Investing In or Launching an ICO? 5 Things to Consider

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@ kennymuli Kenny Li Investment Analyst @ SenseTime. Founder of Worthyt. MIT Sloan 2020.

Investing or Launching ICOs Wisely

How to Use This Article:

If you’re an investor, use this article to guide your own thought process when reviewing your next ICO and deciding whether or not you want to participate. If you are intending on launching an ICO, review these considerations to better understand if your project truly fits the profile of a good ICO and candidate as an altcoin.

Not sure what an ICO actually is?

An Initial Coin Offering, or ICO, is an event where a yet-to-be-launched coin gives investors who believe in the idea an opportunity to buy the coins early at what those investors would consider a good price.

I’m definitely not endorsing the launch of an ICO. In fact, reconsider.

My second company is a fintech business that I started in 2017 (still in stealth mode, stay tuned!) that went through almost a year’s worth of planning, development, prototyping, creating and testing an MVP, building partnerships… to getting funding last month. And it’s only a drop in the bucket compared to what some ICOs raise with little more than a 10-page document. But I chose to go the traditional route for the same reasons I listed below. Furthermore, ICOs are not some ticket to immunity from the law; the SEC has expressed strong intention to crack down on them, so if you are a US-based ICO, you will be scrutinized and it will put you and your team at risk.

If you’re thinking about an ICO, use this list as guidance to decide whether or not you want to really launch one, and if so, how to do it effectively. If you’re an ICO investor, take a look through this article as well. Feel free to take whatever you find to be useful!

1. The Utility of the Token

There are four major reasons people claim that a token is necessary for their product or idea. But let’s face the facts: I say claim because the first reason is really little more than a bogus one born out of ignorance of the cryptocurrency market. The biggest question you should be asking here is: what will your token be able to do that Ethereum or Bitcoin can’t already do for you?

Reason 1: We want to control the price volatility.

This is what you look like trying to control the price of your coin after it hits exchanges.

If you sincerely think this is a legitimate reason to create your own token, which likely exists as an ERC20 token on the Ethereum blockchain, then the first thing I would do in response is direct you to a website like coinlib.io and ask you to point to one coin out of 1,500 existing ones that has resisted all of the subsequent fallout of a bitcoin pump or crash. Then I would recommend to not do an ICO because you don’t know enough about the cryptocurrency space to understand how the game is played, and are more likely to completely screw over your investors, who are people that believed in you and your idea. The reality is, you have little control over the value of your own coin, especially after it hits exchanges.

So the solution is simple, right? Don’t let it touch exchanges.

Wrong. Investors don’t want to throw money at an ICO only to find out later that they can’t sell it off for a higher price. Furthermore, people need to have access to it in order to grow your user base. You can’t just open up shop and sell them yourself, because then you’re crossing the line of becoming an exchange, especially since you’re dealing with cash. Expect a call from the SEC or FinCEN.

Reason 2: We want to circumvent existing financial regulation.

You better think long and hard about whether you want to start by diving off the deep end and potentially landing in a nice bed behind bars sandwiched between a pedophile and a serial killer. Cryptocurrency projects are not a free ride to bypassing existing regulation, and you would be a fool putting yourself, as well as your team and investors, at risk for prosecution. The SEC is knocking door to door, don’t think for a second they’ll just conveniently skip your doorstep.

Furthermore, step one should not be to reach the global market. You need to test each market and understand the nuances of operating in each region. Did you know that the McDonald’s menu in Japan is different from the one in the US? To think that your singular product in all its alpha-stage (or worse, conceptual stage) goodness is everything the entire world needs to hold hands and sing Kumbaya is probably more of a sign that you either haven’t thought through your product enough (red flag) or you are too naive and assume the entire world thinks like you (red flag).

Reason 3: We need to offer something in return for investor contribution.

This reason touches on User Experience, which I’ll get into in a bit. But for now, sure, investors want something in return for their contribution. Just like on Kickstarter, where you promise to deliver products, investors in ICOs expect some type of exchange — usually a token that is assumed to have an increased value in the future.

