Everything You Need to Know Before Investing In An IEO… Continued Karuschain 🔸 Follow Jan 21 · Unlisted

Part 2

Welcome back! As we discussed in Part 1, the hottest investment buzz right now is all about crypto and investing in IEOs/ICOs. The industry is changing faster than a blink of the eye, so educating yourself before opening your wallet is considered a wise move.

With early adopters dying to take advantage of the next BitCoin cash-in, many are throwing caution to the wind. Smart investors, however take the necessary time to understand the risks and rewards of such at play.

Below are several questions you must ask in order to mitigate your risk when investing in an IEO/ICO. In this part of the series we will be taking a closer look at the tokenomics and relevant questions to ask when evaluating an investment opportunity.

Is the tokenomics model realistic?

Tokenomics, also referred to less frequently as “token economics” is the application of economic theory to the tokenization of a blockchain-based micro-economy. Given the early stages of development and adoption of the underlying technologies involved, many crypto projects have substituted proper tokenomics with simple accounting information. In short, anything that impacts a token’s value is considered tokenomics. This is arguably the most complicated thing you need to master before comfortably investing in IEOs. It takes a little time to understand it, but no investment should be made until you can explain the basics.

The whitepaper should explain the type of token, its use and other details fully and simply. If it is too confusing, it may be an indication that the model needs to be honed further. Once you’ve read the whitepaper, you should be able to understand and give a basic explanation of the tokenomics before investing.

How many tokens will be released and how are they distributed?

A good indicator is the percentage of tokens given to the development team. A solid IEO is one where the majority of tokens go to investors in order to raise sufficient capital for the further development of the project.

How do the tokens give a realistic project valuation?

Early attempts at valuing tokens, regardless of their type, failed because they almost unanimously used traditional valuation methods from the world of finance. Some clear examples of this were the Capital Asset Pricing Model (CAPM) and the use of Discounted Cash Flow (DCF) approaches, neither of which make sense for pre-revenue ventures early in their product lifecycle.

The tendency of approaching token valuation like a financial instrument can be further seen in the first successful valuation standard adopted for tokenomics, namely the INET approach pioneered by Chris Burniske. There are other case studies such as the Token Velocity Thesis, NVT Ratio and Daily Active Addresses, to name a few.

At Karuschain we adopted the INET model as it was clear that it is one of the most developed asset pricing methodologies that blends traditional valuation approaches with the new realities of the cryptocurrency market.

How will the number of tokens impact the investment over time, ie. What causes the token value to fall?

Supply and demand is the most important determinant of cryptocurrency prices, however going back to our previous Q&A on tokenomics, a key question a potential investor absolutely needs to ask and understand is how the token was initially valued.

What fundamentals, assumptions, empirical evidence and economic model were used to derive the discounted present value of the token? In addition, has the project limited the number of tokens they can mint, or can they mint new ones indiscriminately? The latter will cause dilution of token value, so be wary.

A large number of projects use accounting methods to value their token and have little to no idea what the actual present value of the token might be, nor what the future value might be, based on a true tokenomic model. The danger of this is that prices often plunge once the initial hype is over and as the token price is recalibrated by market demand and supply needs.

Is the tokenomics model one that you understand and can explain?

If you can adequately understand and explain the tokenomics model, then its reasonable to continue to investigate the project, however, if it seems quite complicated and you can’t wrap your head around it, maybe give the project a miss.

Once you have satisfactory answers for these questions, you should be well informed regarding the economics of the project, how the token gets and keeps its value and what kind of return on investment you might expect.

The IEO Exchange

Once you are comfortable that the project behind the IEO is viable and has strong potential, the next thing to consider is the platform where the IEO is launched.

Is the exchange listing the IEO reputable?

Be sure to do some due diligence on the exchange; what is the exchange’s recent volume vs its historical volumes on Coinmarketcap. What is the general quality of IEO projects that are being listed on that exchange? For example, do the projects have whitepapers and team members? Why are these important? An exchange needs to conduct it’s due diligence prior to listing any project and this is a basic check one can do. No team, no whitepaper equals massive red flag! This is the IEO world, not the wild west ICO and investors are wising up!

A global exchange should have global presence, and this can be easily verified. Check out a few key employees at that exchange on Linkedin for example. How many connections do they each have, what is their experience and how many IEO projects has that exchange listed, and how many successful ones have they concluded?

Is the exchange secure?

Have there been any security breaches, hacks or scams associated with the exchange or it’s founders?

What due diligence does the exchange conduct on the IEOs it lists?

Ask the exchange itself or projects for the list of due diligence questions they had to complete. Exchanges should be able to provide this.

What KYC does the exchange perform on investors?

The laws are changing rapidly, is the exchange compliant with local and national regulators in the jurisdictions they serve? What level of KYC checks does the exchange perform on each user?

How are the payments made to purchase tokens?

Should be clearly articulated on the exchange, and investigate the liquidity before purchasing tokens. If you opt to use the exchange’s native token as liquidity, this can sometimes be an issue. You don’t want to be stuck holding a token you can’t cash out.

Is there a holding period for tokens?

Once you purchase tokens on an exchange you will often be able to see your IEO tokens stored in your balance immediately. However, depending on the T&Cs of each individual IEO, your purchased tokens may be held for a lockup period. During this time, they are not able to be withdrawn, usually until the end of the IEO sale.

If you have answered these questions fully, you are much more prepared to make an informed investment decision. There’s a lot to learn but once mastered, there are great potentials in many IEOs. This is in no way financial advice, just a few questions you should comfortably know about any potential project you invest in.

Don’t miss out on our latest news and join our newsletter.

Karuschain is a blockchain technology platform for the precious metals mining industry, giving mining companies a powerful tool to ensure data integrity, safeguard human rights, reduce risks and improve environmental regulations in their supply chain.

Follow Karuschain on our social networks!

Twitter Facebook LinkedIn Instagram Telegram Medium Youtube