Often in Reddit or Quora, you will come across heaps of questions on whether someone should invest in an ICO or if it is a scam. Now ICOs can still fail if mismanagement happens, just like in Startups, IPOs and even democratically elected governments. So we won't got into detail on this but focus on weighing in on how to judge an ICO's worth.
So here are three simple rules to assess the value of an ICO.
ICOs should have a niche business that will generate Revenue
This should answer the question should the ICO be a type of security or utility. Just ask yourself...
Does it disrupt a business model in a particular industry?
Folks, never invest in a ICO when you are unfamiliar with the industry it is in. This is how a scam happens. ICO will weave a tale of woe telling you that they have the technology or know how to disrupt the current way business is done. When you do not know that industry well enough, how could you commit a load of Bitcoins to their cause?
These are the most common questions found on Quora and it shows your lack of knowledge on investment.
The Whitepaper says it all. If you read my teardown blogs on the gaming industry ICOs, you'd know that I have had experience in them to know that these ICOs are just pure BS. Another type of scammy ICOs have nothing to show for but loads of promises when they get your tokens.
Would you buy a token to a Ferrari car rental when they don't own any Ferraris?
My sentiments exactly.
Even if you are not totally familiar with the business the ICO pretends to be in, you should of course ask someone with knowledge of the industry before going all in.
Once you know the industry well, then you can make a sound investment decision. Many ICOs want to disrupt the way business is currently conducted but they haven't the faintest idea how. They might have a plan but that doesn't mean the plan will work.
ICOs with little to show for will brag about their team and beg you for money to change the world. The business model of an ICO should always be niche, that it will generate income. If that doesn't seem to be their modus operandi, where else do you think they will be getting their revenue from to pay for it all?
An ICO should have verifiable collaterals
When you have an ICO with a dubious team and no real collateral, would you invest in it? When I say dubious, I mean people with no social media profiles and dead end links to their companies. In the age of the Internet, people cannot NOT have a profile on Linkedin or Facebook unless you lived all your life in China.
ICOs must have some sort of collateral to bring to your attention. In the case of LightCash they are backed by the Lapri Gold Mining company. This is what I mean by a collateral. Now move to the next step. Verify the collateral mentioned on the site. A cursory search on the Lapri Gold mining company will turn out with nothing. It is unverifiable. So here you have a backing company with NO historical data on google search. Would you invest in such an entity?
Collateral of any kind should be verifiable at least on the Internet. An ICO should have an audit trail instead of just a few mentions on websites. So when an ICO states its collateral credentials, you must be able to verify some of it on the Internet.
Should the collateral be only in the form of a technology, software or hardware, then it should be proven in the real world first before it can be an asset. I hate ICOs that promise to develop the technology upon getting the money. We have seen loads of failures on Kickstarter and Indiegogo after getting millions in funding. What makes you think an ICO is any different?
Badly written White Papers are clues to a Scam
There are boring white papers and lengthy ones which may consist of more BS than facts but the first clue to a bad white paper is one that bores the shit out of you with a sales pitch and no substance.
Yes, I hate a sales pitch. I want the details on how the ICO is going to disrupt the current business. The sales pitch should be in the Website where they sell you their dream. The White paper is the reality of the business model so if the sales pitch is still in there, it will sound like they are selling snake oil.
The White paper is for you to judge their business model. You need this to make an investment decision and many so called ICO investors want to skip the details and go right into when the ICO tokens will be listed on the exchange so that they can sell and make money out of it. This is extremely foolish. But hey, it's your money and if you like investing that way, why bother with the White paper. Please take my money.
Returns on your Investments are clearly stated
How do you return value to your investors? In the beginning, many ICOs were structured as securities. So there will be a buy back or dividends paid at a certain term. When an ICO promises much but doesn't clearly state how they will return some value to the investor, then why would you invest in it? In the real world, companies return value by dividends or stock buy backs from the market. ICOs should be judged on the same criteria.
These days, having ICOs structured as securities will pose a big problem unless you are listing in countries that have clearly defined laws on ICOs. This means ICOs have to find other ways to return profit to the investor.
How do they do this? This is where ICOs have to use their creative license to find ways to do this instead of making wild suggestions on a buy back when they are profitable.
This is where tokens can be structured as a utility token instead of a security token. You should know how and when the token is convertible to a service or product when the time arise and how that is perceived as value. If the same service or product can be bought via fiat then the ICO token has little value. The value has to be in the form of a discount or fixed price mechanism where you enjoy some privilege. The problem with this concept is that most Securities Commissions around the world could take it to mean a profit of some sort and slap the ICO with a cease and desist order for securities violations.
How an ICO works in the long run will depend on how profit can be distributed legally. Why would you even give money to an entity which doesn't return value to the investor?
Conclusion: There is an ICO born every minute
Didn't they say the same about 'suckers'?
For ICOs, there is no fallback mechanism when it fails to deliver. For a listed company, you could take it to court but ICOs don't fall into that category unless the ICO is registered to operate in a country that has ICO laws. There is no avenue to protect your investment in an ICO if they are legally not recogized as a business entity.
This is where it is very important to recognize where the ICO is operating from.
All ICOs have to register themselves as a business entity and operate with a bank account. ICOs may not pay staff benefits or have maternity expenses but they will need to hire people to work with them and the last I checked, I don't think being paid only in Ether or Bitcoin was part of their contract.
You can invest a handful of Ether in an ICO you like but like in gambling, you should also be prepared to lose everything you have invested due to the risky nature of ICOs.
With that in mind, I hope you use your sound judgement when investing in ICOs instead of asking strangers on Quora.