The future of finance is crowdfunding. This means that investments are no longer available to just a few. Furthermore, startups don’t have to depend on or commit to all the required conditions of one venture capital investment.
This has resulted in multiple platforms like Kickstarter to help entrepreneurs turn their projects into reality. But in recent months, with the rise of cryptocurrencies, things are rapidly changing.
When it comes to the blockchain, in particular, crowdfunding has become extremely popular in the form of ICOs (Initial Coin Offering). This approach is basically exchanging cryptocurrencies like Bitcoin for tokens.
ICOs are now so popular that several are launched every week. As a result, this can make it difficult to clearly identify which ones are good and which ones are bad.
So what should you look for before parting with your crypto coins?
The standard is to go through the background of the founders to see if they have the skills needed to deliver results. If they have a successful track record, a background in crypto, or have made a name for themselves in similar areas, it will be a safe investment opportunity.
But that’s not enough as you also have to look at the company’s goals. Are they realistic? If not, that should be a sign to take a step back.
You also have to read through the whitepaper to see if all the claims in there add up. If it’s just a bunch of buzzwords thrown in together, you’re probably going to get ripped off.
The race to invest and access bonuses can fool investors
As investors are afraid of missing out on a great opportunity to invest in the next Airbnb or Uber, ICOs can sometimes sell out within minutes. As a result, investors might not have the time to do due diligence before parting with their cryptocurrencies.
Another driving force behind this phenomenon is the promise of bonuses. Bonuses are usually structured around the total amount of the investment, but sometimes investors may submit their transaction to receive as much as a 90% bonus.
This contributes to increased uncertainty as investors will rush to get the best bonus which is usually capped within minutes. In this scenario, cumulative amount or short-period bonuses should be avoided along with bonuses that offer more than 20%.
As Vitalik Buterin, co-founder of Ethereum and co-founder of Bitcoin Magazine, has put it: “If an ICO does volume bonuses (“buy at least $50000 of coins, get 20% more”) then they don’t understand the first thing about the egalitarian spirit of crypto (or at least, the egalitarian spirit that I believe crypto should have). Skip them.”
That being said, when ICO bonuses on offer far exceed 20%, it should immediately be red flagged. On the other hand, a lack of bonuses doesn’t mean that the sale will be wrapped up quickly. Rather, it means that everyone will get in at the same rate.
Undisclosed hard cap can also be a dangerous proposition as it’s a highly attractive target for hackers. A great example of this is the Decentralized Autonomous Organization (DAO) which raised over $150 million, but was hacked shortly after and lost 3.6 million either.
In most cases, huge bonuses offered at token presale are usually covered by crowdsale contributors, which gives the first a big privilege over the latter. A great example of hidden bonuses and how they can affect ICO project’s reputation is the Cobinhood case. Some investors who bought Cobinhood’s “COB” token during presale got a 100% bonus, i.e. 2 tokens for the price of 1. According to the Financial Times, those contributors were then “permitted to sell their discounted tokens on the open market, possibly at profit, before outsiders could buy them through official channels.” In addition, Cobinhood provided a 150% bonus (can you imagine that?) to its strategic partner Ian Balina who claims to be “Cryptocurrency Investor, Entrepreneur and Author”.
After the information about those hidden bounties was leaked online, Cobinhood’s CEO apologized to investors admitting own mistake and saying that “the arrangement was unfair for participants who joined the ICO through the official channel”.
Although Cobinhood’s ICO continued, COBs were traded on the EtherDelta exchange below their ICO price.
The DMarket project has taken many expert recommendations into consideration before its first ICO. In fact, the technology company is focused on avoiding any possible manipulations in the future by pre-sale investors (wholesale investors who invested more than $50,000 at once) and other platform partners.
Furthermore, there aren’t any public or hidden bonuses as the founders don’t believe in treating pre-sale and crowd-sale investors differently. This approach is also supported by leading investment managers who share this belief of equality and transparency.
While this space may seem like the wild west at the moment, things are changing with legitimate businesses taking the ICO route. But before you invest in an ICO, you have to do your homework.
What’s more, while ridiculous bonus offers might be quite tempting, it should definitely be considered as a cause for concern.