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INITIAL COIN OFFERING: AN INVESTOR’S GUIDE


This paper is the second installment of a two-part series on Initial Coin Offerings. In this paper, I explore what a good ICO looks like and identify the red flags that you need to look out for when considering an investment.

2.1. THE WHITEPAPER AND BUSINESS PROBLEM

A whitepaper is a central communication tool founders use to raise

funds and attract investors.

A well-articulated whitepaper should at a bare minimum, begin with

a problem statement and be followed by a proposed solution. It

can also include a number of options. The solution to a business

problem should detail how it will fix the problem and what new

product or service(s) it will offer as a solution. In the case of

a new coin, it should describe how the underlying blockchain

technology will disrupt a marketplace successfully. A strong

description of team member skills, qualifications and experience

should follow this. The whitepaper should also provide competitor

and market sector analysis.


Any whitepaper which fails to disclose these basics – and if you are

unable to summarize the project in a sentence or less – is one to

steer clear of. You need to be able to summarize what the project

aims to solve in one sentence.

Some examples include:
Blockchain – solves the Byzantine Generals’ problem of a

transaction intermediary and trust;
Bitcoin – solves the need for a financial intermediary in a

payment transaction;
Ethereum – provides a platform to launch new tokens and

apps on the blockchain;
STORJ – provides a cheaper alternative to centralized cloud

storage services; and
STEEMIT – provides a platform to publish articles without the

need for a publisher (third-party).

At a more detailed level, a whitepaper should at the very least

contain the following:

• a roadmap which shows how money will be raised and spent

• business benefits

• details of the proposed system architecture

• proposed interactions with blockchain technology

• data relationships and data dependencies

• growth expectations

• financial projections including assumptions

• financial projections comparable to industry benchmarks

• risk factors

• use cases

• blockchain governance

• technical requirements

• detailed team biographies and experience

The whitepaper should also be very clear why the project is going

to the public to raise funds (crowdfund). Is it to make the founders

quick money, or is it legitimately going to be used to fund a multistage

development of the coin or token?


Whilst the whitepaper is the key document entrepreneurs use

to raise money to help develop a new coin or token, it is just as

important to look beyond the whitepaper.


Everything can sound amazing in a whitepaper with promises

to innovate and solve a problem, but the reality is that the vast

majority are ultimately documents full of empty promises and

unsubstantiated claims.

 

2.2. THE ROADMAP AND MILESTONE

A roadmap should be clearly divided between pre and post-ICO

milestones. A pre-ICO roadmap should describe how target funds

are to be raised – when, how and by how much. The post-ICO

milestones should confirm how the money raised, will be spent.

Early investors will be keen to know how funds will be allocated

to IT development and when the coin or token will be listed on a

cryptocurrency exchange.


A roadmap should be a clear timeline of key milestones.

Common ICO milestones can include:

PRE-ICO MILESTONES – SAMPLE

• Social marketing launch date

• Token information published date

• Website launch date

• Pre-sales targets (private token sales) – how much?

• Pre-ICO coin or token distribution terms and conditions

release date

• Token design release date

• Token distribution – will any tokens be deferred or released

in batches?

• Investor pre-ICO registration targets – how much?

• Date coins or tokens are allocated to early supporters

(investors, partners, advisers)

• ICO or crowdfunding launch date (public token sale)

• Wallet launch date

• Crowdfunding targets – how much?

• Exchange listing date

• Beta or Minimal Viable Product launch date

POST-ICO MILESTONES – SAMPLE

• Token security audit dates

• Product or service launch dates – often multiple

• Final design protocol – completion date

• Final design operating model – completion date

• Mining configuration – completion date

• Development or Build – completion date

• Pilot or Proof of Concept – release date

• Testing – completion date

• Implementation or app deployment on blockchain platform –

completion date

• B2C and B2B launch date

• Full product integration – completion date


Milestones are not exhaustive and should be tailored for each

individual project. Many milestones will centre around IT release

dates and funding allocation. It is usually a red flag, or at least

makes a coin or token less desirable, if Pre-ICO milestones

are changed mid-fundraise. For example, if an ICO raises its

funding target or changes its closing date mid-fund raise,

this may indicate that the project is not properly understood

or that the founders are primarily in it to make money.

