I’m not sure if you saw the news recently, but ICOs or Initial Coin Offerings have surpassed VC funding for the past two months. Which is kind of crazy when you think about it since almost no one knows what an ICO is, let alone how to take advantage of one.

And when you have high dollar amounts and low knowledge in an industry, you’re bound to see a lot of scams and people being taken advantage of.

The ICO market is RIFE with these scams. For instance, you have a lot of groups out there that put up a website and then fabricate an executive team, whitepaper, and business plan. Then they list their ICO and rake in hundreds of thousands of dollars or even millions in cryptocurrency in a very short amount of time—only to disappear into the ether.

When this happens, there’s little to no recourse for the investors.

Dean Takahashi recently interviewed Austin Hill and discussed this very thing.

At the same time, there are legitimate companies that are using ICO as a vehicle to fund their companies on the blockchain and they do provide the opportunity to experience a significant return on your investment.

But how can the casual cryptocurrency investor take advantage of ICOs and avoid getting burned? Unfortunately, there’s no 100% guarantee of protecting your investments. However, if you’re smart and do your homework, you’ll increase the chance that you are putting your hard earned cryptocurrency into a legitimate venture.

First, What is An ICO?

Think of them as an IPO for the blockchain. However, the term itself is a bit of a misnomer since a lot of the companies performing ICO’s aren’t offering coins, but rather tokens. Tokens and coins are very different things.

Coins are a way of transferring monetary value. The most popular coin that almost everyone has heard about is Bitcoin. Tokens on the other hand, can store complex and multifaceted data streams that can be used for endless functionality.

ICO’s are Not Just For Currencies

Many of the new companies that are holding ICOs are not currencies at all and are instead technology companies that will be built on the blockchain. So, they can’t be judged solely on their monetary value, but rather they need to be evaluated based on their business model and potential solution.

What to Look for When Evaluating an ICO

To help you avoid being taken advantage of, I’ve put together some pointers to help you when you’re doing your homework on ICOs.

First, you’ll want to look at the company as in-depth as possible. This means reading their whitepaper and doing a deep dive into the founding members. Go check out their LinkedIn pages. See how much history they have in the space. Check to see if their digital footprint is greater than just their website.

If you can find enough information to make you feel comfortable, then move on to this next step.

Secondly, get a taste test for their business model and the way they’ll be using their tokens. Is there any validity in what they’re doing? This step is a little more subjective than the first because you have to use your gut instincts and business savvy to deduce whether you think they have a chance of succeeding.

For instance, if someone is launching an ICO for a fleet of ice cream trucks that will use the blockchain to discover where the highest concentration of ice cream lovers reside, then they’ll sell that ice cream for their tokens. And their tokens will derive their value based on how many people want to use them to purchase ice cream. If this were the model I’d just studied, I’d take a hard pass. But hey, that’s just me.

But realistically anyone with some business sense would be able to identify this as a flawed system that is trying to create an artificial economy where none is desired.

And that’s the kind of stuff you have to look out for.

Third, see if they’re just a copycat of another company that’s already doing this and doing it better. Again, this is going to require you to put on your detective hat and look for similar companies and then check them against the group you’re considering. Often times you’ll find companies that have similar business plans of other blockchain companies. That in and of itself isn’t a bad thing, but make sure the technology is sound and that they actually have a chance of improving upon the idea.

However, if you notice that the business plan or premise is a carbon copy of another group, that’s a huge red flag. A lot of groups that are taking advantage of ICOs are just copying someone else and looking to dupe investors into a similar idea.

Fourth, consider whether the value of the token at the time of ICO is worth it. Do you think that the token has a chance of reaching those values on the open market? Do you think they’re going to saturate the market with too many tokens? Are there really any incentives to use their tokens?

Finally, and this might be the most important thing to ask, did they just duct-tape the concept of a token onto the side of their business model? Some business have genuinely great ideas and great founders, but they don’t really need a token. They just added one last minute to jump on the bandwagon. In these cases, their token concept it doesn’t make much sense and their tokens are going to have an uphill battle to gaining value and are less likely to provide a return.

So, if you can answer all of these questions to your liking, then you’ve done a significant amount of work to reducing your risk. Of course, you can’t fully eliminate your risk. Investing in ICOs, as with all other investments, will always be a risk.

Have you invested in any ICOs? Let us know in the comments below!

Happy investing,

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