But if that’s really the only legitimate reason you’re creating a token, then I would recommend entertaining the possibility of actually treating your ICO token as a security and providing shareholder equity in your business idea, rather than using it as a Chuck-E-Cheese coin to play all the arcades in your shop. For those of you that don’t know, Chuck-E-Cheese is an American arcade-style shop for children to go (sort of like Dave & Buster’s) play games and eat pizza. But they have to use Chuck-E-Cheese tokens to activate games. I’ll get into this more in the User Experience section.

Reason 4: We want to raise tons of money.

Game over.

Your vision is focused on the money, not on the product. Because your motivation is not on the actual delivery of your product, a community cannot and should not trust you to build one. The market is rampant with scam, the last thing it needs is another one.

Don’t get me wrong. The end game, of course, is money. Money is important. You need it to survive. You need it to feed your employees. You need it to keep your business alive. But the ICO is not the end game. It’s the launch of the game. If you are depending on the ICO as your singular source of income for the project, you better revisit your revenue model before taking another step.

Get creative to prototype without breaking the bank

You may argue that you need money to build out your vision. But most ICOs don’t even have a prototype to test the market with yet. If you think you need millions of dollars to build a prototype for testing, then you are one of the most unresourceful entrepreneurs I’ve met. If, on the other hand, you think your product vision is perfect at stage 1 and doesn’t need iteration so you want to raise millions immediately to start building it from 0 to 100 without any feedback from potential users, then you are one of the most stubborn and idiotic entrepreneurs I’ve met.

2. User Experience

Do you know what I hated about Chuck-E-Cheese’s as a kid? The tokens.

Looking back, Chuck-E-Cheese was pretty creepy, actually.

Those stupid machines destroy the otherwise very fun time I would be having. First, I had to find cash. Then, I had to go to the vending machines that would take my cash to spit out the coins. If I only had large bills, then I couldn’t get change; instead, I would have to walk around with a cup full of tokens that were worth nothing outside of Chuck-E-Cheese’s. It was only then that I could start playing the games.

This is what you’re forcing all your users to do when they use your token; therefore, if you do not have any good arguments for the utility of the token, don’t make one just for the sake of one of the reasons mentioned above. As cryptocurrency investors, we already have cups full of all these other tokens we never intend on using.

Powering your app with BTC/ETH vs. Using Your Own Coin

Imagine every extra step for getting a user to start using your platform as an extra kiss of death. Now take a look at the diagram above. If you power your app with BTC and ETH, the user experience is still complicated, but there are many less steps in the user experience to start engaging with your app. But if you power your app with your own token, you’re making out with Death, tongue and everything.

So you better have a really good reason for using your super amazing token that is going to be totally different than all the other 1,500 tokens out there that thought they were going to be totally different, too. And the reason should be better than the ignorant logical fallacy of “all we need to do is get 1% of the Internet audience and we’ll all be billionaires.” Realistically, 99.9999999% of the Internet population can’t even figure out how to withdraw their coins from Coinbase. Now you’re going to educate them on how to read charts, place orders and withdraw to altcoin wallets from shady altcoin exchanges, too?

Wait — but Binance and Bittrex are very reputable altcoin exchanges; they aren’t shady at all, you claim. And that’s totally true; in fact, Binance’s recent decision to reverse all trades in response to an API exploitation that left many of their users with lost money was a very noble decision, and I sincerely support the exchange even more than before.

But don’t get your hopes up… Especially starting off, your coin is most likely going to end up in EtherDelta, TradeSatoshi, or Cryptopia.

3. The White Paper

The white paper is one of your first impressions to the world of serious investors. It’s not as simple as having a good idea — investors should know why you’re going to be able to build it out better than anyone else can. So you must lay out your vision.

A well-written white paper requires time and commitment and can show how serious teams are about the project.

The vision must have specifics. Ideally, investors should finish the white paper with even more questions than they had before. By achieving that goal, you are proving your team’s attention to detail and seriousness about the project. I’ve listed some general recommendations to keep in mind when drafting your white paper:

A) No Typos or Grammar Mistakes

You’re probably surprised to see that this is my number one recommendation, since it’s an obvious one. But you’d be surprised. Even some of the best white papers I’ve read in terms of content and thought process had typos and grammar mistakes.

No one wnats to raed typsos.

Keep the cryptography in your blockchain, don’t spill it over to your white paper. If absolutely no one on your team is attention-to-detail enough to eliminate typos or grammar mistakes, then how can anyone trust you to be detailed enough to launch bug-free code that can accurately calculate and report coin values that have floating points up to 8 places?