 

2.3. QUALITY OF THE TEAM AND PAST SUCCESSES

The quality of the team behind the ICO is perhaps the most

important aspect to consider when assessing an ICO. It is no

surprise that some of the best coins and tokens have some of

the best teams behind them. Ethereum (ETH) has the most active

developer community by far with Joseph Lubin (ETH co-founder)

claiming that it has 30 times more developers than the next largest

blockchain community: Fabric.1 It is also supported by some of the

biggest names in Crypto.


When evaluating an ICO team, look at the experience of their

specialists. Also look for variation and complimentary skill sets in

team members. Look for a bloated adviser group – a potential red

flag. Ensure that the whitepaper has detailed individual biographies,

which fully outline accomplishments and experience and which

also stack up to other sources, such as LinkedIn profiles. Look

for thought leaders. Look for any of the specialist fields such as

blockchain technology implementation, cryptocurrency, good

quality coders and people who have relevant experience. Good

project management skills should also be at the top of your list.

Google their names, visit their LinkedIn profiles, check their Twitter

accounts to assess authenticity and perform Companies House

checks. Usually, if a celebrity or famous person is marketing the

coin it’s another red flag.


Team members with prior success on similar projects or with

similar product technologies are usually a good indicator of future

success. Reputation is very important and how previous success

has been achieved should not be overlooked.

It is also worth noting a team’s age. A study by The Kellogg School

of Management suggests that tech start-ups are more successful

the older the founder and founding team. This debunks the myth

of the Silicon Valley wunderkind. For example, the study found that

an entrepreneur aged 55 was 3.4x more likely to succeed than a

25 year old.

 

An indication of future success can also be potentially derived from

the quality of ICO advisors and leadership team. OMG is being

advised by Vitalik Buterin (Ethereum founder), Dr. Gavin Wood

(Ethereum co-founder) and Julian Zawistowski (Golem founder) – a

strong cast indeed! Waltonchain (WTC), which uses blockchain

and the Internet of Things (IoT) to manage supply chain logistics, is

being advised by their Chief Scientist, Kim Sukku – a former vice

president of Samsung. Both founders are former directors and have

extensive experience in logistics. IOTA (IOT) and Cardano (ADA)

also have a number of leaders in their field with a mix of academics,

professors, technologists and PhD experts. All are regarded as

having strong leadership and advisory teams.


Where there are doubts, gaps in biographies or potential unknowns,

it’s worth investigating and challenging. In many cases, advisors

are unqualified and are literally in it for self-interest and greed.

Founders or advisors who propose to sell all or the majority of their

holdings soon after exchange listing, is another red flag.

ICOs that provide little information on the team members are an

obvious red flag.

2.4. RESEARCH THE FOUNDERS EXPERIENCE

It is important to research the founders proposing an ICO thoroughly.

Check whether the bios on their website stack-up. Independently

validate experience, career history and qualifications. Perform

an audit by googling their names and look for gaps in their work

history. Do a Companies House check and compare claims to

LinkedIn profiles. And ask yourself the question: “Do the founders

have the necessary experience and skillset to manage such a large

project, successfully?” – many will not.

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2.5. LOOK AT THE ANNOUNCEMENT (ANN) THREAD ON BITCOINTALK.ORG

Bitcointalk.org is the oldest and most active cryptocurrency forum

on the internet. It is basically a large website of discussion threads.

Most crypto enthusiasts including developers, miners and investors

have an account here. And, almost all new projects use this as

a platform to announce the launch of their new coin or token –

using the annotation of ‘ANN’. Investors use these threads to find

information, review opinions and ask questions. It’s a red flag if

developers avoid answering investor questions on this website or

are inadequate, inaccurate or slow in responding.


The website also ranks published responses and the older more

experienced writers are the ones with more credibility – it’s worth

monitoring their responses closely. Search for words like ‘scam’,

‘fraud’, ‘con’, ‘legit’, ‘hodl’ and ‘mlm’ (multi-level marketing).

Beware of MLM as this can indicate false claims of high return

investments.

2.6. A STRONG COMMUNITY IS CRITICAL

After a strong team, comes a strong community. It is imperative

that the ICO project builds a strong community. This helps early

adoption which ultimately drives success. Dogecoin which

started very much as a joke meme ended up being a successful

cryptocurrency. It can largely credit this to its large community and

a focus on philanthropy. It even appeared on Fox News. Chairman

of Dogecoin, Brock Pierce, claimed community was everything to a

cryptocurrency. The philanthropy component to dogecoin provides

a valuable lesson to bitcoiners and the wider community that good

deeds can breed support.


