The fundamentals of Bitcoin created a framework to create decentralized networks with provably fair consensus. Since it’s inception many projects have come to fruition in the space, some successes and some not. We are entering an age of financially backing decentralized protocols and decentralized applications built on top of protocols. One common decentralized network is Ethereum, used by many projects as a base to build on top of. Ethereum offers a smart contract language which facilitates new creative uses and applications with native tokens.
It’s important to understand what codebase a project has, or is built on top of. The major distinction is if the project has it’s own Blockchain, or is built on top of another. Smart contracts, or decentralized apps are often built on top of an existing Blockchain. Decentralized Apps, also include DAO’s or Decentralized Autonomous Organizations. While the level of human interaction varies between Decentralized Apps the goal is generally to create as much autonomous functionality as possible, which is sometimes supplemented with human interaction.
Many new cryptocurrencies are referred to as altcoins, or basically alternatives to Bitcoin as it’s still the largest mover in the space. Altcoins generally have their own blockchain. While tokenized assets, and cryptocurrencies have attempted to move beyond this definition nothing yet has reached critical mass, to where it competes in a significant way with Bitcoin. As such the value of most projects is denominated in terms of Bitcoin on the markets. Bitcoin is simply the most liquid and easy to utilize cryptocurrency in current times, so you’ll generally end up realizing profits at some point in Bitcoin.
The analysis here generally applies to projects with perceived long-term value. There are many new altcoins that are launched that have short lived profit opportunities. It’s a more risky and time sensitive endeavour, but to be transparent some people really do well with these opportunities, whether through manipulation, or pure speculation. Profit is profit, and while we won’t be focusing on these opportunities they exist and we can’t write a complete guide while ignoring them.
Here’s our list of 10 things to start your analysis process for crowd sales’s:
The bottom line here is read, and research. You won’t find the best information from the project’s marketing, or from singular forum comments. You have to take the time to do your research, dig in and make decisions from an informed base. The following list is a guide to what you might start with when doing your own due diligence on a potential opportunity.
1. Do they a have codebase?
Basically every project, including Bitcoin at this point uses http://github.com. It’s important for projects to be transparent with their progress, and even if you aren’t a coder, looking at the commits, issues, and relative accomplishments can give you an idea of their current state. If you need, consult someone, or ask somewhere, for basic review of the code. If a project posts their code, and shows progress, especially beyond just forking another code base, that’s a huge plus.
2. Do they have previous experience?
It’s always good to see that the team has had previous successes. It may not be directly related to the current project, but good work ethic and previous accomplishments show the individual holds themselves to high standards, and is probably not going to just drop the project. You can generally find information about the team by googling their name + linkedin. Many projects list an impressive list of advisors, and attempt to stake their reputation on their success. Advisors are not really as involved as it appears. Generally advisors will jump on a call, or answer email for some small compensation, but don’t actually develop on the project, or make core decisions. Keep in mind that Satoshi Nakamoto was a pseudonym, and look where Bitcoin went. Sometimes creators prefer to remain anonymous, but after the many bad experiences participants have faced from following anonymous developers it places more emphasis on the other questions.
3. Is there a market for this?
A common joke in this industry is, does it need to be decentralized? Well it rings true. As we know there’s many startups, applications and existing technology that fulfill needs in the market. If in fact the idea has competitive advantage over existing solutions, then it has a much wider audience, as it becomes more apparent over time. Many of the benefits listed by projects are, decentralization, privacy, security, autonomy, and less exposure to legal risk. Now you’ll often see these listed in the marketing materials, but you have to ask yourself, would I, or would people, really want more privacy with social media, for instance. If you can’t see the competitive advantage that the project provides over existing solutions in the centralized space, then the project may be creating a market where it doesn’t exist. More specifically, creating a product that is interesting, but people don’t really have a desire to use because that need is already fulfilled by existing technology.
4. Is the projects plan to capture their market clear and focused?
Assuming you can establish a viable market for the project, how clear and focused is their plan to achieve market demand. Generally simplification can be a great benefit, because a straightforward path to fulfilling the needs of their prospective users should be relatively obvious. It really should be the projects job to define who actually is going to use it. You might have to define this yourself based on the needs of the market they fulfill, and if their strategy makes sense to achieve this then we can assume we’re at a good starting point. Many times a projects information will be covered with complexity, and confusing jargon, but there isn’t a clear definition of why they will get users. That may mean they either aren’t even sure if a market exists or, a fail in the clarity of marketing. Note that many great projects have lacking marketing because they’re consumed with development so it’s ok to work through this mental experiment yourself.
5. Do they have an existing community and social media following?
It’s difficult to judge community sometimes, because projects often offer rewards for following, retweeting and being involved. The most important community would be an active group on Github, of talented individuals, so you can start there by looking at contributors to issues, and commits. Slack and Telegram are also great places to gauge active members of the community and also see the quality of discussion. Ideally there’s an active and relevant discussion. Twitter followers can be another good indication, although many follow because of incentives, but a project with a large number of followers may have more supporters. One other piece is that the project should be actively updating the community through their blog or other channels. While it’s important they have a big community it’s also important that they are utilizing their resources to update regularly with quality content.
6. Do they have a beta preview?
It’s not often, but having a beta preview is a great assurance. Whether it’s a video going through the working product, or a downloadable beta client, if you can actually try out an early version of the product, that’s a huge plus. What more can I say, seeing is believing, and if all you have are flashy images, and marketing quotes, and no idea of the actual product in action, what it looks like, if it works, and if it seems to be on course to deliver their promise, than you’re somewhat in the dark in terms of having validation of their ability to produce.
7. Do they have a projected launch date?
It’s important for the project to clearly lay out a road map, and a project launch date. While this may not come to pass, as developers can take more time, having a timeline to hold the project accountable to, gives the opportunity to gauge their commitment. Without a clear projection of milestones it’s difficult to establish accountability and decide how long you’re willing to wait for the live version.
8. Will you receive access to your coins within 3 months of the ICO?
3 months is an arbitrary number, but it’s good to have the coins relatively soon after the ICO. This means you can have full ownership and it also opens up trading opportunities, even if the project is not finished. In some cases you may have no choice but to wait, and that’s a calculated risk to take, but this is a really important part of being able to gauge your participation, and exit early if needed.
9. Is there a cap on the tokens or asset?
It’s important that you know exactly how many tokens will exist. Some project choose to reserve the right to create more as they please. That creates an awkward scenario where you trust that their inflation will not impact the market. It’s generally better to have a cap on token or inflation from the outset, so the supply is fixed so that the market can establish demand, without the looming fear of downward pressure from further issued tokens.
10. Do they have a fair allocation of funds?
Many projects have a planned budget for the allocation of coins or tokens. It’s good to evaluate this allocation, and make sure a majority of funds will end up in participants hands. In some cases the project may choose to hold a large portion, so in either case it is important that they clearly communicate what they will use it for, and why it’s beneficial to the crowdsale.
A general rule you might follow is if three red flags, or unresolvable issues exist then it’s time to get skeptical. You can adjust the number of red flags to your personal risk tolerance.
*Note: while we think this is a great starting point for analysis, it is not everything worth consider. This is not a guarantee on how to succeed with every ICO, rather advice on how to start thinking more critically. The execution is up to you, but we hope by empowering users to research they can come to better conclusions on their own. *