I have been Following Bitcoin since 2013. This is one of the better articles I have seen about the space.
It's from Alber Murphy , The Crypto Geek who made $2 Million in 2017 from ICOs
With the current vast oversupply of ICOs in Nov 2017, and the legal collapse of projects like Tezos, the ICO market is extremely dynamic, complex and needs more than ever, careful analysis before making any decisions. You can still make great profits as there are some good projects out there, but the majority are ones which can lead to significant losses if you don't do your homework right.
This is why, If you are looking into buying into an ICO, make sure you read this article very carefully as I will outline some recent case study facts, which can help you make the right choice. History is proving us who is right and who is wrong and you can't afford to ignore this because this is the fastest developing market at the moment. I have been using these practices and as a result, I managed to yield profits in excess of $2 Million so far in 2017 from ICOs alone with an investment of less than $20,000.
Size - The Bigger The ICO is, the Better...Right? Wrong!
One of the most widely spread misconception is that the bigger the amount a project manages to raise or targets, the better that project is and the higher the probability for future profits when it goes to aftermarket trading. This is because people are driven by emotion, and the one which is particularly dangerous is the fear of missing out. This particular emotion might happen when you see big amounts of money going to a project with a big community, and thousands of people buying in. This is particularly valid for large projects. This situation could result in making an impulse and irrational decision that you can regret.
Before we continue, let's analyze some of the "big ICOs" compared to some smaller range projects that just took place and in which I personally invested during the ICOs and how they are performing on the aftermarket that followed the tokensale events.
One of the biggest reasons for the big projects to fail on the aftermarket is because the buyers are not retail buyers. Large Buyers or also called "whale investors" or "bulk investors" that typically buy chunks of $1 Million -$5 Million, and are generally provided large discounts in non-transparent conditions which give them an unfair advantage over the retail buyers. This is so, because they have the power to dump their tokens with an apparent "loss" which in fact, is not really a loss, because they bought those tokens much cheaper anyways. For example if they got a -60% discount, and the price drops to -30%, they are stil making a whoping 30% profit, while at the same time you and all other retail buyers are generating a -30% loss. The bonus they can get can reach as high as -80% on the official/retail ICO price depending on the volume and reputation they have.
These bonuses can be in the form of additional tokens or cashback on their Ethers, sent back to them after finalizing the ICO. These shady transactions also lead to regulatory problems, as the project owners need to divert funds from the company in order to cover these unofficial deals. Such an example is the Tezos ($232M) project, which has a collective lawsuit and is pending SEC regulatory action that could lead the project to a collapse. One of the main reasons for this is because the owners did series of illegal transactions with the money that were supposed to be for the project development after they finished the ICO.
The average retail buyer spends around 3 Ethers when buying into an ICO. That's around $990 USD with current Ether Price. Naturally when someone buys such a small amount it is impossible for him to obtain any different price/discount than the officially stated one. This leads to stronger resistance to price drops (meaning people are less likely to panic sell with a loss and are more likely to wait for the price to recover). Also retail sellers can not orchestrate a dump at the same time because they act and think independently from each other, which also adds more price drop resistance.
And most importantly, the retail buyers are also very often end users, which can immediately fuel the project service which is associated with the token as they add actual value to the service community.
Generally, the higher the disbalance between the retail and wholesale investors in crypto/ICO projects, the bigger the likelihood for price drops on the aftermarket.
This is why I recommend to avoid the big ICOs. They are more prone to regulatory problems and are likely to have a much higher percentage of whale investors that have negotiated a price which is much better than yours.
Rule # 1 - Choose the Right Sized Projects, focus on value and avoid projects with too much hype
When it comes to sizes, it appears that there is a "golden range" where projects are not too small and not too big. This range is statistically proven to be in the $2M to $10M. Don't forget that ICOs are start-ups in nature.
Google was founded in a garage and was later on funded with $1M USD. Generally if the project and the team are good, any raised amount in the range between $2M and $10M would be more than sufficient to build the project and to get to a point where they can make a proof of concept. And in the same sense if a project is bad or the team is made up of idiots, giving them $232 Million is not likely to solve any of the problems.
Don't forget that this is the initial funding that the company needs to deliver their project. Once they do, they should scale up their operating revenue according to the size of their business.