Beyond Bitcointalk.org it is worth observing whether the ICO has

open and active communication channels, which provide readily

available access to developers and team members. Common

channels include: Telegram, Slack, Facebook, blogs/videos,

YouTube and Twitter.


It is also important that an ICO has an active website which provides

regular news updates. This includes videos and blogs. A good

website will provide a brief, informative video describing what the

ICO project hopes to achieve, including the problem it wishes to

solve.


ICOs should also provide accurate and reliable answers without

circumventing the questions. Common questions include how the

company intends to spend money raised.


Other social media chat forums like Reddit, Medium, Quora,

SteemIt can additionally provide good independent views of an

upcoming ICO. Do not under-estimate the insight that Reddit

can provide.


Large communities that are well-informed can indicate a positive

enforcement for an ICO. Well-informed community members will

also act as ambassadors for a project.


Things that can suggest a red flag include: low community

participation, hyperbole, irregular ICO communication, unanswered

or inadequate developer responses to questions, lack of information

on the ICO website, few communication channels and Twitter

bounty threads. Be aware of communication threads which hype

an ICO by rewarding users for spreading positive information. And

airdrops are a potential red flag, though some are a legitimate form

of marketing. 

 

2.7. WHAT DOES THEIR ICO OR GITHUB REPOSITORY LOOK LIKE?

Has the ICO posted their committed development code on GitHub?

Is the code complete? Is it of good quality? Has it been peer

reviewed and challenged?


GitHub is a web-based hosting service, which is really a big data

repository that brings developers together from around the world to

share ideas and build better software, through peer-to-peer review,

collaboration and data tools. A Github project is called a repository.

A good ICO will use a GitHub repository to save a copy of its

committed software code for others to review. Key information

about the project should also be saved here.


As of April 2018, GitHub had more than 25 million repositories

of source code and 10 million developers. Effectively a very large

digital storage space where millions of developers share code and

build businesses. And because these repositories act as opensource

software projects they can easily be audited by other

developers in the know.


Any ICO GitHub which is private, empty or lacking information is a

red flag.

2.8. STRATEGIC PARTNERSHIPS

ICOs that partner with well-established brands are naturally a

good early indicator of potential success. But beware of phony

announcements and scams. A recent high-profile example

involved BMW and CarVertical.5 BMW USA was forced to issue a

public statement and categorically deny any association with the

ICO project CarVertical. The project was effectively using a BMW

branded interface (accessible by any third-party), to lay claim that

it was partnering with BMW. So, it is important to question all

partnership announcements and do your own research.


Some of the best-known coins have strong brand partners. Bitcoin

has Microsoft and PayPal – both accept Bitcoin as payment. The

Ethereum Enterprise Alliance (EEA) partners with MasterCard,

Credit Suisse, UBS, BP, Reuters, Intel and Microsoft. Ripple has

over 50 financial institutions supporting its development including

American Express, Santander, MoneyGram, Royal Bank of Canada

– though it remains a private blockchain and most likely always

will. According to a recent report, Ripple has plans to partner with

over half the world’s financial institutions.6 Arsenal Football Club

also announced this year that they were partnering with a gambling

ICO.


And beware of the full-blown partnership scams after an ICO

launches. The price of Verge surged 66 percent in April when

rumours surfaced that it was about to announce a big partnership8.

It all started in Asia when a developer nicknamed Sunerok, posted

a YouTube video, wearing just a hoodie and baseball cap. He started

spruiking an upcoming brand partnership without providing much

detail and soon the news went viral. He managed to capture an

active audience and maintain an air of suspense over a number of

weeks and months. Somewhat inevitably, deadlines were missed

and observers became increasingly skeptical. Needless to say, the

partnership was never announced and all the hype surrounding the

coin subsided. In the end, it proved to be a classic pump and dump.

It is worth noting, that there are a number of websites that track

ICO announcements, including upcoming partnerships. Some of the

better-known ones include ‘trackico.com’, ‘icoalert.com’ and

‘coinschedule.com’.

