Dark side of ICOs

So this article is not meant to scare people away from investing in cryptocurrencies and specially in ICOs (Initial Coin Offerings). If you are new to the crypto space, an Initial Coin Offering is equivalent to an IPO or Initial Public Offering for stocks. If you also do not know what that is, I’ll make it simple, it is when a company is trying to raise capital (more money) by offering a share of the company in the case of a stock, or a coin/token for cryptocurrencies, before the stock or coin goes into exchanges for the public to buy and sell. For the stock market, only accredited investors are allowed to participate in IPOs and you have to have a few million dollars as your initial investment in order to buy some shares.

Initial Coin Offerings do not have this ridiculous minimum amount, most of the ones I invested in had a $10 minimum, and anyone can invest, given that you meet their criteria, usually not from a country who has strict rules, the U.S. is one of them, and you pass their Know Your Client (KYC) process.

This KYC process is adopted by banks worldwide, and it is a measure to prevent possible money laundering clients from getting involved with such institutions. Once they have accepted your application, you just have to wait for the date of the ICO and invest however much you want. Buying a coin during its ICO process can turn out to be extremely profitable, as the potential gains are great. If you search online, there are several cases of people who, in 2017 during the boom of ICOs, became millionaires just from investing in them. Just search the name Ian Ballina and you will see what I am talking about. If you have heard of him, he supposedly started with an initial investment of $20,000 and within a few months he was a millionaire. But that does not make him an ICO guru, by no means.

Now that you know a little bit about ICOs and why everyone in the crypto space has been talking about them, lets get into how you can find good projects to invest in and what not to do.

Investing in ICOs

The first step that everyone in the world should do before investing into anything, is to do your own research, and some times that will take time, a lot of time. However, if you want good returns, you have to choose carefully. But what does this research consist of for ICOs? That is a difficult question to answer, and a lot of crypto YouTubers as well as bloggers will have different responses. The first step is to read a company’s whitepaper. The whitepaper is the detailed business plan, so to say, for these blockchain companies. There you will find why their project is useful to society, how they intend on accomplishing their objective and sometimes, even what are the adversities they have to face. For me personally, seeing this is a plus, because it means the company is acknowledging that there are difficulties and not trying yo hide them from the public.

Another step is to research about the team members. If the team members are not clearly displayed on the company’s website, this is already a red flag. If they are, then you have to go on Linkedin and search their past work experiences and be critical, are their past work experiences relevant? A lot of times, Co-founders and other members will try to make it sound like they did a lot, but maybe they are not that valuable to the team, take the image below for example:

This was taken from Linkedin, from one of the founders of Yappadappadoo. All this guy has, apparently, is experience with a couple of golf-related websites he also created. Obviously he can help the team with web-development experience. So how, according to my personal opinion, will this guy bring enough value to a company related to blockchain? If you can answer this question, or most importantly just think about it or any other questions that may arise, you are on the right path. Again, this is time consuming, but should you give your money to this company? This is the ultimate question we are trying to answer for every project, and that no one in the world has the correct answer.

Another step is to really use Google on your research. For example, I use Google to search for possible competitors, also I search something along the line: “why not invest on …” or “… is a scam”. These searches almost always raise important points. It is very easy to google “why invest on…”, you will find loads of people praising every project, specially YouTubers, not all of them, but a lot just like talking about why a project might grow a lot. Also, there are dozens of websites that review ICOs, and that may seem perfect, because then you do not have to spend time yourself to review them. But be extremely careful!

The Dark Side of ICOs

Lets talk about Ian Ballina again. He has a YouTube channel, with over 120,000 subscribers, where he talks about promising new projects and if he will invest on that particular project or not. He also created at one point, a Google Documents Spreadsheet that everyone could access to see how he evaluated different projects (picture below).

As you can see, his analysis was relatively in depth about each project. I am using the past tense here, because he announced the Google Doc would not be available to the public anymore, or at least updated versions of it would not be available. I highly encourage you to go watch his videos so you understand my next point.

Your research should not be based on other people’s opinion, like Ian, it should be based on the criteria you set yourself as being important. Here is why. Ian would sometimes talk about some great projects, but on his spreadsheet it would also show him as being an advisor for that project. Now if you are not familiar with this, it is a huge conflict of interest to be advertising a project that you are advising, because advisors earn a share of the project via that project’s token/coin. So Ian and other YouTubers are advisors and earn tokens, then they can go on YouTube and talk about how great a project is, then people will get hyped, the price of the token goes up, he can sell his tokens and there you have it, he makes a lot of profit and you are there expecting this project to blow up. I am not saying that is what he does, I am saying he has a very big incentive to do it, specially because there are no laws regarding ICOs right now, so it is almost certain that there are people out there with bad intentions trying to make a quick profit.

Do not trust ICO review websites

This is another point that is extremely important. There are a lot of websites out there who claim they fully review new ICOs, and by fully I mean, they analyze the information available to everyone and based on their own methodologies they will give you a score. If you want to take a look, just type “ICO review” on Google. What bothers me the most is how a lot of these websites have a Risk score, and they actually rate some projects as “Low Risk”.

Taken from icoratings.com

How can someone rate any ICOs as “Low Risk”? If even Bitcoin, considered to be the largest and most important cryptocurrency, is a highly volatile and risky investment, how can a brand new project with a lot of hype, in the case above, Very High hype, be considered as Low Risk? The truth is, that these websites are probably comparing each ICO against other ICOs, but if you compare two risky investments and one of them is less risky, that does not make it low risk. Again, be careful when consulting all these tools, you should look at them to complement your research/analysis, but they should not be all the analysis you do.

Lastly, I would recommend staying away from “Experts’ opinions”. There is this website called ICObench.com, and they review ICOs themselves, but they also take into consideration the ratings of “Experts”.

Just take a look at how ridiculous this is. Some of these guys have a lot of influence on ratings, this guy Vladimir just rated everything 5 and did not give any explanations. And some other ratings include some very general sentences like: “Strong, hardworking and very dedicated team… Clear Vision”. But what makes the team strong and dedicated? Have they showed how hard they are working, by presenting consistent results? Just keep that in mind, always be critical of others opinions when it comes to ICOs. And here again we have the conflict of interest problem, because who can assure me that these guys are not being paid by the company to just leave positive ratings? The answer is, no one can assure, so you should always be careful with high ratings without a proper analysis. I like to use this website to check for bad reviews and see what they are saying, if someone is raising some concerns about a project that I cannot dismiss or show that it is incorrect, than I usually do not invest in that project.

I hope this article shed some light onto how you should prepare yourself to invest in ICOs and what not to do. There are plenty of people out there trying to make a quick buck by screwing other people over, and the fact that there are no regulations for ICOs right now, just makes everything more susceptible to these actions. Good luck and always do your own research.

**Disclaimer: I am NOT a financial advisor and this should NOT be taken financial advice. You should ALWAYS do your own research before investing. The information in this article reflects only my PERSONAL opinion. Investing in ICOs is risky.

**For more crypto-related information, check out my YouTube channel: https://www.youtube.com/channel/UCR7DmzG8UULUuYLLIU7FhLw?view_as=subscriber

Dark side of ICOs was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.