By eliminating hyped/over sized projects you eliminate a big amount of the "pump and dump" risk factors and a lot of the "noise". Not that smaller projects can't sell to whale investors, it's just that it is much less likely. You also lower the regulatory issues, because with big projects there are a lot more legal risks because they also attract more attention and have contributors from a much wider spectre.
In addition, team founders will not be incentivized to work towards improving their token value, because If they raise $232 Million before the project starts, then they would have already made a fortune that would definitely have an impact on their motivation and focus.
Rule # 2 - Analyze the team and make sure they are already successful
If the team founders don't have any other successful businesses - ditch them! Make sure the founders are business oriented. They must have proven already with other projects in order to be eligible for your money. Otherwise it would be something similar to throwing money at someone who has no idea on how to develop a business from scratch. Doing that will not make him learn how to do business. Also if they are successful, it would imply that they are not likely to commit any illegal stuff as they have a reputation and a life to lose.
By choosing a successful, experienced and business oriented founders team, you greatly increase your chance of success. This by itself is the most important value metric, but I place it at #2, simply because of the regulatory risk associated with #1 which can easily ruin a good project regardless of the founders experience.
Rule # 3 - Avoid projects with big "Dark periods" in their road-maps
The concept of ICO is to launch a cryptocurrency that would be useful and widely adopted. This is possible only through a service which should be innovative, disruptive and with high and immediate value to the retail users. Waiting 1 year to get an alpha version is not acceptable.
Ideally you should be able to get a feeling of the service during the ICO itself and be able to spend your tokens immediately after the end.
Rule # 4 - Make sure there is a reasonable Hardcap, any unsold tokens - destroyed and that there won't be any future offerings
With current abundance of ICOs it is becoming much more often that projects don't meet their hardcap. This is generally not a negative signal as long as the raised amount is over $2M, as like already mentioned, a group of smart people will perform better in the long term with $2M than a bunch of idiots with $232M.
This is why it is extremely important the token holder to destroy all unsold tokens immediately upon finalization of the tokensale. This will ensure that the supplied amount of tokens will be corresponding to the demand of the market and that its economy will be in balance.
Also making sure there won't be future offerings on the same token. This gives you protection against oversupply and this way the price can potentially go up as high as 500% - 1000% increase within a year.
Rule # 5 - Make sure the project really needs to be on the blockchain and that it is disruptive in character
We see an enormous amount of projects doing ICOs simply because they want to get a piece of the pie without actually needing to utilize blockchain technology. You should carefully read the whitepaper and make sure that blockchain is an absolutely invariable aspect of the project and that it adds unique value and competitive advantage.
Otherwise it would mean that they are making an ICO just for the purpose of making an ICO which is a major red flag.
Also make sure the project has a disruptive character. This is because it is extremely hard to penetrate established leaders regardless of the niche and the project should not rely on marketing. It should rely on core value and disruptiveness that creates viral effect among retail users.
Rule # 6 - Make sure the founders are engaging with the community and that they need their token to increase in value
Another huge plus of having a project with a reasonable size is because the founders are more accessible. The best projects I've invested are ones which I had the ability to communicate with the CEOs and founders of the projects in their community channels. Avoid projects where everything is managed by community managers and you have to go through several people to get to speak with the founder or the CEO. Those are just employees and don't give a damn about you or your money. An investment should be personal as this minimizes risk.
Also make sure that the founders will be bound to make their riches from their own token, and not from the Ethers they raise during the ICO. This way you will be certain that your interests are in line with theirs which is very important as they will be managing the money you put into their token and will be working harder towards achieving that mutual goal.
Another advantage is if the founders are not giving priority to the profitability of the actual business, but rather they strive that business to achieve a high market share and increase the circulatory demand for their token (even if it means to be operating the business at break-even), so that their token can increase in value as much as possible.
Conclusion: So What is the ideal project?
The ideal project would have to fit these criteria
- To be in the $2M - $10M Range (I would personally favor projects on the lower range) and to have an average investment of no more than 4 Ethers per backer
- To have founders which are business oriented and are already successful, e.g. won awards, have established businesses etc.
- To have direct application of the token with a unique service immediately after the ICO
- To be a truly blockchain based project and to be disruptive in character
- To be able to speak with the founders any moment you like, via Telegram or other social channel and to make sure they don't make money out of the business operations, but rather out of increasing the value of the token