 

2.9. EARLY INVESTORS

Are there any well-respected or established career investors,

venture capitalists or influential people backing the ICO? A wellknown

early supporter of Bitcoin and Tezos included billionaire

venture capitalist Tim Draper. His support and people of similar

ilk helped propel Bitcoin into mainstream media. Other notable

influencers are Brock Pierce (investor and Bitcoin Foundation

board member), Chris Larsen (founder and CEO or Ripple Labs),

Barry Silbert (investor and founder of Digital currency group), Vitalik

Vuterin (Ethereum founder), Andreas Antonopoulos (well respected),

Marc Andreessen (early pioneer) and Roger Ver (angel investor).

If any of these people announce their support for an upcoming ICO

then it is worth your attention.

2.10. SUPPLY CONSIDERATIONS

Supply will impact the micro-economics of a coin over the longterm,

regardless of demand. Put simply, a coin or token with a large

supply, say 1 billion, will struggle to appreciate in value over time,

when compared to a coin with a supply of 20 million.

Coins or tokens with a low supply include: Factom (8 million),

Monero (18 million), Bitcoin, Bitcoin Cash (21 million) and Everex

(25 million).


Coins or tokens with a large supply include ETH (unlimited)9, IOTA

(2.7 quadrillion), Ripple (100 billion), Stellar Lumens (100 billion)

and Cardano (31 billion).


All cryptocurrency above are quoted in maximum supply.

It is also worth understanding the difference between circulating

supply, total supply and maximum supply. For example, Bitcoin has

a maximum supply of 21 million, a total supply of 19 million and

circulating supply of 16 million coins, as at March 2018. Maximum

supply is the total number of coins (or tokens), that can ever exist.

Total supply is the maximum supply, less coins lost or burned

forever (so is an estimate), and Circulating supply is the total

number of coins mined to date – coins in circulation. Bitcoin is not

due to mine its maximum supply until the year 2140.

Coin and token supply is also impacted by pre-mines and

instamines.


Pre-mined coins are mined prior to an ICO launch date and have

the effect of reducing the coin supply available to the public. These

coins are usually sold in bulk soon after listing on an exchange. It is

common for large coin holders to flood the market and manipulate

price. Large early coin-holders (who basically get the coin for free or

at a large discount) can dump at a high price and re-buy later at a

lower price later, making an instant profit, yet still owning the same

number of coins. This was symptomatic of many of the pump and

dump price cycles seen in 2017.

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Pre-mined coins can also be used to pay legitimate costs such as

early development work, marketing, legal fees and advisory. And

they can also be used by the founders to assert control over supply.

Examples include Ripple which was 100 percent, pre-mined and

Stellar Lumens which was 97 percent, pre-mined. Of Ripples’

(XRP) 100 billion maximum supply, Ripple labs own 60 billion XRP,

meaning only 40 percent of XRP is in current circulation – mind

you, still a very large volume.


Pre-mining in large quantities can mean that more coins go to

fewer people. This can result in fewer digital wallets or nodes on

the network. This can lead to a loss of blockchain benefits. For

example, less nodes on a network means the blockchain is less

secure and more corruptible. NEO a platform coin, with its own

blockchain, was 100 percent pre-mined, but 50 percent of coins

were kept by the NEO council to fund further development and 50

percent were sold through crowdfunding to the public. Many would

argue that this is a legitimate and plausible use of pre-mining.

Some reports suggest that 60 percent11 of the top 100 coins by

market capitalization are pre-mined.


Insta-mine refers to coins mined in the first few hours of an ICO

launch and can have a similar impact on token distribution as a

large pre-mine. Dash insta-mined about 2 million coins out of

about 7 million available.


In summary, pre-mined or insta-mined coins reduce available

supply to the public, which potentially exposes an ICO to price

manipulation once a token launches on an exchange. This impact

is further amplified if ownership is concentrated and there is no

investor cap in place.

 

2.11. COIN OR TOKEN DISTRIBUTION

The planned token distribution after an ICO launches is important.

The company should be clear on how tokens will be allocated to

founders, developers, advisers, miners and other team members

once an ICO is completed. This also includes tokens offered at ICO

pre-sale to early seed investors. A large part of the money raised

at this point will go towards the cost of marketing the coins and

running the ICO. Running a professional ICO can often exceed

£1 million in expenditure.


A good ICO will raise funds progressively over time, aligned to

milestones in their development plan or roadmap. Each stage

of development should be aligned to a stage of funding or to a

token release date. This shows that money spent is aligned to the

development of a coin or token – a sign of good governance. A

poor ICO will distribute coins or tokens, to team members hours

after launch (instamine) and quite often up to 50 percent of tokens.