B) Technology and Roadmap

I’ve read countless papers that do not include at least some detail about technology and roadmap. As a white paper, you do not need to necessarily include specifics about your hash algorithm for ASIC-resistance or quantum-proofing, but please show us you’ve thought about what you’re going to build, how you’re going to build it, and when you will have built it by. You want to show your audience that you have left no stone unturned — a single, lurking cockroach can melt down the entire project.

C) Commitment

While blockchain is designed to be a trustless system, your team is not. You and your team must show commitment to the project. One solution to this is to create vesting schedules, which are typical in business. For example, your team may, in total, own 5% of the coin supply, but that supply is released to you over a 4-year period, so you cannot immediately dump all of the coins into an exchange once the project launches.

D) DO NOT TALK ABOUT HOW MUCH MONEY YOU’LL MAKE

This isn’t just for your white paper. Don’t reference money making on your website, chats, forums… Only scammers promise big returns.

Some Samples of Good White Papers

The bitcoin white paper is a great template example. It talks about specifics by addressing the problems with centralized financial systems and issues that have historically prevented decentralized economies, and outlines the solution of a proof-of-work system for operating a trustless, decentralized transaction model.

Recently, one of my favorite white papers has also been one published by Lexit. Without knowing much about the intricacies of the Mergers and Acquisitions (M&A) space or Intellectual Property (IP) Rights, the white paper does a great job in narrating the problems of the industry for anyone to follow along with, and it also details the Lexit solution in a clear, understandable manner.

4. The Team and Advisory Board

If you’re about to launch the next revolutionary blockchain-based McDonald’s, and you can’t even convince one person in the fast-food industry to join your team or advisory board, then you need to go back to the drawing board and figure out what’s wrong. There’s a reason why the industry experts are avoiding your project, and it’s not because they are too humble.

I get it — you’ve got passion and talent. But you’re going to make tons of mistakes and things are going to hit you from out of nowhere. Advisors and experienced team members who have walked the same path you’re currently trying to navigate will be able to help you with things such as identifying problems you didn’t even know would be problems and figuring out solutions to existing problems much faster, which will streamline the delivery of your product.

Also, when it comes to team, it’s about quality, not quantity. Sure, you pitched the idea to your buddies that all work in the same marketing firm as you, but if your founding team is 8 marketing experts and 1 programmer, you’re going to have a hard time convincing investors of your ability to execute. Look for a well-rounded team of developers, marketers, and operation…ers.

5. Community Building

Between ICO and alpha product launch, many apps can experience a lag time of several months. In the cryptocurrency world, that’s eternity. If you cannot maintain community interest in your product during that lag time, you product will be dead on arrival.

Reddit, BitcoinTalk, Twitter, Slack, Discord, and Telegram are all common ways that projects keep the community engaged and informed. Medium and MailChimp-powered newsletters are a great way to provide updates on a weekly or monthly basis.

But only publish verifiable, quality content. The amount of effort it takes to lose your supporters’ trust is only a fraction of the amount of effort it takes to build it (the unfortunate economics of customer acquisition). For example, on November 30, 2017, Einsteinium published an enigmatic Tweet that was a pre-announcement of an upcoming “mind-blowing” announcement. This was paired with the image of a Macbook pro.

Due to supporter trust and enthusiasm, speculation and conspiracy theories about the topic of the announcement drove prices up for Einsteinium in a frenzied pump. Turns out, the announcement was about a change in the hashing algorithm to make it more GPU friendly. Cue the slaughterfest.

Einsteinium prices plummeted after its misleading pre-announcement.

Einsteinium later apologized in a public announcement on its Subreddit, but the damage had been done. Community trust was destroyed, and the coin price plummeted as loyal enthusiasts dumped their shares and commitment to the coin.

In Conclusion…

If you can’t already tell by the tone of this article, I believe many ICOs have no business being ICOs. And I think most tokens out there can aptly be labeled as shitcoins because they provide little utility value except acting as speedbumps for adoption of what would otherwise be a really cool idea.

On the other hand, if after reading all of this and re-evaluating your own ICO, you have checked off all these concerns and still believe that your ICO is the next big thing, I want to talk to you. Seriously. Reach out to me on Twitter @KennyMuLi.

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