ICO investing 101 | Part 3: How to Analyze the Whitepaper?
- Read Part 1: Some ICO facts you should know
- Read Part 2: Where to begin with an ICO analysis?
In this article, we’ll put the whitepaper (the single most important document an ICO provides for potential investors) under the microscope and clarify all the things you need to understand when reading it.
Let’s revise what we’ve already learned!
In our previous blog, we’ve introduced many points that are also included in the whitepaper:
- Firstly, we need to understand the point of the project — what it’s actually trying to do.
- We also need to understand the concept of the problem and the solution. Most of the ICOs usually fail at this point — they’re often trying to solve a nonexistent problem. ‘Blockchain’ has become a buzzword, and some people are jumping the bandwagon without there being any actual need for it.
- Then, we have the team — who’s behind the project and who will run it
- We need to research the current as well as the potential competition.
- We also need to learn about the project’s partners and advisors.
After we’ve ticked all the boxes on the list above, we’ll usually deal with the ‘tokenomics’ segment of the whitepaper. It describes the economics of the project which is really important as it gives you more information on how your money will be used.
Hard Cap & Soft Cap
Let’s presume that an ICO is raising funds and has reached its first limit — this limit is called the soft cap, and it represents the minimum amount that the project is hoping to raise. If they succeed, that’s great news. If the project fails to reach its soft cap, it means that the ICO has failed. In this case, the team usually reimburses the investors.
However, if the ICO continues to raise funds and surpasses its soft cap, it may reach its hard cap. This, too, is a great sign because the hard cap represents the maximum amount that the ICO is aiming to raise. It means the team did a good job in terms of their market research as well as that of their own economics — they know how much money they need now and in the future to continue operating.
There is a possibility that there’s no hard cap. This is called an open cap and should be a major red flag for an investor because such surplus of funds can be misused by the team members!
Token Allocation
The token allocation tells us what shares of the project’s tokens are allocated to the public (ICO), to the team, to the private investors, partners, and so on. The part to pay attention to here is what share of tokens is received by the team itself.
A healthy ratio is between 10% and 20%, perhaps up to 25%. For anything above that, an alarm should go off: why do they need so much money in their pockets at this point?
Don’t forget: ICOs can receive a lot of money — 10, 20 million USD, or even more — which can be easily misused by individuals.
Vesting Period
The concept of a vesting period can apply either to the investors or to the team members, both of which are important to understand.
Let’s explain in an example. Let’s say you receive a certain amount of tokens as an investor. During the first year, your tokens will be in the lock-up period, meaning you cannot trade or transfer them from your wallet. In the second year, half of your tokens will be released, so that you can trade them in the market, and the other half you’ll be able to trade in the third year.
Such an approach is important especially when it comes to the team members. Why? If they don’t have the vesting period in place, this means that they can sell their tokens immediately, which poses a threat of leaving the project early on.
Avoid the three deadly sins!
To recap, there are three huge red flags for an investor — all or any of them, and you need to avoid them:
- There is no hard cap, or there is an open cap.
- There is a substantial token allocation to the team members.
- There is no vesting period for those tokens.
In such cases, there’s a high chance that your money will vanish!
Bonuses and Conversion Rate
Last, but not least important, there are some other points you need to keep in mind when making a decision to invest:
- You need to check the starting date of the ICO.
- You need to know how the bonuses are structured.
- Pay attention to the time differences. This is where some new investors miss out on many opportunities such as bonuses.
So what’s a bonus? Here is an example of the bonus structure: 10% in the first week, 5% in the second, and 3% in the third. This can be done in many ways — it can also depend on the amount you invested.
The price and conversion rate can be expressed in different ways, for instance: for 1 ETH you get X tokens, or 1 token is 0,0001 USD.
The roadmap
Lastly, take a look at the roadmap. This piece of information really matters since it shows what the project has achieved so far and also what are their plans for the future.
It is also good to check whether the team has been consistent with their deadlines and achievements of their previous goals because this shows if they’ll also be consistent in the future.
The purpose of this article is to provide our readers with relevant information to the best of our knowledge so that our readers can avoid the basic mistakes with investing in ICOs, or at least to save you from some unnecessary headaches. We hope we helped you take the first step towards investing in crypto! If you like our content, make sure to follow us on the channels below!
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DISCLAIMER: This article is for informational and discussion purposes only and does not constitute a marketing message, an investment survey, an investment recommendation, or investment advice. The article was prepared exclusively for a better understanding of market dynamics.
