sosobtc Li Xiong: What should investors know before investing in ICO?

Original author: sosobtc Li Xiong

This year, "blockchain" has become a hot topic in the currency or chain industry. We started by focusing on digital currencies led by Bitcoin, and then participated in the construction of the underlying technology of blockchain. At the same time, various "chains" appeared at home and abroad, and governments and industry giants were paying attention. For me, I mainly focus on the theory and application of blockchain, including the controversial ICO crowdfunding recently. I hope that the ICO content described in this article will be helpful for you to participate in ICO, and you are also welcome to come and exchange ideas.

Talk about some views on ICO

There have been many articles explaining what ICO is, so I won't spend too much time on it. Generally speaking, ICO is a new financing method in the field of Bitcoin or blockchain. The full English name is Initial Coin Offering, which is adapted from the IPO (Initial Public Offering) in the securities industry. So far, there is no official or dictionary definition of ICO. It is a product of the international digital currency/blockchain community to raise sufficient operating funds for blockchain startups. Most of the funds raised by ICO are Bitcoin, Ethereum or other encrypted digital currencies.

Unlike traditional financing methods, the ICO adopted by blockchain startups has broken the traditional way of raising funds for projects. The specific method is to tokenize the projects of blockchain startups, which can also be regarded as an asset securitization process. However, in order to avoid legal risks, we more often call ICO an online crowdfunding method.

In recent months, ICOs have become a controversial fundraising method in China. Because the early market was crazy, it was too easy to get investors' money through ICOs. Many startups have successfully raised a lot of money through ICOs, but they did not do anything after getting the money, and did not even come up with a proof of concept or a feasible white paper, and could not deliver on their promises of returns to investors.

Simply put, everyone in the industry knows that both Bitcoin and blockchain are in a hype cycle, just like a forest with pests besides birds. The entire industry is not completely innocent, let alone ICO? In this highly speculative ICO, investors are exposed to great risks. Although this may make a limited number of people rich, it will also bankrupt other adventurers. Like other investment methods, you must not only have sufficient risk resistance, but also have the skills to master more effective information for judgment, otherwise you cannot play this game.

Do you really want to participate in an ICO?

In the development of blockchain, I believe that ICO is an indispensable business model. As long as investors are calm and patient enough to master enough information, and rely on some professional third-party ICO platforms to provide advice from a safe, honest, fair and transparent investment community, it will be easier to identify the feasibility of the project. I believe that ICO will have a relatively healthy development. But we cannot guarantee that there is no risk behind the return, because many blockchain start-ups may only have an idea and nothing else, just want to achieve the goal of raising millions of dollars.

When some outside investors hear about ICO, they just hear that it can make them rich quickly. Usually, they don’t know much about the basic technical principles of blockchain, nor do they know what functional attributes the tokens in their hands can have. The only thing they know is that people who invested in Bitcoin and Ethereum early on got rich quickly, and they also want to make a quick buck. But the crazy people seem to have forgotten one thing, you need to have a detailed understanding of the knowledge required to invest in any blockchain project.

How to evaluate ICO projects?

Earlier I mentioned some of the problems and prospects of ICOs. Hopefully, the following principles will help you better evaluate blockchain projects if you are participating in ICOs.

There are four main ways for blockchain startups to conduct ICOs: one is to conduct ICOs on their official websites, such as Ethereum and DECENT; the second is to conduct ICOs on third-party professional crowdfunding platforms, such as domestic Coin Crowdfunding and ico365; the third is to conduct both of the above, such as FirstBlood, which conducts ICOs on both its official website and Yunbi.com; the fourth is exchanges, which not only trade tokens but also issue ICOs, such as Yunbi.com, which recently launched ICO+ services to resolve conflicts between investors and blockchain projects for the healthier development of ICOs. Regardless of the ICO method, the following five points can help you evaluate an ICO project:

1. Founding Team

When investing in a blockchain project, you should first look at the project team, especially the core members. If the team is relatively strong, both technology and marketing will be first-class, and they will be more open in team publicity. If the founding team of a project cannot share their ideas and progress on social media such as QQ groups, WeChat, forums, etc., then we will question whether their team is taking this matter seriously, and accordingly we will be relatively cautious in our investment, because all blockchain projects must conduct active and open discussions on social media and answer investors' questions in order to gain trust.

2. Project Introduction

We first need to read the white paper of the blockchain project to see if they have done it in detail and whether they clearly explain the project and the problems it can solve. From the perspective of the model, it is innovative and there are no unrealistic boasts. If it is an unrealistic project, of course, don't consider it; from a technical point of view, there are irreplaceable core technologies or functions. For example, Ethereum has a better technical solution than Bitcoin in the short term - smart contracts, and the recent Zcash can do better than Bitcoin in terms of privacy. If you don't understand technology, you will consider its rationality and feasibility from the perspective of the model, and whether it is really related to the blockchain, because there are too many projects that are just borrowing the name of the blockchain.

3. Financing history

There are many good blockchain startup projects that have been operating for a year or so, and some have even received investment from certain investors or institutions. Such projects tend to be more reliable, but we must be cautious when examining this. It is best to find a few more people who know the industry to ask about its financing situation, mainly to confirm its authenticity. If we find that all of this is false, we basically do not need to consider investing in the project.

4. Specific and feasible plans

A specific and feasible plan must be examined. This is related to the development of the project and the key to whether your return on investment can be realized. If a project has an unclear development plan, it will be difficult for it to survive, let alone make a profit. We can give up such a project directly.

5. Financing targets and rights released

A blockchain startup project has a high valuation and the ICO financing target is too high. If you think this is the case, you should invest cautiously. If you say that 10 million yuan is enough to support the initial development of the project, but they insist on raising 100 million yuan, and their project team does not clearly explain the purpose, we have to doubt this. In fact, the founding team should consciously limit the financing limit. In the end, it would be more reasonable for the founding team to have 10-50% equity ownership, and it is best not to exceed 50%. If the ownership is too little, the founding team will not have more motivation to develop, and may even have the intention to abandon the project in advance. If the ownership is too much, then the founding team will have too much control, which will affect the circulation of the entire token market when issuing tokens later.

Summarize

From this we know that blockchain projects that conduct ICOs mainly use the property of blockchain technology that cannot tamper with the ledger, which can ensure transparent public issuance of tokens and use smart contract technology to achieve automatic dividends. At present, the exit method of ICO is relatively simple and direct. As long as the blockchain project issues tokens, the tokens can be sold on exchanges or OTC transactions, which means that you can exit at a suitable price.

However, blockchain projects also have some other problems. On the one hand, due to technical limitations, some blockchain project founding teams cannot guarantee normal development or token issuance. On the other hand, the price of tokens in transactions is easily manipulated. If there is no strength to guarantee the continued development of the project, the price cannot be stable and liquidity is insufficient, which will eventually lead to losses for investors.

In short, any new thing will be chaotic at the beginning, just think about the crazy Bitcoin in 2013. Although ICO is in its turbulent early stage and many people have great prejudice against it, the ICO culture may stay. As this market matures and becomes reliable, ICO will become a financing method different from traditional investment and financing methods.