Disclaimer: ICOs are risky. Only spend what you can afford to lose. As you will see in this article on how to invest in an ICO and buy new cryptocurrencies, acting with caution and getting educated is key to your success.
2017 was the year of the ICO. We saw good, bad and downright ugly projects launch and a lot of hacks as well. After reaching crazy highs and mania, elements of calm have started to spread through the crypto space. There is a general acknowledgment that the first stage of ICOs, where rational thinking all but evaporated is coming to an end.
But the ICO as a fundraising mechanism is only starting. The next generation of ICOs will learn from past mistakes and bring better innovation to the space. That mean’s you should be ready to invest in more mature ICOs that could potentially provide you with a return on your investment in some way, not just hot air and promises.
Before we go into the granular details of how to invest in an ICO, let’s start with the basics. What are ICOs, and why are they so important?
An Initial Coin Offering is a new kind of fundraising method made available by the development of blockchain technology and cryptographic tokens. Through ICOs, organizations distribute their platform’s native digital tokens in exchange for cryptocurrency (such as ether (ETH) or bitcoin (BTC)) to obtain public capital to fund their product development and business operations.
What this token represents will vary between projects, but in simple terms, it provides a specific set of rights and utility to its holder like for example access to a network or a platform, rights to program, develop or create features for a system, right to cast a vote on governance issues, etc.
“The investor of today does not profit from yesterday’s growth.” – Warren Buffett
This novel method for fundraising has not only provided a new way for startups and companies to finance their development, but it has also lowered the barriers to investing in new technological innovations. Thanks to ICOs anyone can become an investor and support their favourite projects at early stages.
However, not everything is ideal and rosy.
While ICOs give back some of the power that has been historically hoarded by traditional investors, they can also bring undesired results. A lack of education and understanding, or greed for seemingly easy gains, can be dangerous for inexperienced investors.
Investing without proper research and analysis is no better than just gambling at a casino. My take is that you should only invest in an ICO when you’re confident of your research, motivated by genuine project interest and trust, and (in most cases) driven to hold the investment long-term.
Research: The cornerstone for investment success
The crypto space is full of success stories of crypto investors that made millions by investing in different coins and tokens.
Many of them have spent countless hours analyzing markets and researching to make sure they pick the best projects and teams. Others have just been lucky.
A nugget of wisdom from Warren Buffett states:
“Only when the tide goes out do you discover who’s been swimming naked.”
You don’t know or appreciate the risks that somebody is taking until they go through adverse conditions. The most recent bull run in the crypto-space is not the proper context to test this.
Seek to invest in projects that you genuinely believe in and are ready to support even in a down market. Remember that although you can profit from them, ICOs are about helping projects develop and launch. Do your research and choose projects that you believe to have real value. Even better, pick projects you would want use.
“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
To make this decision you have to conduct thorough research to analyze all the relevant aspects or indicators that reveal the project’s strengths and weaknesses. Here are a few of the most important indicators to look at when choosing a project.
The website should have most of the information you need to understand a project. It should also provide access to documents or resources to help you conduct a more in-depth investigation, including the indicators listed below.
Team and advisors
Who is building the product? Check who the founders are and their experience. Make sure they have a strong technical team and reliable people to transform the technology into a business. Examine if they have any advisors and what they are contributing to the project. Most important of all, don’t be satisfied with what you see on their site. Do a background check on Linkedin, Twitter, forums, Google searches, etc. Make sure they are the real deal.
Blend in with the project’s community. Analyze who the followers are, how active they are, and why they are interested in the project. A small community of engaged developers and users will be way more relevant than a larger community of speculators.
Always read the whitepaper of any project in which you are looking to invest. It is the only way to understand the team’s vision and concrete plans to meet that vision.
Learn what the team is committing to and within what timeframe. Tracking the milestones as they happen and checking to see if the team adheres to project deadlines will show you how seriously they take their project and promises.
If a team has a real prototype or working platform, it’s a great sign!This means the team is capable of building a product with limited resources and shows a real commitment to the project.
Frequent and reliable communication is a key indicator of how transparent and trustworthy a project is. The best projects use blog posts as a tool to let you know about their company, weekly and monthly milestones, changes in the project, partnerships, or any relevant information.
ICO terms and conditions
Read the fine print of the sale. Some projects collect some initial investment with pre-sales that can have big discounts. This may be a honeypot for speculators rather than project supporters. Also, analyze if the funds the project is collecting is in proportion to the size of the project and the roadmap they have presented.
Spending of ICO funds
Make sure you understand how the ICO funds will get used. Projects should be clear about their intentions and respect their investor’s money. The best and most reliable teams are transparent and keep their community well informed.
Having external investors could be a sign that somebody with experience has trusted this project with their money. While not always the case, projects with this kind of support have better access to resources and an increased the chance of success.
