If you want to buy stocks, bonds, or other securities through an IPO, the required financial statements are usually considered to be a great resource for conducting the proper due diligence. What about ICOs, though?
Unlike an IPO, where companies must provide financial statements and register with the SEC, entrepreneurs looking to sell digital tokens to the public are bound by no such requirements at this time. So, where can you look to begin your research?
Why the Whitepaper Matters
The ICO project’s whitepaper may very well be your primary source of information. This document should contain key details on the management team, the token sale, and the underlying technology. It should answer the sort of reasonable questions the typical investor might have regarding the token and the ICO project itself.
It is estimated that more than 80 percent of ICOs are scams, according to market research conducted by ICO advisory firm Satis Group. Investors can save themselves a lot of time by seeking out red flags that are telltale warning signs not to take part in digital token sales.
So, what exactly should you look for when you read a project’s whitepaper? Here are a few key factors to investigate:
Factor Number One:
Verify The Management Team
One of the fastest ways you can sort out ICOs that are scams is by researching the management team. By taking the pictures provided for different team members and throwing them into Google Image Search, you can easily identify illegitimate digital token sales.
Many of the photos used for the team members of ICOs are downloaded from image banks like Shutterstock, so by conducting the appropriate search, you can single out profiles that are fake.
Takeaway: If the project fudges the facts on the management team, steer clear!
Factor Number Two: Another Management Team Consideration
Once you verify that the pictures of the management team are legit, it is time to look at their accomplishments and credentials. As far as is possible, it makes sense to do research on all the principal members of the team, asking questions such as:
- Does this team have the experience required in the industry targeted by the ICO?
- Is the team’s employment history verifiable?
- Are there team members who are well-known in the industry as thought leaders?
- Is this a team to whom you would lend your money?
Takeaway: If the credentials of the team give you pause, steer clear!
Factor Number Three: Scrutinize The Plan and Roadmap
Many companies holding ICOs are looking to raise money so they can fund the development of an innovative new technology or ecosystem. The whitepaper should lay out these plans clearly. If the document does not explain exactly what the team behind the ICO plans to create and how the team will create it, that is a red flag.
Further, if the company holding the digital token sale does not make a compelling case for why the project requires blockchain technology, that is certainly a cause for concern, according to TechCrunch. Blockchain technology has generated a lot of hype, so there is a significant incentive for companies to leverage it when developing new projects.
Takeaway: If the whitepaper clearly explains the project and makes a compelling case for why it is needed and how it will be developed, that is a good sign for investors.
Factor Number Four: Look For Plagiarism
When reviewing whitepapers, be on the lookout for plagiarism. The whitepapers issued for digital token sales frequently leverage substantial content that is not unique, according to Business Insider.
Fortunately, you can harness tools like Titan AI, an application that can examine whitepapers for plagiarism.
“There should be less than 1% plagiarism in a white paper,” Ryan Dennis, head of content for ICO Alert, a company that vets digital token sales, told Business Insider.
Takeaway: Plagiarism is a big no-no, period.
Factor Number Five: Seek Out Typos
Reasonably speaking, you would think that anyone looking to solicit investors for money would distribute professional materials without typos and grammatical errors. However, if you read more than a few whitepapers distributed for ICOs, you likely already know that is not always the case.
Thoroughly scrutinize the whitepaper that goes along with the offering. Should the document contain typos, run-on sentences, sentence fragments, or any other grammatical errors, this is a major sign that the team is either not hiring professionals to review their materials or is simply not paying attention to details. Would it make sense to invest your money in such a venture?
Takeaway: Professionalism matters. If the whitepaper contains major grammatical errors or typos, think seriously before investing!
The Bottom Line
Risk is inherent to investment. If you are thinking about putting your money into an ICO, keep in mind that conducting thorough due diligence is crucial. It can mean the difference between meeting your investment objectives and experiencing notable losses.
A project’s whitepaper is a good place to start your research. Keeping in mind the above five factors will help you vet whitepapers prior to any investment on your part.
Want more information about ICO investment?
- For more information about current and upcoming ICOs, check out Bitcoin Market Journal’s upcoming initial coin offerings page, which is updated continuously to give you the most current information available on a variety of ICOs.
- To stay up-to-date on the latest developments in the digital currency space, subscribe to the Bitcoin Market Journal newsletter.
- Got a question or comment about ICO investment? Contact us today!