Many initial coin offerings (ICOs) were tickets to quick riches in 2017. Take a token called Status—it was issued in June, raised about $100 million and soared 1,200% within six months. It’s easy to get excited by crypto’s surging prices. But now that the market has corrected somewhat and it’s clear that tokens both rise and fall, it’s prudent to determine whether the virtual asset you’re buying has merit and utility in the real world.
1. Who’s the team behind the coin?
Much like the venture capital world, the founding can make or break a crypto asset. When evaluating a coin’s developers, look beyond education to find out what projects they’ve built, says bitcoin investor and researcher Tuur Demeester. He likes to see that developers are “respected in the fields of cryptography, memory compression, peer-to-peer networks and large open-source projects.” The more knowledge and experience they have, the less likely they’ll be to repeat past mistakes that have plagued other crypto coins.
And try to evaluate the team’s integrity. Chris Burniske, co-author of the book “Cryptoassets”and a partner at crypto investment firm Placeholder Ventures, tells Forbes it’s important to “get to know the developers. If not in person, through podcasts, videos or talks.” Do they explain their project clearly, or do they seem evasive when answering questions? Do their motivations seem sound?
2. Read the white paper and ask what problem the coin is trying to solve
Developers typically publish a white paper that explains the software and economics behind a coin, and investors should read it with a critical eye. Cryptocurrencies’ main reason for existence is decentralization—they’re controlled by many people instead of a single, central authority. In crypto theory, that’s good because central authorities are more susceptible to incompetence and corruption. The white paper should clearly explain why the digital asset benefits from decentralization, Chris Burniske and Jack Tatar write in “Cryptoassets.”