3 Red Flags to Watch Out for When Considering an ICO Investment
When it comes to making financial investments in cryptocurrencies, you have various choices. Initial coin offerings (ICOs) are a trendy option right now.
Because there are so many ICO options, it can be challenging to determine which ones are worth the extra money and time. Therefore, this post will describe three warning signs that an ICO might not be a sound investment.
What does ICO stand for?
Let’s start with a definition of ICO. An ICO is when a new cryptocurrency is produced and sold to early investors. This is similar to how a company might offer stock to investors in an IPO.
ICOs have been increasingly popular over the last year as they offer startups a means to raise money without going through the traditional venture capital process. Instead, all the money raised in an ICO is used for project financing and development.
However, there have been several high-profile scams related to ICOs. So, it is vital to be informed of the potential hazards before investing.
When investigating an ICO, a few essential red flags may signal the investment is not worth pursuing. Here are three red flags to watch out for when considering an ICO investment:
1. An unknown or inexperienced team
The single most critical stage in researching an ICO is to learn about the team behind a blockchain project. The team’s composition is one of the essential factors in determining whether or not it will be successful, regardless of how appealing the premise of the business and the target market appear to be.
When it comes to ICOs, the absence of any named full-time developers on the project team is sometimes a warning sign. Also, if none of the leadership team members have any prior experience or expertise in the particular venture, it’s a reason to be cautious.
Platforms like Twitter and LinkedIn can be helpful when investigating a team and confirming the members’ level of experience. For example, suppose team members claim to have had previous affiliations with colleges or companies. In that case, it is essential to verify these assertions using reliable third-party sources (for example, the newspaper published by the university or the company’s website).
ICOs will frequently credit their advisors on their websites. In addition to learning about the project team, it’s a good idea to find out if these advisors are sincere before entrusting your money to them. Therefore, you can see the sincerity in the structure of their process to publicize the NFT.
2. Lack of a strong token use case
Tokens are digital assets. They are not an inherent and intrinsic element of a blockchain like most cryptocurrencies. But you can use them to buy and sell digital artworks (non-fungible tokens) or even speculate on the price of coffee (utility tokens).
You can use utility tokens to buy and sell digital artworks (via commodity tokens). So, your ICO needs a solid token use case.
A token’s lack of a well-defined use case is also a red flag. A use case depicts how someone uses a method or technology to achieve a goal. If there is no clear use case for the token after the ICO, you may lose your money.
With a solid use case, tokens used for advertising on a company’s platform may hold value after the ICO. But when a company sells a token to use on its platform, the token’s value after an ICO is less likely.
3. Absence of a clear strategy
The typical practice for ICO companies is to lay out their funding and development objectives on a timeline that investors can easily view.
In some cases, though, the developing team does not have a long-term plan for the project. As a result, they are likely to be motivated simply by short-term financial gain. But, again, this can be deduced from the lack of a clearly outlined roadmap.
Another common practice is to set aside a portion of the new cryptocurrency for the development team before making it available to the general public. This is known as “premining.”
A project that lacks a clear roadmap, combined with the presence of a sizeable “premine” for the development team, should raise a red flag that the project team should not be trusted with your money.
So, how can you determine if a development team has a clear strategy? One way is by joining the project’s media channels.
The general public is typically invited to join dedicated Slack or Telegram channels associated with ICO initiatives. Also, potential investors can obtain a feel of how the project’s development is progressing by receiving periodic updates published on various channels.
It is still possible for scammers to fabricate a timeline out of thin air or deliver phony updates using chat apps. But investors who have carefully investigated a project and its team will likely be able to sense if something is “off” about the project.
ICOs can be an exciting way to invest in the world of crypto, but remember that crypto tends to be a volatile and high-risk investment. So, it’s important to conduct careful research and diligence to look for potential red flags.
By looking at the project team, the token use case, and the project’s long-term strategy, you can narrow down a list of ICOs to those most likely to succeed and provide good returns on your investment.
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