Relevance and utility
This should be your final and most important indicator in deciding whether to invest. How exciting is the project vision to you? Do you find relevance in what they are doing and trust their team? Does the platform solve a real problem?
If the token price completely collapses, would you feel comfortable still supporting the project? If you have doubts, remember this saying from Warren Buffett -“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
How to invest in an ICO
If you’re new to the crypto space and especially to ICOs, the process of participating in an ICO might seem a bit intimidating.
To help you get started with this process, here are the steps you need to take to invest in an ICO. While not the only option for ICOs, Ethereum’s blockchain has become the most used to create unique cryptocurrency tokens and run token sales. To make things simpler and avoid confusion the steps detailed below are based on ICOs running on this platform and accepting contributions in ether, Ethereum’s native token. Remember, as Warren Buffett says, “Risk comes from not knowing what you’re doing.”
Create an Ethereum wallet
The first step is to create a wallet which will store the ether that you will use to take part of the ICO. Later, this wallet will let you store the project’s tokens. Many wallets exist for this purpose, so the one you will use is a matter of preference. One of the most widely used and recommended wallet is MyEtherWallet.
Using MyEtherWallet will give you total control of your wallet, including your private keys. This is very important as it means that you are in full control of your funds. This will, however, also mean you will be in charge of the security and protection of these funds.
Get some ether
Most ICOs take ether as contributions so you will naturally need to own some to be able to participate. Now that you have your wallet in place it’s time to acquire an amount of ether equal to the amount you will be investing in the ICO.
How this is done will depend on the country in which you live. Coinbase is one of the most popular and easy to use platforms that provides its services to 32 countries (check if your location is supported here). Coinbase allows you to buy both bitcoin and ether.
If you’re in a country that is not currently supported by Coinbase other options exist although they can be a bit trickier. One of the easiest ways is to buy bitcoin and later trade it for ether is on an exchange such as Bittrex or using a service like Shapeshift. Peer to peer networks like LocalBitcoins is also an option.
Move your ether to the wallet you created
This is an important step. You cannot participate in an ICO from the exchange you used to buy bitcoin or ether. The reason for this is that these are centralized services (Coinbase, Bittrex, etc.), and they are in control of the private keys to your addresses.
Any funds you send to the ICO public address from an exchange will probably get lost, and you won’t receive your tokens.
Send your ether to the ICO address
By now you should have all the necessary elements set up. Now the real action begins. First of all look at the project’s website. Make sure you are looking at the official channel of communication of the project you are investing. They usually have a button, tab or a call to action mentioning their token sale and an invitation to participate.
Once you find this, you will have to register for the ICO to get whitelisted as an investor. The information requested from you will vary. At a minimum, they will ask for your public wallet address and email, but more serious ICOs will also seek to comply with KYC/AML laws and may ask for your personal information and identity.
After registering for the ICO, you should begin receiving detailed instructions and the public address where you will have to send your ether once the ICO goes live.
After you get all this information, you are ready to contribute and receive your tokens. All you need to do is wait for the crowdfunding to open. After sending your ether to the project’s public address, the proportionate number of tokens will get sent to your Ethereum wallet.
Tip: To see the tokens on your Ethereum wallet you may need to add them to the wallets monitoring list. You can find a tutorial on how to do this on MyEtherWallet here.
Store your tokens safely… and wait
If your selected project doesn’t have a working prototype that enables you to use your tokens immediately, there is not much to do now. You are in for the long run which means you should find a secure way to store your tokens. Check out this guide on how to use MyEtherWallet for cold storage, and their tips to stay safe.
Selling: Trading your tokens
When the time comes, you might want to sell your tokens either for profit or because you need the money. The main thing you need to decide is if you’re going to turn these tokens back into USD or exchange them for some other cryptocurrency.
Changing cryptocurrencies other than bitcoin or ether back to USD can be quite tricky at this time, so you will probably have to go through these cryptocurrencies if you want an exit from the market.
One of the things you will need to look at is if the project’s token you invested in has been listed on any exchange. Some exchanges are more difficult to get listed on than others so not every token will be immediately available everywhere. (CoinMarketCap shows all the exchanges where tokens are traded).
Don’t invest in technologies or products you don’t understand, and know that there is a real possibility of losing all of your investment. When looking at the ICO, focus more on the project rather than the short-term gains you think you can make.
It’s also important to trust your research and shut out the hype. There are a lot of people out there looking to influence the market by spreading positive and negative feedback.
Finally, don’t be afraid to get involved. It’s possible to become an active investor in the crypto space even if you have relatively little experience. Behind all of the buzz and sensationalist press articles, new and disruptive developments are taking place, some of which will change the world.
Ever thought about launching an ICO? Check out this comprehensive guide
If you have any questions about how to invest in an ICO or would like to connect you can find me on Twitter or email me at [email protected] I’m always interested in meeting people working in the blockchain space at any level.
Also published on Medium.