Not a day goes by when we don’t hear about a new ICO launch. No matter where you turn, you’ll likely to be faced with a new coin offering, with most promising “unbeatable returns” and “revolutionary technology”. The problem is that no every ICO is worth your time or – in extreme cases – even legitimate. Plenty of honest investors are being stung by “scam coins”, as ICOs continue to become a Wild West environment where practically anything goes. Understanding that not everyone is up to speed on what makes for a high-quality ICO, the BitStarz team has stepped in to help. We’ve pooled together our collective knowledge to reveal exactly what you should look for in a whitepaper, to ensure that the ICO you’re investing in is honest and upstanding.
Location, location, location
Those exploring the ICO market tend to be doing so for one of two reasons – they’re either on the hunt for profit, or they’re keen to invest in emerging technologies. Because this is the case, scam ICOs are clever, in the sense that they know just how to load up on the information that they know will be of interest. However, because these ICOs aren’t legitimate, they tend to leave some questionable holes within the attached whitepapers. The most obvious red flag you’ll see within any whitepaper is a lack of coin promoter location.
Recent studies have shown that approximately 32% of all ICOs omit any information related to coin promoter location or origin. As an investor, this information should be considered pivotal, because the country where an ICO is based can tell you a lot about both its legalities and future prospects. This information is also important for understanding what legal protections and rules might be afforded to you in the event that an ICO encounters delays or fraudulent activity.
Without this information, there is effectively no home ground for the coin. Any ICO whitepaper that stands as a legitimate operation will always detail information related to location, along with where the issuer and management team are located. If you can’t verify these locations, then the whitepaper should rightfully be questioned.
Looking at the coin’s purpose
When you look to invest in an IPO, you’ll be able to cast your eye over a wealth of information. US Securities Law makes it so that cash flow, income statements, and balance sheets are made available at minimum. This means you research a company’s history down to the finest detail, understanding every aspect of the business before parting with any money. ICOs are different, as they’re presenting a technology-driven commodity that might not always have an extensive history.
ICOs are often start-up products that identify a particular technology-based problem and propose the financing or sale of a technology-based “solution”. In return for financing, the issuers will “sell” coins with various security, currency, or utility features. When it comes to a company issuing an ICO, you’re not really looking at past performance to determine its quality, you’re looking at the technology proposition put forward and its potential.
The sheer technological nature of many ICOs is where other issues begin to appear. With many ICOs there appears to be a serious issue with disclosure, as it can sometimes be difficult to understand the purpose of a coin, let alone the technology behind it. Every ICO whitepaper should feature a full-unabridged description of the coin and its technological purpose, but it shouldn’t simply deliver a message that’s confusing and complex. ICOs should – to the best extent possible – present a “plain English” description of what’s being issued.
Effectively, while a certain sales approach is expected, ICOs should avoid hype as much as possible, instead sticking to what’s realistic. Any investor should be able to identify an objective basis for all statements made related to the coin. It’s also our belief that any technical parts of the whitepaper should be subject to third-party validation in the form of a technology audit. This will confirm that the solution disclosed in the whitepaper complies with mathematical principles and sound engineering.
Understanding what the token actually is
Coins can vary in everything from scale to features, but there are three main categories that any ICO will likely fall under – security, currency, and utility. What the token “is” should be made obvious. Any coin should indicate its intended use – along with its available quantity – within the whitepaper. What should also be addressed is whether or not the founders will hold coins in reserve, and how they can choose to liquidate them. Plus, it should also include information on whether there are any restrictions in place that may contravene their power to sell. Any coin promoter should also be willing to disclose the intellectual property and/or ownership of the company’s protocol. What should also be addressed are the protocol elements that have been “loaned” from somewhere else, as well as address what legal rights buyers and holders receive.
We’ve seen countless whitepapers play fast and loose with descriptions, so don’t fall into the trap of lapping up whatever’s being said just because it sounds good. Understand what it is you’re buying into, including the token’s intended use. If a whitepaper continuously skirts around telling you what the coin is for, it should represent a huge warning sign that the ICO might not be all that it proclaims.
It’s a team effort
An ICO is only ever as good as the team behind it – at least that’s the idea anyway. While a team of unknown entities can certainly successfully launch a coin – every coin has to start somewhere – experience can often be telling. Information related to the experience of the development team, along with the business experience of directors and executive officers, should be detailed in the whitepaper. The right experience will give you peace of mind with regards to the ICOs legitimacy and direction.
A cryptocurrency – no matter its form – will carry a heavy coding element, so a coder’s experience can be telling as well. Look for any coder connected to the ICO to have key engineering experience, skills, and qualification. Links to their prior work on a public code repository will also be another positive. Remember, experienced coders will be a sign that the ICO is in capable hands.
Rules, regulations, and governance
No coin – not even Bitcoin – can survive without a supporting infrastructure. Without it, it’s simply a hollow marketing ploy. All reputable whitepapers will address how the supporting infrastructure operates and how it will impact the governance of the token. This sounds like a given, but it’s actually rarely the case at times. The consensus mechanism for any cryptocurrency’s blockchain should be made clear and obvious. An overview should also be provided of how governance decisions and other decisions affecting the network will take place. For example, the implementation of software upgrades and how such will be coordinated among developers, users, and miners should be made clear in a whitepaper.
Addressing potential risks
Risk is related to any ICO – it’s an investment after all – so you’re going to need to understand that no matter how amazing an ICO looks from the outside, there are no guarantees. Honest ICOs will be understanding of risk, ideally looking at what challenges lie ahead for the coin in the whitepaper. These issues could relate to a non-functioning product and its future development, the creation of required technology, and even larger sectoral risks related to industry changes. There are countless risks associated with investing in an ICO, crucially any buyer must be made aware of a coin’s vulnerability and potential legal issues. When it comes to whitepapers honesty is certainly the best policy, as the more open it is regarding potential risks the more reputable it will likely be.
Whitepapers have become a very controversial subject in the cryptocurrency community, largely as they’re just so many out there vying for your attention. We’ve come across countless coin offerings ourselves and have rightfully pushed most to one side, but there are some serious ICOs out there that will be worth taking a look at. The key comes in understanding what makes for a conclusive whitepaper. Take note from the above and we’re sure that you’ll soon have a firm grasp on what you need to keep an eye out for in the world of whitepapers and ICOs.