How to assess an ICO

UPCOMING ICOs
#1

Though I do have a little investment experience, I am no investment professional so don’t take this method as gospel, it is simply the method personally I use. I have been working with a simple valuation technique that I think cuts through a lot of the BS. I would appreciate any feedback if you think its flawed or could be improved. Apologies if the the following seems pretty obvious but it could be useful to people who have never looked at things this way before.

So let me create a hypothetical ICO for use as an example:

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Facebook are going to create the FaceToken. FaceToken is to be tied to the social media platform. Token holders will receive 1% of advertising revenue from the platform distributed proportionate to holdings.

Facebook are going to create 10,000,000 tokens in their ICO, Facebook (the distributor) will hold 500,000 tokens and the remaining 9,500,000 tokens will be available for issue. 1 ETH will buy you 300 tokens.
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The fist thing we need to do is ascertain what the ICO issuer is valuing their business at. This is quite simple. Get the price per token. Todays ETH price is $287.86, there are 300 tokens per ETH.

Value placed on each token = $287.86 / 300 = $0.96 (rounded for simplicity)

Next we can simply get the effective market capitalisation. This sum is essentially what the token distributor is saying the business is worth. This is done by multiplying the price set for each token by the total circulation of tokens.

Valuation of business = $0.96 * 10,000,000 = $9,600,000

Now you have to decide if you think the business is worth $9,600,000

A Good Deal

If Facebook decided to do an ICO based on the above terms I would cash in every asset I have and even borrow money to buy as many of these tokens as I possibly could, Facebook is worth actually worth $500 billion, and generates $26 billion a year in advertising revenue. If you spent $960 and bought 1,000 of these Facebook tokens you would own: 1,000 / 10,000,000 = 0.01% of the tokens.

Your share of Facebook’s annual revenue would be: 0.01% of 1% of $26 billion = $26,000

Not bad for a 1 time $960 investment to receive an income of $26,000 every year for as long as Facebook survives. That figure would grow as advertising revenues will likely grow also.

Now in reality it is highly unlikely that such a great deal will ever arise and if it did I would be looking for the catch or suspect some sort of scam but the fundamentals point to 300 tokens per ETH to be a cheap buy in for the business presented.

A Bad Deal

Dave Social Ltd. is issuing this token sale instead of Facebook. Dave has just 6 months programming experience, no business experience but has a great idea for how to make a new platform that is better than Facebook. Dave has a couple of friends who will be on his development team and plans to work on this project 3 days a week, most weeks. He has no working platform at this time but has a long list of ideas, plans and even some drawings he made in the pub.

I would not invest in this, this business is clearly not worth $9,600,000

Beware of misleading pricing, Dave Social could offer 30,000 tokens per ETH, meaning each token is costing only $0.0096 per token, this might seem quite cheap but if the total supply is increased to 1,000,000,000 tokens then the business is still being valued at $9,600,000 and you will still only own 0.01% of the total tokens if $960 were invested. So still as bad a deal as the previous example.

Summary

In reality all ICO’s will fall somewhere in between these 2 examples. You just have to value them using this method and then decide if you think the idea, team, community and product or service is worth that valuation.

I hope this is useful, if there are any questions or something is unclear then please let let me know.

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#2

I was directed to this website when i first got started into crypto, and it has some very useful info.

https://cryptohydra.com/

6 Likes
#3

That is a very helpful description of how to value an ICO. Thank you!

2 Likes
#4

That’s a pretty good check list, thanks. Have you found any low priced and unheard of coins that meet all these criteria? Might be worth throwing £10 at some of them if there are potential 50,000% gains, but then it no big deal to lose if they don’t.

#5

There is another video on another pretty good crypto related youtube channel talking about the perquisites before taking part in an ICO. Well worth a watch if you are into the ICO space now. I’ll link it below.

Anyway, while I do find market caps to be a useful way of thinking about ICOs, I think it can lead to it being quite confusing for the sheer reason that most ICO companies don’t really have a business worth their market cap. I personally feel one of the biggest factor in the ICO is how realistic their ICO. The second most important factor is the token model. There should be good upside to holding the token (as opposed to relying solely on trading value).

Heres the video:

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#6

Great introduction read to any new comers into the ICO investing, thank you for this conversation David!

1 Like
#7

Due Diligence for Cryptospace

Clif High has a checklist of red flags you should look for and avoid when considering investing in an ICO. This is his opinion and the following comes right off the front page (at the bottom) of his website https://halfpasthuman.com

Due diligence for Cryptospace

Due Diligence Clues

These linguistic clues can be used in your due diligence work before investing in any crypto offering.

