How to check ICO whitepaper: a guide for potential investors
Initial Coin Offerings (ICOs) are hot now, with many blockchain-cryptocurrency projects launching them every month. If you are a potential investor, you need to analyze which ICO you should invest in, and which one you should stay away from. ICOs are unregulated, hence as an investor, you should study the project carefully before investing, and the whitepaper of the project is an important source of information. An investor new to the crypto-world typically finds a whitepaper confusing, hence, here I explain how to check ICO whitepaper. Follow these steps:
Check the credentials of the ICO team:
The section about the team is typically at the end of the whitepaper, however, it’s the most important one.
A good team can make the best out of an average idea, hence first check whether the ICO team is credible. While the whitepaper may provide some information, you also need to separately look into social platforms like LinkedIn. Ideally, the team should have impressive expertise in the blockchain technology and the industry, and they should have implemented successful blockchain projects before, preferably in the same industry.
On the other hand, if you find no or scanty information about the project team, don’t invest in the project!
Check the quality of the ICO whitepaper writing:
The project team will use the whitepaper as their main vehicle to convey information about their project to the prospective investors. It should at least be professionally written. Spelling and grammatical errors in the whitepaper, or an unprofessional presentation of the content indicates that the project team may be lacking the professionalism necessary. After all, when you want to raise millions of dollars from the market, you are expected to proof-read your main marketing document.
On the contrary, a professionally written ICO whitepaper with correct spelling and grammar isn’t sufficient for you to invest in the project. You need much more than that in the whitepaper. Read on.
Validate the ICO product idea in the whitepaper:
There are many ICOs that don’t have any clear product or service to offer, rather it could be a Ponzi scheme. When you study the whitepaper, focus on the following questions:
- Is there a specific business problem the project is addressing? Or, is there a new market opportunity the project caters to?
- How big is the business problem or market opportunity? The bigger it is, the better.
- Who are the current players in the market, and is the ICO project team offering anything different that will make a tangible difference to the customers?
- Is there any other blockchain-based competitor addressing the same business problem or market opportunity? If there is, what is the ICO project team offering that stands out?
- Is the proposed product or service specifically addressing the business problem or market opportunity, or is the whitepaper too vague in this aspect?
- If the project team has used charts and statistics to describe the current business problem or a new market opportunity, are the numbers there credible? Is the source of the statistics genuine?
If the whitepaper demonstrates a good team and a sound business idea, the project could be the right candidate for you to invest. However, you need to analyze more, hence, read on.
Study the ICO technology aspects of the whitepaper:
The whitepaper shouldn’t just use technical jargons, rather it should explain the technical solution clearly. Remember that if the project team can’t explain the solution simply to a layman, then either the solution is too complex or the team is not clear about it themselves.
The blockchain is still a new technology, and may innovation ideas are great on paper but haven’t been tried in reality. If you find too many first-of-a-kind (FOAK) technologies in the solution, then the project is highly risky.
Also, if a project team already has a working prototype, even if in Alpha stage, then you can have better confidence in the project. In absence of that, if the whitepaper provides sufficient information for you to review the open-source code, then also you know that they have done some actual work. Please check the development roadmap and analyze its’ viability.
Only a whitepaper with complex technology components described with a lot of jargons indicates the actual execution of the project could be far rockier than the glossy whitepaper tells you.
Analyze the ICO tokenization aspects:
It’s may be possible for a project team to develop a solution to a business problem, and create a product or service addressing a new market opportunity without using blockchain and without creating a crypto token. The blockchain technology may be powerful, however, a product or service may require just a web app with a set of targeted functionality, and not a decentralized blockchain and crypto token. Remember that ICOs are a craze now, and many companies are trying to raise a lucrative sum from the market without having to follow stringent regulatory requirements. Hence, analyze the following when you read the whitepaper:
- Why does the project need blockchain technology at all?
- Even if there is justification for using blockchain, what is the justification for the crypto token?
- Is the planned token a cryptocurrency coin, or just a utility token with which the users can access the specific product or service offered by the project?
- How will the token appreciate, does the business model provide an avenue for the appreciation?
How is the ICO token sale structured?
The whitepaper should indicate the following clearly:
- What are the various stage of the token sale, i.e. private, pre-sale, crowdsale etc?
- How is the token distribution for the project team, private sale, and crowdsale?
- Is the ‘soft cap’ requirement reasonable, and is it tied to the development roadmap?
You need to analyze whether the amount of token reserved for the project team is too high. Also, check if there’s enough liquidity provided in the plan, and whether the lockdown period, if any, is too long.
Finally, check the token sale mechanism, how you can participate if you have indeed decided to invest in the project, and whether there are country-specific restrictions.
Look at the legal aspects when you check ICO whitepapers:
Check whether the whitepaper describes the legal preparedness of the project team in view of the jurisdiction they will operate in. Does the country have ‘Know Your Customer’ (KYC) and ‘Anti-Money Laundering’ (AML) requirements, and if yes, has the project team planned to meet these?
If the project is issuing a crypto token and claiming it to be ‘SEC compliant’ then be careful. The US Securities and Exchanges Commission (SEC) has not explicitly approved any ICO token!
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. Do your own research!