping. This is something every ICO needs to have experience in.

This is obviously an extreme example and we're just using it to say that we rate team's slightly differently from Ian Balina. Either way though, the point is that by rating teams, you can effectively separate the better projects from the garbage ones.

In summary, here are the takeaways for you to remember:

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    Team & Tokenomics: Give these the highest weightings
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    Team: How responsive are they in their answers to the public? Is it clear or are they avoiding questions?
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    Whitepaper: A google doc can raise money, but a clear, no-nonsense whitepaper trumps everything
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    Idea: How for "out there" is it? Where will it fit in the top cryptos right now
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    Prototype: ICOs are less likely scams when they have a working prototype
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    Tokenomics: Look for 1 year vesting and 1 year lockup periods. It's a fine balance between decent cap sizes, bonuses, and the overall supply
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    Token Supply: Price does not determine how cheap or expensive a coin is, but market capitalization does
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    Percentage of Tokens: Don't want to see more than 50% goto founders, unless it's split up purposefully
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    Your Strategy: Consider the tokenomics and your overall goals when going into an ICO. FOMO is important as a characteristic of a successful ICO going onto an exchange
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    Your Gut: The best way to assess projects is to read more whitepapers. The more you look at, the better judgment you'll have in a projects validity.

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