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Saturday, January 13, 2018

How To Analyze Initial Coin Offerings (ICOs)



  • ICO's are no different from any other investment, you have to do your due diligence.
  • The process starts with researching the offering and the team behind the offering.
  • The process ends with finding a good technical price to buy at.

I've been asked on several occasions how to analyze an ICO. The process of analyzing an ICO is no different from any other investment. 

First a few reminders: Don't ever invest your money in anything without feeling comfortable with it. I also wouldn't invest in any crypto-coin with money that you can't afford to lose. As much as I like crypto, extreme caution is required in new markets. There are tiers of risk in the crypto-world and ICOs are among the highest because you have no historical data. 

With that said, let's take a quick look at scams.

Vetting Out Scams

Before getting to the analysis process, I want to put an umbrella of context over your goal. I hate to say this, but there are many scams in this space. The truth is, like the Federal Reserve and quantitative easing, a good scam is hard to detect. These are a few things you can look for:
  1. Be wary of ICO's with an incoherent message or purpose.
  2. Be wary of ICO's that have a project that sounds similar to others -- you may even find an identical white paper or technical detail being used.
  3. Be wary of ICO's with fake credentials and websites -- click on ALL of the links of the website to see where they lead and if they're live.
  4. Be wary of ICO's with no names or transparency. You want to see faces and those faces should be attached to real people. You can vet people by looking at social media accounts or LinkedIn. Even these can be faked.
  5. Be wary of ICO's that are uncapped.
  6. Be wary of ICO's that have no time limit.
Keep this list in the back of your mind when going through the analysis process.

The Analysis

The same questions you have for any start-up should apply to ICOs. Analysis is a function of 6 main areas: Quality, Team, Team Investment, Blockchain, Social Media, Total Project Funding
  1. The first thing you want to look at is the quality of the project. Is it something that looks thrown together, or does it seem like a well thought out idea. Quality is a large category that can be split into others. In general, it refers to the idea potential. Is the road map overly optimistic? What are the merits or features of the token used? Does the coin derive value from the product or something else? How will it be used (for transactions or investment)? How is value created for token holders (staked interest, a % of profit)? How many tokens are being issued and is there a cap on the number of tokens.
  2. The Team: This is a group of people you are going to trust with your money. Where have they worked, what have they worked on before, do they have advisers? Are they qualified? You also want to note how many developers they have? Do those developers have profiles on Github?
  3. How does the project use blockchain? The value proposition for using blockchain should be clearly stated. Is the market big enough to benefit from the new technology or service provided? The start-up is going to have to unseat others in the market -- can they do that?
  4. Browse social media to see what people are saying. Can you pick up a general feeling about how people in the community feel about the ICO? I tend to shy away from ICOs backed by celebrities. I never buy an ICO endorsed by a bank or government (Venezuela excluded). If I do pick them up, it's after the "pump and dump".
  5. Check to see how much the team has already invested. Have they invested their own money in the venture?
  6. How much money does the total project need? I'm not fond of pre-sales, but if there is one I want to know how many offerings will take place. I also want to know what the allocation process will be.
If you can get to this point, you can progress to the next step: technical analysis.

Moving From Fundamental To Technical Analysis

Technical analysis is difficult without historical prices, but there are some tricks. Now that you know what you want, accumulate low. You want to buy at pre-pump prices.

There are a group of ICO buyers that like to buy and sell into the pump. They have no intention of holding. Once these guys bail, where is everyone going to hang out? That's where you need to place your order. Look for the buyer with the largest order at these prices and place your order just before theirs. You also want to monitor the number of coins in circulation during the ICO. Distributed coins shouldn't be for more than 40%. Too many is a sign of a dump. Wait and pick up on pre-pump prices.