by Last Updated on March 5, 2024 by Sohail Qaisar
Cryptocurrency has been around for a while now, and many people have familiarized themselves with crypto trading. However, one aspect that still brings confusion is how to spot a good initial coin offering (ICO), especially with the growing number of pump and dump schemes. ICOs carry various risks brought by market dynamics and prevalent scams, and they offer no legal protections, exposing you to significant losses. This article will provide you with some tips on how to spot a legitimate and potentially profitable ICO.
1. Determine the Intended Use of the Coins
The primary focus of your research when looking at an ICO should be based on determining whether there is a clear use for the funds. If an ICO features a business plan that makes no sense in relation to the intended use of funds, it is probably wise that you find a different option. Additionally, the business model should establish a clear need for the product or service in the market and the number of companies offering the same. It is also important to understand that not everything can be tokenized.
2. Research the Risks Involved
Just like public stock offering, many ICOs rarely meet the promised goals as they tend to be overambitious at the beginning. While many startups have a low survival rate, the case is different when talking about tokens. Many providers sell tokens to the public who have little to no understanding of the risks the projects carry. Watch out for a possibility of fraud and misrepresentation since some companies withhold information about some projects. High volatility and price manipulation and a lack of liquidity and market stability are also huge risks.
3. Treat an ICO Like Any Other Asset
Before investing in a traditional asset, you probably conduct an in-depth analysis to determine its viability. When it comes to Bitcoin and other crypto tokens, viability depends on an analysis of the underlying project and token economics which back the currency issuance. You should base the economic analysis of a cryptocurrency on innovation with a basis of old-fashioned principles. A platform is only good enough if it can attract users since this is where its value lies.
4. Don’t Ignore the White Paper
The whitepaper is arguably the most important element of any ICO. The offering party has to offer a whitepaper before the coin’s actual launch to provide investors with all the information they need to know before making a purchase. It includes the commercial applications of the currency, the financial details of the offering, the technological specifications, and the use of the funds raised. The whitepaper should clearly lay out the project, the rights that come with the tokens and the risks you are exposed to as an investor.
5. Consider the Jurisdiction
Certain jurisdictions, like China, have implemented prohibitions on ICOs and token generation events (TGEs). It’s essential to verify the project’s origin before purchasing an ICO to ensure its legality. Established jurisdictions typically enforce regulations aimed at safeguarding investors.
Endnote
Assessing the viability of an ICO is not easy. However, with some careful consideration and caution, you can make some smart decisions. One thing worth noting is that this is a relatively new market and it carries some risk.