Good ICOs will develop their beta version before distributing tokens.

A good example was Ethereum, which waited one year after ICO

launch to distribute tokens. This shows honest intent and can help

build trust with early investors. This also prevents token holders

from selling out early and flooding the market.


It’s also worth checking valuation. If a company is valuing coins

high and is expecting to circulate billions – this is unrealistic. Also

look out for any bonus tokens that aren’t incentivized to align to

project goals.


Remember the majority of the founding team members are getting

their tokens given to them for free which are supposed to be a

reward for the hard work the team has put in to date. Many of

the founding members will not be receiving a salary during an

ICO project and will rely heavily on token allocation alone for

renumeration. Look out for early investors who cash out as soon as

a coin or token starts trading on the exchange.

2.12. IS IT A COIN OR TOKEN?

A simple distinction which often gets overlooked is whether the ICO

is a coin or a token. And, if it is a token, it is important to understand

what type of token it is.


A simple definition provided by the website ‘CoinmarketCap.com’ are

that Coins operate independently on their own platform, whereas

Tokens depend on another platform or blockchain to operate. The

majority of ICOs depend on the Ethereum blockchain. In fact,

according to CoinMarketCap.com (March 2018), Ethereum hosts

over 90 percent of all token launches. And from 1,600+ roughly

1,600 cryptocurrencies today, 60 percent are coins and 40 percent

are tokens. So based on these metrics, coins look like a crowded

market. Some of the best-known coins are Bitcoin, Ethereum and

Litecoin, whilst some of the best-known tokens are Golem, OmiseGo

and EOS. Coinmarketcap.com identifies all cryptocurrencies as

either a coin or a token.


Remember, the predominant function of a coin or a token is to keep

the network trustless by rewarding miners for their efforts. And the

coin is essentially a tradeable exchange of value.


Depending on what publication you read, tokens can vary in

definition and demarcation. According to the Swiss regulatory

body FINMA, tokens can serve three functions: Payment Tokens,

Utility Tokens or Security Tokens. Payment tokens are a currency

which are used to pay for things. Utility tokens are a service or

application. Security tokens are deemed to be issued equity or

profit share and are regulated by the US Securities Exchange Act

(1934).


And Brave New Coin, a respected cryptocurrency publication,

recognises payment cryptocurrency assets, platform

cryptocurrency assets, side chains and application tokens.

Taxonomy for coins and tokens are yet to be universally agreed,

but as a general rule, a coin or token are defined by their

relationship to the blockchain.

 

COIN AND TOKEN DEFINITIONS
 

Currency token or coin: can be used as money in the real world.

Examples: Bitcoin, Bitcoin Cash, Dash, Litecoin.

Utility or usage token: has a real-world value native to a platform

or ecosystem. For example, Binance coin has a specific use and

value to the crypto exchange it supports. The coin can be used to

pay exchange fees, is convertible/tradeable with other coins and

will increase in value as demand for the coin increases. Though it

has limited use outside of the Binance Exchange, the coin offers

greatly reduced exchange fees if used to purchase other currencies

on its exchange.


A utility token is like an access token – in order to use that

businesses platform or service, you need to own their token.

Example: Binance coin.

Application token (DApp): a token to be used for a decentralized

application or DApp, which sits on the Blockchain. These tokens will

be used to reward miners on the platform.

Example: Eth-Tweet (currently only available in Beta) is a

decentralized microblogging service, similar to Twitter, that runs

on the Ethereum blockchain. The DApp platform ensures that no

one can control or influence tweets. Users are rewarded with ETH

donations.

Asset token: also referred to as Tokenised Asset Offerings (TAO),

which link directly to the value of an underlying tangible asset. For

example, Goldmint which links to the price of physical gold. These

tokens are less popular with investors as they are deemed less

speculative.

Example: Goldmint (linked to gold price).

Security or Equity token: behaves like an equity, is an investment

in an ICO project and is governed by the Securities Act.

Example: tZero ICO which is a portfolio of a company called

Overstock Inc.

Reward token: is a token used to reward loyalty and users. An

example is SteemIt which is a publishing forum built on a public

blockchain that rewards users with Steem dollars, determined by

the number of readers they attract.

