Cryptocurrency and ICOs: a guide

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Cryptocurrency – especially bitcoin – has been a hot topic for some time now.

At the time of writing, the price of one bitcoin (BTC) is $4365.96 with a market cap of $72,171,392,631. This time last year it was trading at $583 with a market cap of $9,228,619,466.

In August 2015, the total market cap for all cryptocurrencies was $4,492,434,387. Exactly a year later, it was $11,560,008,512.

Today there are 865 different cryptocurrencies listed on CoinMarketCap.com, with a total market capitalisation of $160,726,893,022.

The numbers are impressive.

Today, the majority of the market is made up from a few major coins: bitcoin, ethereum, ripple and litecoin.

But recently, the number of cryptocurrencies available have been on the rise. And this is due to an increasingly popular way to raise funds for cryptocurrency projects and blockchain-based startups: ICOs – which we’re going to explain here.

(If you have some questions about how bitcoin actually works, this Washington Post guide is quite handy).

What is an ICO?

ICOs (Initial Coin Offerings) have become a popular way to fund cryptocurrency projects. An ICO occurs when a new cryptocurrency project sells part of its cryptocurrency tokens to early adopters and enthusiasts in exchange for money today.

ICOs provide a way for cryptocurrency project creators to raise money for their operations. Most ICOs raise money in bitcoin or other cryptocurrencies.

This is used to fund the early stages of development and other operational expenses the founders have. Investors in these token sales are betting that the value of the token will rise to above the ICO price, once the token is developed and starts gaining traction from users.

As a model, it’s attractive; it allows the founders to fund their project without having to give away equity and it also creates early liquidity for their network.

And it’s a big deal. The money raised for blockchain-based startups via these token sales has surpassed early stage venture capital funding for the year. To date, in 2017, there have been 92 ICOs, raising $1.25 billion collectively.

The rise of these ICO’s have not been met without uncertainty and speculation. The U.S. Securities and Exchange Commission (SEC) announced in July that the sale of new digital coins may need to be regulated by the country’s securities laws. The regulatory environment is uncertain, and the hype around cryptocurrency assets continues to rise. Investing in ICO’s is not for the faint of heart and it can be quite difficult to sort out the winning opportunities from the projects that are out-right scams.

Separating the wheat from the chaff

It may be hard to navigate the waters of the ever-increasing amount of coins lined up for ICOs, but there are a few key ways to determine if a token is worth your time. When analysing new coin offerings it is important to begin by looking at a few elements:

Team

  • There should be biographies of the founders and team members on the project’s landing/marketing page; if there isn’t this is a huge red flag.

  • Find them on LinkedIn, look at their past job history

  • Have they been in crypto very long? or are they brand new to this and looking to cash in on the ICO game?

Marketing

  • Is their website professional? It looks bad for a team that’s about to raise millions of dollars to have a low-grade Wordpress site

  • Is there a Slack channel? Are they active in forums and talking about the tech?

  • Are they active on social media and engaging future users?

The token

  • How is the white paper? Is it barebones and a few pages, or is there substance behind it?

  • How big is the market of users for the coin? Is this something you would pay to use?

  • Is the value of the token necessary and not being offered by an already existing medium?

How much they are raising

  • It is common to see rounds of $5 - $10 million; anything above this raises eyebrows
  • What is the funding going towards? If they only need 25% of the proposed funding $10m for marketing efforts ($2.5m), then it really does not make sense for them to raise $100m. What would they do with all that extra unnecessary money? Uncapped raises like this only make sense for ICOs going towards investment vehicles or funds

If you’d like a more in-depth listing of KPIs when analysing new ICOs, take a look at this due diligence framework from Earlybird VC’s Alexander Lange. The evaluation framework was crowdsourced from an interdisciplinary group of crypto enthusiasts, developers, entrepreneurs, researchers and investors.

Cryptocurrency is relatively new territory for everyone, making it an interesting space to watch and interact with. We’re looking forward to seeing how it evolves.