Initial Coin Offering Investing: Top 7 ICO Research Factors To Study Before Buying
If you have any involvement in the world of cryptocurrency and the ICOs (initial coin offerings) associated with them, there has been substantial evidence of their rapid growth rates. In fact, the numbers reveal that ICOs have elevated to $5.6 billion in 2017 alone and hundreds launched every month. The caveat however, is that over half of the ICOs launched in 2017 have failed due to lack of foresight, extreme emphasis on token value, team mismanagement, ICO structuring, etc.
At CAM, their team carefully evaluates an ICO to invest in through an analytical framework, which typically ratios to less than out of every 100 ICOs that flows into their line of sight. When having made the selection, CAM ventures to support the organization through various funding and shares classes it manages.
That being noted, CAM receives approximately dozens of emails daily from newly established companies requesting funding for each of their ICO launches for the designated cryptocurrencies in order to raise capital.
To clarify the stipulations in the election process, listed below is content which is critical in determining an ICOs’ eligibility for CAM’s support. The company dubbed this the The Seven Pillars of ICO Investing™, which has been conscientiously formulated in the throes of several years of investing in crypto tokens and other assets.
Pillar #1: Team
First and foremost of the crucial variables marking a successful ICO launch is the team proposing it. The ideal team will have a strong history in developing and launching blockchain technology, as well as a marketing strategy which caters to its’ audience. The team must display competency, and be versatile in developing, completing and/or further expanding their gameplan.
In addition, a few key points to consider for the marrow of the project:
- Are the advisors for the team taking an active interest in the project and do they have experience in the field?
- Does the campaign have any financial backers? (VCs, other hedge funds?)
- Is there a proper token schedule laid out by the team which will work to incentivize it.
Pillar #2: Idea
How solid is the campaign in the sense of its realistic framework including timeliness? A few key variables CAM seeks to identify:
- Total addressable market: How much can the opportunity expand? A key note is in how large the market is.
- Product-market fit: How are bugs and issues addressed?
- Unique value proposition: What are the features of the technology that facilitate its’ uniqueness? How much competition in comparison? They observe if the token has a proprietary technology, and if there any similar products on the market.
While CAM certainly favors both Pillar 1 and Pillar 2 and their interoperability with one another, the first aspects of the equation they will survey is how effective the team is. CAM’s vision of ideal investment would be for “A” team working towards “B” idea than a “B” team focusing on an “A” idea. Having a reliable and resourceful team is the maker or breaker of a business, regardless of cryptocurrency or otherwise.
Pillar #3: Execution
At the end game, the results are the determining factor.
While a talented team and a superb idea are valuable, the execution of the proposal is truly a paramount component. Is there already a prototype for the product in question, or is it simply a pipedream nebulously projected onto whitepaper?
Trust that when the company says your brand will need some results, they expect it to already in play. In doing so, CAM is more liable to invest in a product which already exists to some degree, be it a cryptocurrency backed campaign or analogously through fiat currency. With these cornerstones in mind, it aids in the search for some proof that the organization will hit the milestones it projects for itself.
Pillar #4: Legal/Regulatory
The Legal end is another highly important pillar, as this is a necessity in the growth period of an unstable industry.
Anyone involved in the market will be aware that various global government agencies (especially the U.S.A.) are taking regulatory actions or creating a new criteria for the distribution and management of ICOs. In that same vein, there are countries considering a legislation toward ICO governance. At this stage in the game, it is crucial that the product and or token in question is able to navigate a continuously changing landscape vigilantly and possible future comprehensive regulation.
A particular point of concern that has proven to be a thorn in mass player’s sides is the jurisdiction issue. A company must ask in what country will it be incorporated and what access will others have to the ICO? This determines the rules and limitations.
In regards to limitations, if you are a U.S. investor seeking reprieve, CAM does tend to apply the methodology of the Howey test’s KYC/AML principles and the securities law surrounding them.
Pillar #5: Tokenization
The crux of this issue usually develops during the last public sale. There is often superfluous activity behind it by way of creating apps (dApps) which would not necessarily require token usage, no matter the claims that the founders may make. NASDAQ’s settlement system is a prime example of token output and its’ views creates a gratuitous and even in some cases, counterproductive move. Truth be told, the tokens are, in most cases, unnecessary if the platform is proposed correctly.
As the industry continues to grow through the perpetually changing value system via blockchain technology and the notion of “free” standard of exchange, it stands to reason why so many entrepreneurs would favor approaching the diving board of ICOs and cryptocurrency under any reasoning.
Therein, another main principle of CAM’s stigma is a business must have legitimized reasons to back the purpose of purporting their tokens into business operations and publicly extending that value system through the market.
