Secret #2 of 7
5 min read
In stocks when a company wants to get listed on the stock market, they often do so through an IPO (Initial Public Offering).
Investors can buy the stock at a reduced price. As soon as it is listed however, the market will decide if that price was right.
In crypto there is a similar process, called an ICO (Initial Coin Offering).
The problem with ICOs is that until last year there was hardly any regulation in place to protect the people buying them. Most of the ICOs had no real plan or business value except for putting money into the pockets of their founders and developers.
As they deservedly so have a bad reputation we don't recommend anyone to invest in ICOs until they know what to look for!!!
The people involved are key to detecting if an ICO is fraudulent or the real deal.
Are they real people? Do they have genuine, well-developed social media profiles?
Have they been involved in the crypto space for longer than a year?
What business or other relevant experience do they have before launching into ICOs as programmers or project managers?
Their whitepaper is a clear and thorough description of the goal of the new coin or token and how it will work in a detailed fashion.
If anyone wants to get an initial public offering (IPO) on the stock exchange, they better get their business plan, marketing, team and project well worked out. The same applies to ICOs.
Is there a well developed whitepaper?
Does it clearly define the aims of the ICO?
All successful projects have a community of loyal followers with active engagement and growing numbers
Does any community exist or is there any level of support?
Is there engagement by the project owners and leaders to feedback from the community?
Are real people liking, sharing and engaging with the project?
Is the community real <=> does it only exist on Telegram? If there is no other presence (Reddit, other forums, ...) that may be a red flag as it's easy to create a community on Telegram with just bots and fake accounts. Perform a proper search.
Since the underlying principle of cryptocurrencies is transparency, most of the coins and tokens will keep a code repository on Github where developers can contribute and people can check the code.
Is there a public or private code repository on Github that developers use to work together?
Is the development team actively working on improving the coin's programming?
If the codebase is public, is it in line with what the whitepaper claims?
Is the team transparent about their code or are they trying their best to hide it? If so, that's a major red flag.
When we invest in any company or project, we ideally want to see an existing business that's already proven to deliver and that has other resources at the ready if needed.
Is it a business model, service or product with real world value? Does it serve a need better that another coin doesn't?
Are there any other signs of cash flow or investments by investment funds or by reputable people involved with other successful coins or tokens?
Is there an existing customer base or will the coin have to carve out its market first?
What will the majority funds of the ICO go towards? Will it be staked or will it mostly go towards the financial gains of founders and developers?
What happens to the funds if the ICO goal is not achieved?
Is there a detailed roadmap for each step of the project?
Keep in mind that a lot of advisors are paid to endorse projects, so take "endorsements" with a pinch of salt.
Have the advisors or board members been involved in other projects and how many? "Too many" may be a red flag!
Do they add credibility? Good advisors offer value through first-hand blockchain, business or financial experience.
If advisors are also successfully running their own projects then that’s a positive sign.
It is considered a utility when it can be used to pay for goods or service such as game time or a subscription to a video service.
It is considered a security when it cannot be exchanged for goods or services, but you buy it in the belief that its value will increase.
Depending on whether it is a utility or a security you may be taxed differently in your country, or it may or may not be allowed.
Is the project a utility or a security?
Are there any restrictions on certain citizens participating? If they allow anyone to participate in the ICO then investors could get into trouble with local authorities if it is not allowed.
The biggest red flags of fraudulent ICOs are of course the legal entities of the project and in which countries they are registered at.
Many ICO projects attempt to register in countries that are "crypto friendly" or that lack crypto regulations or a proper justice system.
Is there a credible legal entity set up for the project in a country with proper law enforcement?
Is there verifiable contact information listed on the website, on their domain name?
Does the ICO have "Know Your Customer (KYC)" and "Anti Money Laundering (AML)" verifications in place? It is a requirement nowadays of ICOs to know who their investors are and keep record of it. Fraudulent ICOs will not care about who invests as long as they receive the funds.
If you buy a coin or token through and ICO or if you trade it, keep in mind that like with most real world businesses a lot of projects will fail or get replaced by other projects over time.
Don't get married to a coin or project. After going through the rest of the steps you will know how.