Example: SteemIt.

2.13. FIRST TO MARKET

Coins or tokens benefit greatly from being first to market, even

with inferior technology. Bitcoin benefited hugely from being first

to market in payments despite slow transaction speeds and high

transaction costs.


Ethereum benefited from being the first blockchain platform

other tokens could build applications and services from. OMG, NEO,

ARK, LSK, SXEM, EOS, STRAT and ADA all followed.


Siacoin, Storj and MaidSafe benefited from being first to market

in the decentralized cloud storage economy, now competing in

the $250 billion sector with the likes of Dropbox, Microsoft Azure,

Amazon and Google.


Monero, which uses CryptoNote technology, benefited from

being one of the first coins to the fungible and private

coins sector (also referred to as transaction anonymity or zero

knowledge transactions).

2.14. DISRUPTION, MARKET SECTOR AND COMPETITION

It’s important to understand what market sector the offered coin or

token will operate in. How many existing market participants exist

(future competitors) and what the ICO will do differently.

New entrants to a market sector won’t just be competing with the

existing established participants, but also other new entrants from

the Cryptocurrency and Distributed Ledger Technology.

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2.15. QUALITY OF THE TECHNOLOGY

Understand which blockchain the coin or token will be launched

from, as roughly 90 percent of tokens are launched from the

Ethereum blockchain. Note what software language (C++, Golang,

Node.js, JavaScript) the developers have chosen to use and

whether it will be published as open architecture (transparent for

everyone to see) on GiTHub.


If a token is not launching from the Ethereum blockchain, then it’s

important to understand why.

 

2.16. PROVEN USE CASES, POC/BETA PRODUCT LAUNCH

Before a project team goes cap in hand to the public to ask for

funding, they should at least have some evidence of how their

proposed product or service will work. This should take the shape

of a pilot or minimum viable product.

This early stage of product

development can be referred to by any of the following terminology:

• Proof of Concept (PoC)

• Minimum Viable Product (MVP)

• Beta version

• ProtoType

A Beta of MVP version are considered to be further ahead of the

development curve than a PoC or Prototype. Consequently, a

more advanced product development, has a greater probability of

attracting potential investors. Use cases and user stories also help

investors understand how potential customers will interact with

the product.


Proven use cases and proof of concept don’t necessarily guarantee

success. DigiCash founded in the early 1990s by David Chaum,

a cryptographer linked to Cypher Punk movement, offered an

electronic form of currency with proven use cases. He had signed

contracts with the Dutch government and most major banks

including Deutsche Bank, Credit Suisse, Advance Bank, Australia

and Sumitomo in Japan. He was also in advanced talks with VISA

and Microsoft. It filed for Chapter 11 bankruptcy in 1999, citing

poor management decisions.


In June it was reported by The Financial Times12 that a Cayman

Island-based crypto company Block.one raised $4 billion without

a MVP, meaning it raised this capital on investor confidence alone

and also making it the largest ICO in history. The previous largest

ICO was Telegram, which raised funding of over $1.7 billion. Both

projects are now suspected of fraud and misgivings.


Any project that does not have evidence of an MVP before going to

ICO, is a red flag.

2.17. REGULATORY IMPACTS

With the SEC already closing down a number of ICO projects in

2018 and even publishing a fake ICO website13 in May of this year,

to help educate investors, it is paramount that you also consider

whether an ICO is complying with its regulatory obligations. Keep

in mind that ICOs are not yet regulated to anywhere near the

standards of an IPO.


An ICO needs to consider a number of regulations, when accepting

funds from clients, these could include:

• Anti-Money Laundering (AML)

• Know Your Customer (KYC)

• FCA, EU, US financial sanctioned clients

• General Data Protection Regulation (GDPR)

• US Securities Act (1933) – and the ‘howey test’

The majority of these regulations are designed to protect a

customer’s rights and legislate against fraud, including misusing

personal data. Any breach of these obligations could lead to the

project being shut-down and/or paying large fines.


Once the project is up and running it will also need to consider any

or all of the following regulations:

• Payments Service Directive (PSD2)

• MiFID II (OTF, MTF, TTR)

• FCA, Payment Accounts Directive

• IFRS

• IAS 38.

