In our first edition of Cryp-splained, we dive into one of the most common concerns of novice and advanced traders alike:

"How should I decide whether or not to participate in an Initial Coin Offering?"

Unfortunatley there's no sure fire signs, magic equations, or even much historical data considering the vast majority of ICO's were only launched in the last year. Remember, this is a market in which more ICO funds were raised by April 2018 ($6.3B) than in all of 2017 combined ($5.6B).

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source: icodata.io

Even the sheer number of coin offerings grew from a mere 29 in 2016 to over 800 in 2017, and already over 800 to date in 2018. Governments around the world are racing to understand, let alone regulate, the burgeoning initial coin offering market. The US SEC actually took a pretty novel approach of trying to warn customers of ICO scams with its Howey Coins website. It may look like many other ICO sites you've come across, but try to buy and you'll be in for quite a surprise.

However regulatory concern doesn't imply there aren't real ventures building valid eco-systems for their tokens. Far from it. But wading through a sea of complex whitepapers, blockchain jargon, and grand claims can be hard. Fortunately this 5 step guide should make it a little easier.

Now there's plenty of tips, tricks, and advice out there for evaluating an ICO - so what makes this one different? Most of these methodologies fall short when it comes to a fundamental element of the process: Context. Unlike many other approaches, we believe that first acknowledging the "why" sets the tone for subsequent research and validation. So let's get to it.

Quadency's 5 Step Guide to ICO Evaluation:


1) The Why's: Why this coin? Why do you want to invest?

To put it simply, does this coin need to exist? Can other existing business models or currencies achieve the same end goal being touted? Note that this is very different that evaluating the underlying business challenge being solved. Sure, the seed to patient cannabis supply chain could clearly benefit from blockchain efficiencies, but is tokenization the answer? And why this particular token?

Next, why are you evaluating participation in the ICO? We'll forego the obvious monetary gain incentive and focus instead on whether you're planning to HODL long term or looking for a quick gain. Fundamental valuation of the ICO aside, there are external market factors that could indicate investment opportunity - the most important of which: the likelihood and speed with which the token will be listed on popular exchanges. In some cases, an informed, well timed strategy for shorter term trading could very well lead to large gains regardless of your long term view of the business model.

Be sure to keep both of these WHY's in mind as you proceed through the rest of the evaluation process.

2) The Business Model (i.e. the white Paper)

Whether it's 5 pages or 50, it's important to ready each and every detail of the white paper to understand the venture's business model. Diving in beyond a cursory glance will be telling: Was the paper outsourced or cobbled together to promote a pre-sale? Or is there a detailed, thought out approach to longevity? What's the incentivization model for the token? Does the project timeline seem realistic? Are there unaccounted for regulatory concerns? Ultimately the question to answer is whether you're looking at marketing fluff or a real business model committed to driving value.

3) The Team

There's an old venture capital mantra that if only given two choices, investors would always take an A management team with a B product vs. an A product with B management team. That lesson applies even more so to the unregulated world of ICO's. Is the team behind the coin credible? Do they have the talent, resources, and funding to execute on the vision being promoted? Have they had any successes in the space already?

4) Community Support

An ICO's promotional approach can be a very clear indicator of the potential success and even longer term prospects of the asset's value. If you encounter an engaged community across an offering's social media and other marketing channels, it's typically a good indicator of credibility. Not that this factor alone would be a definitive driver, but if you don't see any engaged buyers or miners actively supportive and instead a wave of pop-up ads to "Buy Tokens Now for Huge Gains" - it may be worth a closer look!

5) Structural Transparency

There is no 'correct' ICO model as each offering has it's own short and long term business goals. But its fluidity, incentivization, release schedule, as well as the founders' control of each of the aforementioned items can have a very direct influence on its value. And it can have an even bigger influence on perceived value. Which blockchain is it launching on? Is it a truly decentralized asset or will most of the control be centralized to certain mining groups or wallets? Transparency into these items can be more important than projected price or even market caps.

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Evaluating a new investment opportunity - particularly Initial Coin Offerings - is never an easy task. But following this process has helped us stay clear of some of the pitfalls many ICO investors have fallen victim to, and we hope it can do the same for you.

Please note the contents of this article are for informational purposes only and not intended to serve as financial or investment advice.