Pillar #6: ICO Structure
In correlation to the traditional investing via venture capitalism, the financial underpinnings are the determinant in the choice of investment. In lieu of the decision making process, the characteristics of an ICO have direct impact on implications of the token’s gain. To clarify, this can be split into two categories – ICO mechanics and ICO deal structure.
- ICO Mechanics – Truth be told, when it comes to performance, ICOs with a lower cap tend to yield better results than those with a massive hard cap. Funding is of course, imperative in the integral operations, however in order for the entire machine to be functioning, the ICOs must have a solid mechanized plan for the use of their proceeds as the potential upside decreases in ratio to the amount funded. If you recall, the hard cap serves as a measuring device for the circulation of tokens and their value. This first variable is another factor we take into consideration.
- ICO Deal Structure – As for the deal structure, it should be architected in such a way so that investors are not at an unfavorable position to the market. Further elements in CAM’s analyses are accounted for below:
- Distribution: Distribution of tokens should have a compelling structure, appropriate allocation amongst the team and it’s advisors, market updates for programs, etc.
- Distribution Schedule: Timing plays another large role, especially when the cryptocurrency rivers have been unleashing a fast and furious flow. CAM recommends the distribution schedule not favor specific parties. Essentially, this route expands to the market of individuals and their liquidity preferences outside of the long-term distribution durations.
- Discounts: Another touchy and superfluous subject, ICO discounts are pervasive in nature, so ensuring that your variety of discounts provides point of reference for investors so they can determine what their options are to other stakeholders.
- Equity Stakes: Ultimately, yours and Crypto Asset Management’s goal is to take a part in the growth of the company. Investing directly into the equity of the business segues for CAM to play a greater role in the company’s development. Ultimately, the value proposition of the organization in question can be just as great or even greater than its token ecosystem campaign.
Pillar #7: Price Drivers
As a team may propose a great product and an appropriate cause for its token, this does not guarantee that the Crypto Asset Management team will desire to gain the token or invest in the ICO. By standard of application, a token must have a mechanism to instigate price appreciation.
As ebb and flow naturally occurs in the investor’s market, a token which remains constant in its supply and without any incentive for buyers to hold, is subject to lose its value in the long run for sellers. Inquiring minds will reduce their risk if there is high volatility centered around the coin. Again, as was stated earlier, this is one of the underpinnings of an unstable market and price risks. (Kyle Samani has written an in-depth article elaborating on the problem here.)
A few of the price drivers they will look for includes:
- Network Volume: If you have ever paid to the basic mechanics of a blockchain transaction, with their increase, so does the value of a cryptocurrency. This is a basic principle of demand and is indicative of why CAM’S interests lie in protocols rather than dapps.
- Market Leadership: Simply put, CAM is going to only select in tokens that strive for or project an efficable leadership. These cryptocurrencies will have a feature which allows for unique advantage above their competitions, aka Practical VR.
- Incentives to Hold: Naturally, there will be points in which an investor would hold on to their tokens rather than spend them. The reasoning behind this can be related to a number of variables, be it forecasted prices increase or other non-monetary rewards. In short, CAM won't invest in a token in that it’s only purpose is acting as a medium of exchange.
- Supply Changes: As this is a major consideration, when inflation occurs, the token supply should ideally not dilute the value of the tokens over a duration, or token burning, where the supply of tokens in the system decreases over time.
- Profit Sharing: Naturally, the values in which the system extracts is offered back to token holders. Make sure it is a value which your patrons are satisfied with.
- Staking: Another game play which determines quantitative token and company value is to designate users in a certain network to lock up their tokens either for network consensus or as a safety measure for certain processes.
- Sufficient Liquidity: As a team resource, if your members are not proactive about your product’s presence on multiple exchanges, particularly top-tier ones, chances are high CAM will not make an investment.
It is important to note that Crypto Assets Management generally do not carry interest in asset-backed tokens. The justification behind this decision is that there is very little driving force to be had once a campaign has received a minute boost for its growth convenience. Generally, the opportunity cost is too high, while there is better options to be had in the grand scheme of things.
Furthermore, implementing strong incentives in the ICO launch or project proposal is indicative of higher rate of return. The formula has shown that the price increase will be driven by the inherent design of tokenomics, but also potentially influenced by the implementation of these drivers.
In lieu of the plethoras of one-hit-wonder ICOs, it seems a guarantee that a tokenized future is in our midst. It certainly is an evolution in capital development and also has produced literal overnight fortunes in some cases. CAM does offer warning to those who have minimal to no experience in investing that the cryptocurrency avenue could potentially rocket you in a direction of financial ruin. Those however who operate with proper due diligence have an opportunity to earn brilliant returns on your investments in the projects.