Sorry guys, but this has been long overdue. I was bogged down at work. From here we will start to explore the world of ICOs. Now ICOs or Initial Coin Offerings are not really for the faint of heart.
The situation is analogous to this. Say you are starting a start-up and you need capital. There are many ways to do it. Traditionally, the initial or seed capital as they call it was gotten through the founder’s own pocket or angel investors. Now to help you understand the scenario. I want to point out to you the old and more established route of raising capital. The purpose of this is to give you an idea of the terminologies we will be using hence forth. This is going to be an introductory article for an ICO, so if you are already experienced in the fund raising processes, then you do not need to read any further.
There are the various rounds of money raised by a start-up, when it starts up:
The company will typically have just an idea and the credentials of the founder at this stage. An investor is normally an individual who is rich. Most likely, an angel investor will not have a team to help him analyze the company and the idea. At this point it is pretty useless to start and analyze as well, since there is actually nothing to analyze. You have a founder and his vision, and such things cannot be analyzed. Contrary to popular belief, angel investors typically give money to people they know pretty well. Since they cannot analyze anything, they analyze the founder himself. And the only way to analyze the person is by knowing him well. Seed capital mostly goes to friends and families of rich kids. Or people with amazing connections.
[I’ve heard the usual trope of misgivings in the Indian startup landscape. Founders lament the huge amount of funding that startups with IIT-IIM/Any good college alumni founders receive despite having a relatively silly idea, compared to some of the founders, who lack similar backgrounds, but have a breathtaking, world changing idea. This is one of the effects of the fact that, most of these angels have Ivy League backgrounds as well, and it becomes easy for them to analyze the person asking for seed capital if they have the same background. Trust me there is no loyalty to the brand of the college involved, it is just that being from the same college, they are invariable able to find a person who can give them honest feedback about the would be founder. A person like the professor, a junior, or a junior’s batch mate’s junior’s close friend!]
The later stage, i.e., VC stage, the money givers have a better understanding of the company, since by then the company has progressed a bit. But this stage also depends heavily on name investing. They invest based on the founder’s name and background.
So why is this relevant to ICOs?
ICOs normally belong to pre-seed investment stage. That means, we are to invest in the technology with little to no information. Obviously, this is risky business. Even angels wouldn’t start investing at this stage. And the returns that the token of ICO promises differ vastly from the returns that a typical Angel would expect. An angel would expect stable cashflows from the company, but we as ICO investors need to hope for a scenario that there will come a time when the demand for the token becomes so great that there will be someone out there who would be willing to spend a greater amount in buying the token from you than the amount you spent buying it.
So the two key features of an ICO are (in the order of importance)
1. The founding team
2. The adoption expected
Why is the founding team more important?
Because, in a market that holds nobody accountable for losses or frauds, you can lose money easily. The one holding that ICO, can just straight up take your money and walk out of the door without any consequences. So the background, and the moral and ethical standards that the founders hold themselves to are of utmost importance.
Why is adoption important?
Without adoption, no one will buy your damn coin!
How to analyze an ICO?
Now that I have described how angel investors go about investing in very early stage companies, this is what we’ll need to do. We need to first get used to the fact that an idea, no matter how great can easily fail, whereas a great set of founders can drive a relatively ordinary idea and turn it into something extraordinary.
Founders > Idea
Now there are many people who do not align with this view. For them I will point out the fact that it is not just google or fb that started the idea of a search engine and social media site. There were many more that predated them. Yahoo, DuckDuckGo were great search engines with a decent following. Once upon a time MySpace was the rage. But Google and FB won out because the founders were rock solid.
The other thing to look at is the probability of adoption. The best way to check this is to find a similar service that is already doing this without a block chain. If there are a lot of users for that then it is reasonable to expect that the same implementation through block chain will also experience good adoptions.
What I personally don’t care about while analyzing companies (And it is a controversial opinion, that I’ll get flamed for)
1. The underlying tech
2. The whitepaper
Why? I believe in a fast turnaround time. There are so many companies out there and just so much time. You cannot reasonably expect to through each one of them. And a whitepaper and treatise on how awesome the underlying tech is like authors of old age, talk of interplanetary space travel. Such things are only rarely realized. Although adopting this strategy will make us miss a few visionaries such as Elon Musk, but over the longer run, we will be able to make enough money otherwise.
What do you need to analyze them? Useful links:
The typical processes of a company as it goes through its incubation stages. I am writing this in an FAQ format. This is important:
What do they mean when they give tokens out?
This is a basic question, that I am sure no one has. But nonetheless, let me just answer it. The idea is that they promise to build a service, in which this token will play a critical role. And for users to use the service, the token needs to be owned by them. Now if an ICO has a lot of adoption potential, then it is reasonable to expect that a lot of users will be using that token and the value of it will rise.
What is this concept of having access to your private keys if you want to get tokens?