  • If the language of the offering is touting a ‘technological innovation’, beware, such are fleeting the world of software, being easily replicated. Further if that is the only claim to fame then you are betting on technological development and not a sound business plan. This rarely ends well.

  • When you read that an offering is going to make smart contracts usable, or easy, or accessible, are they speaking of running an education program? Or are they touting an alleged technical leap that will be most likely both ignored, and lept over in mere months by the next technological breakthrough. If they are proffering their technological edge, be wary of their future. These edges dull quickly, especially quickly in the software world. Other words in this category would include ‘smart contract templates’, and ‘smart contract wizards’.

  • Legally enforceable smart contracts are yet more buzz words to avoid. Legal does not enter into the picture with software contracts. The software executes the contract, or it fails. Pretty binary, and not much to give to lawyers to argue about after the failure. It is simply not within the power of the legal system to force software to perform. Smart contracts by their very nature disintermediate the legal structure of humans.

  • Any ICO that has ‘storage’ within its claim to fame, as in the idea of storing anything, data, pictures, fingerprints, et al, is to be avoided. Such language indicates either they don’t have anyone with experience programming for blockchain networks, or their PR people are totally disconnected from the reality of the business. Either way, not a good situation. It costs too much to store data on the blockchain. It is inefficient by orders of magnitude over regular disk storage.

  • Another idea that keeps coming up is the ‘decentralized search engine’ as competition to Google. Avoid these, and there will be a great many of them. It is not possible to have a decentralized search engine, as by their nature, searches require centralized indexing in order to be efficient.

  • Yet another bad crypto idea is the decentralized, or blockchain enabled, advertising exchange. The idea is extremely appealing as a result of the ongoing ‘adpocalypse’, and the even more recent petty fascist actions of the advertising exchanges supporting the globalista socialist agenda. These exchanges can technically work, but they will need to be specific about how they are going to handle the auctions, the linkages to web sites, the payment gateways, the security of the payment gateways, the placement of advertising on specific platform pages (such as Youtube), and a million other business questions that don’t relate at all to the blockchain. Any ICO touting blockchain as the solution to the advertising problem, does not understand the workings of online advertising, and/or the blockchain.

  • Yet more caution words include ‘micro-payments’. Any micro-payments system that is blockchain based will also be, by its nature, incredibly computation focused, and this is as bad (expensive) on the blockchain as is storage. Not going to end well. As the popularity of a micro-payments based blockchain driven system increases, so will its costs, even more so, until, in the real world, it will cost more in processing fees, than the payment itself.

  • Popular fancy takes the blockchain into areas where it should not be going. One of these is the idea of a work exchange or job matching system. These are great ideas, but the blockchain will not be involved in delivery of resumes, or matching work seekers to employers. Why? Cost, of the processing to do the matching, and the cost of storage. IF these are being done at a computing center and the blockchain is only peripherally involved as a token between job and applicant, what purpose does the intrusion of the blockchain serve? Lacking a compelling business case for it, the blockchain, under these kind of circumstances, is merely yet another point of security vulnerability.

  • More bad words for crypto offerings include ‘community control’, or any words where the ‘community’ will be ‘voting’ on any aspect of the management of the item under offer. These are, by definition, not businesses, but are social engineering attempts. These will inevitably intrude on the business case for the offering. Collective management belongs in the dust bin of history with communism. Please note that there will be ‘collectives’ forming on and around blockchains that will become successful. Our data sets have such becoming powerful over time, however, we need to note that the data is showing that community management systems that do survive (precious few) will do so as the business case will dominate all the thinking, all the time. Again, please note that these ‘community based ICOs’ show up in our data as primary sources for ‘infighting’, and ‘internal meltdowns’ that will be affecting CryptoSpace over the next decade.

  • Associated with the ‘community control type’ of cryptocurrencies, are the dreaded ‘social doctor coins’. These ICOs will be touting the blockchain as a ‘solution’ to some form of perceived social problem. These ICOs are business disaster pigs painted with all manner of engaging social colors.

  • The final set of bad words for cryptocurrencies include ‘distributed computing’. Running distributed computing is a nightmare, even when all aspects are tightly centralized. In the past it has not proven to be cost effective on any project. Merging cryptocurrencies and distributed computing is like giving your nightmare a belly ache. No good result will come from this.

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#8

thanks for sharing DOC!

1 Like