It is quite obvious that investing in ICOs involves high risk, which can be explained by the fact that initial token offerings are usually carried out by financial and tech start-ups whose business is just at the stage of attractive ideas, promises and token marketing.

Start-ups at the idea stage do not really need to attract large amounts of capital. Despite this, beginner investors continue buying tokens of similar companies and lose their funds as a result, thus enriching more experienced traders.

You should keep in mind that «trader» and «investor» are two different concepts. Traders and investors use different methods of making money. Please note that this article is designed specifically for investors.

After all, the trader does not care about the way a token might behave in the long run. Upon the first small price increase after a token is introduced to the token exchange, the trader will close their position. If the entry and exit conditions are satisfactory, it doesn’t really matter whether the project is a scam or not.

I consider the purchase of a token as an investment; I select the best offers from among a huge number of different options (some of them you can see on ICOGO). Therefore, I usually skip those ICOs where there is no product except for a White Paper, because such projects are especially susceptible to scams and pumps (short-term artificial price increase followed by an even sharper decrease, so called dump).

This system of investment portfolio selection helps me save my time and allows me to focus on the most promising assets.

In order to search for and evaluate tokens, I recommend the following scale:

80–100 — token with a high potential.
61–79 — token’s potential is above average.
40–60 — token’s potential is below average.
0–39 — token with a low potential.

Below are the evaluation criteria:

Operating, scalable business: 0–40 points.
MVP: 0–30 points.
Team: 0–10 points.
Token: 0–20 points.
Concept: 0–20 points.
Popularity rating: 0–10 points.
Maximum: 100 points

1. Operating, scalable business

I mean companies that already have a product, established business processes, profits, an open legal entity, an established team, as well as reputation and a market share. A company conducts ICO in order to introduce its token into an existing business operation and receive investments for its development. At the moment, there are few of such companies out there, but very soon they will eclipse other proposals. ICO in this respect will become more like an IPO. You should evaluate a business in its entirety, including its needs for financing and its own cryptocurrency.

2. Minimum Viable Product

MVP, beta or prototype — any of these names would be fine. In order to determine the number of points, you can analyze the correspondence between MVP and the project concept. A good MVP should prove some of the solutions outlined in the concept.

3. Team

You should evaluate the participants’ experience and reputation, as well as their joint experience and relationships with advisors. Analysis should be carried out taking into account the complexity of a concept itself. In other words, the more complex the task the more experienced the team should be (if a company promises to compete with Alibaba, its leader should be as good as Jack Ma). The team is often considered to be the most important factor. The human component does play a role; the founders may have different interests and values, which is also influenced by money. Generally speaking, people are just human beings, and a lot of failures happen because of the human component. However, when dealing with people you don’t know, it is impossible to predict whether it will work or not based just on public information. Therefore, no matter how great a team is, the maximum score for this criterion is 10 points. However, if the score is equal or close to zero, you should completely refrain from buying such a coin.

4. Token

Blockchain technology led to the creation of a transparent and flexible asset which we should carefully study. During the initial offering of coins, it is impossible to calculate liquidity, but you can predict it by means of evaluating the following indicators:

• Token economic model: Inflationary, Stagnant or Deflationary. In terms of growth, deflationary model would certainly be the most interesting one. Bitcoin is a good example. The emission of this coin is strictly limited, while its release to the market occurs in limited portions, which explains the rapid growth of this cryptocurrency. Some developers use additional deflation mechanisms. For example, Wagerr not only limits token emission, but also buys out issued tokens using profits received on the platform and then burns them.

• Sale procedure. In most cases, those companies are preferable that release coins to the market in small portions throughout the entire product development process: 1 year or longer (a scheme similar to EOS does not apply to these). First, it allows the team to prove the product’s benefits and make investors happy with the progress in terms of the road map. In addition, it is much easier to maintain the required trading volume at the token exchange. You should also pay attention to bonuses. If they are too big, it can negatively affect the investment. It is even better when there are no bonuses at all, which means that fewer traders will participate in the ICO.

• Token package. In other words, how a token will be applied in the ecosystem. The more it is needed the higher the demand will be. If the package could be combined with the deflationary model, we can say that we deal with a good proposal (in terms of the token economics).

• What percentage of the tokens the issuer keeps for itself? In my opinion, 20–40% is a good indicator. In such cases, the founders do have an incentive to develop and maintain high liquidity of their asset.

• Your interests must coincide with those of other crowdsale participants. In other words, they should also be interested in the long-term possession of the chosen token. I would not recommend anyone to participate in an ICO where traders comprise most part of all the participants. Such traders would sell the token after it is introduced to the token exchange and literally «drop» the price.

5. The concept

All the information about how the project will develop after receiving investment should be checked and mutually exclusive statements should be searched for. Business may just not take off if such things are present. The concept is kind of a skeleton on which all the company’s elements are superimposed. If the skeleton is not strong and flexible enough or if it contains some errors, it will have a detrimental effect on the company’s further development. In this regard, the concept is similar to the constitution of a state.

The following elements should be analyzed:

Road map
White Paper
Market
The following question should be answered: will all these things be relevant by the time the product is released?

6. Popularity rating

It is based on activity on social media, messengers, forums and mass media. Some projects have low activity during the development and preparation for the ICO; therefore, you should make this evaluation shortly before your participation in the distribution. If the activity level is low, it means that even an asset that is good in terms of all the other criteria may not be liquid.

How to interpret data received?

Firstly, under no circumstances should you treat this or any other system as a template. For example, if a project has the highest score based on all the indicators, but the token’s economics scored 0, it doesn’t mean that it has 80 points and its growth potential is high. Instead, it means that it has very serious problems. For me, this 0 is like -100, so I will just ignore such a token. You should treat other similar mutual exclusions in the same manner.

In addition, there are some other important evaluation criteria, such as auditing the token distribution contract code (another code audit would not hurt either). Analyzing someone else’s code and looking for bugs in it is a non-trivial task even for those who have the necessary knowledge. Therefore, good founders must order an audit. If not, you should always keep in mind that you risk losing everything because of an accidental or intentional error contained in a smart contract. Such a risk exists even after an audit, but to a lesser extent.

Conclusion

The proposed evaluation system will evolve and adapt to rapidly changing trends in the crypto industry. Indicators obtained as a result of the analysis will help assess potential risks and better understand a project’s economics. To invest or not? It’s up to you.

Join our Discord server about crypto investment and blockchain education!

This article was posted on my forum: https://icogo.biz/threads/6-criteria-for-ico-assessment-to-be-used-in-selecting-%C2%ABreactive%C2%BB-coins.18/