Parity Technologies, Cointouch and Localbitcoins were all

forced to shut down recently, with the introduction of GDPR, due to

its new stricter laws for personal data14. Parity Technologies provides

automated KYC/AML checks through an Ethereum wallet. Under

new GDPR rules, which are aimed to protect the ‘digital rights’ of

EU citizens, storing personal information on the blockchain presents

new challenges; remember blockchain information is irreversible.

All future ICOs will need to be GDPR compliant and consider new

client data regulations.


It is important to closely monitor regulatory developments relating

to ICOs.

 

2.18. USEFUL WEBSITES

Reddit.com – a great reference tool for varied

opinion. Not to be under-estimated.

BitcoinTalk.org – one of the most reliable places to

get information on ICOs. Often the first place an ICO

is mentioned including its whitepaper.

CoinGecko – provides information on Liquidity,

Developer rating (referenced to GitHub), Community

rating, Public interest rating (references search

engine results) and makes an attempt at a Total ICO

rating.

ICORating – professional ICO rating service.

Coinist – historical data, ICO return on investment.

CryptoCompare, CoinmarketCap – coin

comparison and price, market capitalization

monitoring websites.

ICOStats – similar to Coinist.

ICOAlert – monitors upcoming ICOs.

ICODrops – ICO calendar.

ICOBench – ICO ratings.

TokenMarket – good assessor of tokens.

Coincentral – review and analysis.

 

2.19. COMMON ICO RED FLAGS:

• Celebrity involvement (suggests a large spend on marketing

and advertising).

• Twitter bounty threads (which reward users for tweeting about

an upcoming ICO).

• A planned high token distribution to the founders (>50 percent

indicates a red flag).

• No individual investor limit – exposes the project to a whale and

price manipulation.

• ICO funds not stored in an escrow wallet or multi-sig wallet

(one key must be held by neutral 3rd party).

• No ICO hard cap – indicates the founders haven’t done their

homework or prioritize personal gain.

• High coin or token supply (1+ billion is high).

• Developers leaving inadequate or unanswered questions.

• Poor team bios on the website or bios that don’t align to other

sources (e.g. LinkedIn).

• Unfavorable reviews by experienced publishers on

Bitcointalk.org.

• A coin or token which is entering an already crowded

market sector.

• A poorly structured White Paper which is missing key content

criteria and/or is plagiarized.

• Few, infrequent or poorly managed communication channels.

• Poor online presence.

• An empty GiTHUB (code, ICO info) repository.

• Plans to pre-mine or Instamine (they often won’t tell you).

• Promotional offers and Airdrops – not always the case, but

be wary.

• Founders who have a chequered history including former

bankrupts (research them thoroughly).

• No roadmap or an unrealistic roadmap.

• Any promises of getting rich quick from an ICO.

• A White Paper that details a solution without a realistic problem

or no problem at all.

• Failing to disclose how all the funds will be spent and not

linking it to milestones on a road map.

• Anonymous developers.

• An ICO project which is not clear on it’s purpose and objectives.

2.20. A GOOD ICO WILL:

• Set token purchase limits per individual investor – reduces

market influence and potential for price manipulation.

• Set fundraising limit for overall ICO – indicates good intention.

• Keep token price consistent pre-ICO.

• Solve a current business problem.

• Provide “intro video” of key features of the ICO.

• Be fully transparent.

• Be open and communicative with their community.

• Provide detailed and accurate bios.

• Fix bugs quickly.

• Provide professional audit (smart contract, software bugs).

• Implement Blockchain governance.

• Publish a crisis management plan.

• Ensure open architecture of blockchain software code

on GitHub.

• Publish a live token counter on their website to track

tokens sold.

 

3. CONCLUSION

A large number of ICOs in 2018 will not be worth investing

in, simply because of the large number already out there,

and historical failure rates.


Indeed, more than half of ICOs from 2017 have already failed.15

However, it’s important to appreciate that these failure rates are

broadly in line with venture capital failure rates, so some ICOs will

still be worth investing in.


To identify the ICOs that can potentially succeed look to the quality

of the team, team members with previous success, community

strength, active communication channels, evidence of an MVP,

token distribution model, token economics, a realistic roadmap, and

essentially, that the project is solving a problem for someone!


And remember, if you can’t summarize what the project is doing in a

sentence or less, then it’s probably not worth investing in.


The success of an ICO is ultimately dependent on long-term

community support, early user adoption and continued market

penetration, which isn’t hampered by scaling issues.

 

 

END

 



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