So, you need wallets for ICOs. All wallets, by definition in the cryptocurrency world has 2 keys, a public key and a private key. To understand what these actually are you need to understand public key cryptography. I won’t go into too much details, so read in a nutshell what I learnt in 2 semesters studying computer science engineer on the chapter of cryptography:
1. You have a public and private key pair
2. You have data to send
3. You have a public key that you can give to anybody that is out there
4. Any party can use your public key to encrypt the data
5. Now only the person with the corresponding private key can decrypt the message and decipher its original contents
6. So anybody who intercepts the message cannot read it, because only you have the corresponding private key
Thus this creates security, and a method to easily encrypt and decrypt data. Now the wallets that you have on exchanges, do not let you have access to your private keys. In the case of ICOs, the tokens are sent to your wallet address. SO DO NOT EVER SEND MONEY TO ICOs THROUGH YOUR EXCHANGE WALLET.
Your money will be lost. Read the ICO webpage, usually they lay down clearly the process you need to follow to get ownership of your tokens.
Common misconception about wallet: Many think that only hardware wallets (which need to be bought and are expensive) are the only ones that let you access your private keys. That is not true. You can also get a software wallet (Which are available for download for free), they also let you have private keys. I will talk at length about this later, if you want to use one such wallet for experimental purposes, try myetherwallet or MEW. (Fair warning: Before downloading any software wallet make sure that you are downloading it from a trusted source. There are fraudsters out there who will make a wallet look legitimate when in actuality they are fake, and then your coins will be lost.)
(Phew, getting coins lost seem to be the recurring theme in crypto, sometimes I feel like coins can be lost by pissing on the commode! And they said crypto was making the whole world more secure!)
ICO Lifecycle (Upto listing)
I have written a few points about ICO lifecycle in a nutshell. You need to know all these before investing in an ICO. This is basic knowledge.
1. ICO presale: This is for pre initial investment. This is the riskiest stage and they are asking for money for just an idea. There can be many such ICO presales, say presale stage 1, stage 2 and the earlier the stage, the less will be the price of each token. So the earlier you buy, the cheaper you will get the coins for. But this is not a bargain sale by any means, you are investing early also means that you are assuming the greatest risk, hence, you are given a discount. I generally abhor too many presales before the actual ICO.
2. ICO: Well, this is the ICO.
3. Listing: Now this is the most important stage for an investor. When we invest in an ICO, the tokens are sent to our wallet at a price that is predetermined by the concerned company and its advisory team. It is by no means a measure of the price at which the actual market may value them. It may so happen that an ICO can overprice or underprice its own token. Till the time of listing the tokens will stay in your wallet. And you won’t be able to sell them.
4. But when does it list? Normally an ICO should lay down a road map that states clearly when it expects to list. And ideally, where it expects to list.
5. Where it expects to list? Can’t it just list anywhere? No, it has to adhere to certain standards. Each exchange out there, extends a bit of legitimacy to the fledgling token. The bigger the exchange it can list itself in, the greater its legitimacy, and higher the expectations for its price rise.
6. Why don’t these guys just go to the biggest exchange and list themselves there? What’s stopping them? What’s stopping them is money, and rules. An exchange just doesn’t develop additional infrastructure to list another token on a whim. Chiefly, these exchanges earn money through the transaction fees they collect from us when we buy and sell tokens. They will typically do a detailed analysis to ascertain whether the amount of trading that may happen in this new ICO token will be enough to guarantee them a profit. If the ICO you’ve invested in cannot prove their adoption to the exchange then the exchange (especially the bigger ones) may not show interest. The bigger exchanges know that a coin getting listed on their platform instantly gets access to a huge investor base. The ICO also knows that the bigger the exchange they list on, the higher the price for their token can rise.
7. Why money? So it’s a haggle between the ICO and the exchange. The bigger the exchange the greater will be their listing fees. A crypto company will weigh the pros and cons of listing on an exchange very carefully before getting themselves listed because if for some reason they pay a lot to get themselves listed and the investor base doesn’t care, then it’s a huge loss for them.
8. Why rules? ICOs are a dubious bunch. Not all of them are trustworthy. To weed out the ICOs which are not really trustworthy, or doesn’t have a potential future, or do not observe certain rules, exchanges will lay down a minimum framework of compliances that an ICO must follow. Just like stock exchanges ensure that all the companies listed on their exchange have to furnish their annual report and make it public before a certain date.
The verdict: ICOs will try to get themselves listed on the smaller exchanges first, in an attempt to gauge the public response as well as to create a bit of hype and excitement. If they feel that their debut on the smaller exchanges was successful they may try going for one of the bigger exchanges.
Listing on the smaller exchanges is easier, that is because typically they will have lower fees and rules that are not so strict to follow. But if an ICO is really ambitious, they should be relentless in trying to get themselves listed on bigger and bigger exchanges. Getting yourself listed on coinbase, binance etc is always a good sign because the public deems these exchanges as trustworthy, believing that their screening process is rock solid. If a coin becomes listed on a larger exchange, then it has to be doing something right.
9. But what if the ICO never manages to list themselves? That means that they’ve failed as an ICO. And the tokens that are sitting in your wallet is useless.
Now armed with this information we will go on and analyze a few promising ICOs.