Financial expert Toomas Allmere spoke about the methods for evaluating ICO projects.
After the explosive ending of 2017, the boom in the development of the ICO market continues. The desire of many to jump into the crypto investment segment of the market is explained by a number of factors, including the lack of legislative regulation, relative simplicity and accessibility, the cost of the entrance ticket, and the period of implementation. Projects are multiplying, and the areas of application of the blockchain technologies are expanding. At the same time, an army of investors is growing along with mere enthusiasts who are eager to take risks on the crypto market.
There are 2,400 ICOs registered on the ICObench rating platform (data as of the end of March 2018), and the number of crypto projects continues growing daily.
According to the statistical report of Suicide Ventures, in January 2018, 44% of ICOs were successfully completed, that is, the projects collected a predetermined minimum of funds. The median amount of funds collected, including both successful and failed projects, amounted to $4 million in November 2017, $7.1 million in December, and $8 million in January 2018.
According to data from a global poll conducted by the Waves platform, in 2018, 77% of investors plan to increase their investments in cryptocurrencies. Obviously, more and more people are showing interest in entering the crypto market and, accordingly, ICO assessment methods are becoming more and more interesting.
At the same time, the crypto market is fraught with dangers. Bitcoin.com has studied 902 crowdfunding projects announced in 2017. Of these, 142 ended in failure at the fundraising stage, and 276 were found fraudulent as a result of the the the banal flight of the founders with the collected investments. Accordingly, 46% of ICOs ended up in failure. In turn, Ernst & Young analyzed 372 ICO projects and found that from the collected $3.7 billion, $400 million was stolen.
Still, the phenomenon of the ICO plays an important role in the world of startups. Traditional investors are increasingly looking at ICOs, analyzing what is happening in the crypto world and realizing the possible risks. For objective reasons, this segment of the investment market is considered extremely risky, and today it is practically unregulated.
An attempt to evaluate the legal part of a project and its compliance with the regulatory framework is hampered by the lack of regulation for ICO projects. All activities related to cryptocurrencies are conducted in the gray zone or the so-called "legal vacuum." There is a lack of even the most elementary rules or standards for ICOs that would be approved by the majority of participants in the crypto community.
There are also no effective methods for evaluating ICOs. We must admit that now there is complete chaos in the world of ICOs. Therefore, if we want to move towards the mass market and encourage traditional investors to invest their money, we need to find ways to enable entrepreneurs to focus on business and its development, and investors should have a proper level of protection and expertise regarding the ICOs.
Three Constituent Elements
The main goal of the ICObench platform is to provide an information tool for investors and experts. The so-called ICO Success Score was adopted to determine the success of a project, which considers three elements, such as the team, the concept, and the product. Each element is estimated on a 5-point scale. The final evaluation is the result of the analysis conducted by the bot of the Bench platform and site experts.
In my opinion, the key to the expert evaluation of an ICO and its future product is common sense. As with any investment, and with any ICO, you cannot predict and justify anything with complete certainty. Often, the problem with studying ICO projects is the lack of information necessary for assessing technical and economic details. Nevertheless, most organizations involved in monitoring and rating ICOs are trying to combine materials available on the Internet along with basic data about the project, information provided in the white paper, information about the mechanism for storing and using the collected funds (in most cases, investors do not even know it!), data on the activity on social networks, and other, seemingly disparate information.
The first step is to evaluate the prospects of the business idea and its market conditions. The project should be studied from the point of view of the market segment. Current trends should be identified, and the current and future development of competitors should also be taken into account.
The second step is the evaluation of the business idea within the framework of the application of the blockchain technology. It is worth getting answers to the following questions:
What is the need for the application of blockchain and the token in this project?
What is the task of blockchain in this project? Decentralization is not always required.
How necessary is a token in the project and what is its ecosystem? If the answers to these questions are not obvious, then it is possible that the project in question is an example of the use of "cryptocurrency for the sake of cryptocurrency," or it is just a contrived project.
How is the sale of tokens organized? If there is already a token, it is useful to study the terms of the sale. A good sign is the attraction of a third-party escrow service.
Is there an alpha/beta version (MVP) of the product, or is the business idea based on an already operating business? Unfortunately, most ICO projects are not able to provide at least a prototype of a product or service.
How realistic is the action plan (Road Map), which gives an idea of the stages of project development, allowing investors to have a clear picture of how their funds will be used in the future?
The third step is to assess the composition and professional experience of the core team and its advisers, which is directly related to the probability of the project's success. The study of who is behind the blockchain project is the main step in the evaluation of an ICO. Even if the idea and the future market of the project seem attractive, the team is the decisive factor determining success. It is useful to use LinkedIn to verify the competence of the team members. Also, it is necessary to recheck the dossier of team members on Facebook, Twitter, and Medium. Sometimes I contact people directly to check their participation in the project.
Finally, the cornerstone of success in a decentralized economy is the community. Any blockchain project is alive, as long as it enjoys the support of a certain number of individuals. Do not forget that members of the community are not a client base; they have a different motivation. One of the obvious signs of a fraudulent project is the lack of information on social networks, as well as the lack of activity of community members in the forums, Telegram, Twitter, Facebook, Medium, LinkedIn, Reddit, and Bitcointalk.
Other Things to Look At
In addition to these basic steps, you should separately study the white paper and the project site. These sources should be well-structured, and their content should be informative and comprehensive. In addition to reference data, it should contain information about funding, goals, and deadlines set in the Road Map, as well as a detailed description of the functioning of the technology. One could realize that the project is serious if the code of its future smart contract is uploaded to public sources (for example, GitHub). If the ICO project is oriented towards the global international market, it is important to have a translation of the white paper and the site into foreign languages.
A Market That Is Still in Its Infancy
Due to the very short history of the existence of ICOs and the crypto market, there are a number of problems that investors face when evaluating such projects. Firstly, the short history of crypto tokens indicates an even shorter life for many projects. This makes it difficult to conduct a thorough market analysis. Secondly, the percentage of success of most crypto projects does not inspire much optimism. In this regard, it is very difficult to predict the future of projects. Thirdly, there is a certain level of systemic risks associated with the crypto market, which cannot be eliminated by diversification. The industry is at an early stage of development, and much is yet to come. In this regard, investors assume both risks associated with specific projects and market risks. The source of systemic risks, which are absent in the traditional market, is, for example, the hard fork of a blockchain. Fourthly, many projects are interrelated; as a result, they are at risk of dependence. For example, a crypto project created on the basis of Ethereum will suffer if something happens to the Ethereum platform itself, for example, a bug in the compiler or an attack on the network.
The Key to Solving Problems Is Collective Experience
So, a large number of ICO projects fail either at the fundraising stage or the project implementation stage. Given the amount of widely publicized fraud in ICOs, investors are encouraged to seek the help and advice of ICO specialists. It was for the use of collective experience that I assembled an international group of ICO experts to combine the comprehensive knowledge and competencies of this industry. The more qualitative the examination, the more successful projects enter the ICO market, and the more transparent the crypto market, and the more investors involved in ICO projects.