How to Reap Profits on an ICO

You can make money on an initial coin offering (ICO), if you've done your homework. That "if" is the difference between profitability and losing money, so listen up.

Whether you're a startup founder looking to raise money, or an investor assessing an untested project, it's essential to know what it takes for an ICO to be profitable. While it may be hard to spot the next Ethereum (ETH), it's much easier to recognize the warning signs of a potential scam.

Hold, Sell, Repeat

"The value of a cryptocurrency grows only after it hits the market, However, that depends a lot on how realistic and valuable the token concept is. Once the coin hits the market, it will start gaining value depending on the demand," according to Medium. "Then, you can start trading your coins for other established cryptocurrencies like ETH or BTC (Bitcoin) or cash. This is why it is important that you invest in a token that is enabled for trading on crypto exchanges. However, you should not sell all of your tokens immediately. A good idea is to hold at least 50% of your tokens for a few months before you sell them again."

Also, know that some companies offer bonus coins for free to early investors. If you're one of those investors, find out if the coins are available and reap those rewards, too. Some firms offer investors the chance to buy coins, presale. Understand, though, that those presale coins may command a higher price. Some popular ICOs have a whitelisting period, in which you must register before the ICO period to book a slot for the ICO date.

Before any of that happens, though, you need to understand the crypto landscape, which, like many investment vehicles, can be littered with scams, and how to suss those out the dicey ones and gravitate toward the reliable ones that can result in profitability.

Due Diligence Is Key

The cryptocurrency world is full of uncertainty, and the risk swings both ways. Many investors and developers are optimistic about the potential of digital currency to disrupt the technology space. On the other hand, some investors have lost fortunes on fraudulent schemes and ill-conceived ideas. ICOs are a prime example: for every successful token launch, there are many projects that have produced nothing but hype and vaporware, which, according to Merriam-Webster, is "a computer-related product that has been widely advertised, but has not and may never become available."

Although this tenet is one of the oldest in the financial world, it bears repeating. Investors should always engage in due diligence before supporting a new company. For novice investors, it's easy to succumb to herd instinct or fear of missing out (FOMO). When it comes to ICOs, there are at least four things to consider: the white paper, the team and its partnerships, the business case, and tokenomics.

"Assessing a project based on its vision, the problems it is trying to solve and the quality of its developing team is vital in understanding whether the project has great prospects," wrote Aziz, Master the Crypto Founder. "Good projects will tend to achieve their objectives and deliverables, which will, in turn, be reflected in an appreciation of their token’s price over the long-term."

The White Paper

First, it's essential to thoroughly read and analyze the white paper of a prospective investment. This is a document that outlines the aims and strategies of that project in detail. Some projects might have stratospheric ideas but lack a practical approach for achieving those goals. Others may lack crucial details that leave you wondering whether the project is truly feasible.

A thorough white paper is not a guarantee of success, but an incomplete, hastily written, or otherwise problematic one can be a sign of trouble. Glaring issues with spelling, formatting, or grammar can also be red flags. Know, too, that if you're preparing a white paper for your own ICO, expect investors to pore over every detail.

A white paper should include a basic roadmap that lays out a set of concrete goals, with a clear and reasonable timeline for achieving them. There should also be a succinct vision statement; companies without one may lack sufficient focus to achieve real success.

The Team and Partnerships

Next, take time to research those leading the project, as well as any partners or advisors. This is one of the most important factors in launching a new startup. Experienced founders are more likely to avoid the pitfalls facing a new business, and reputable partners can be a sign of market validation.

While most companies prominently list their team and partners, it's important to verify their claims from other sources. Some projects have been known to exaggerate the qualifications of their team, or even fabricate nonexistent partnerships.

The Business Case

Research as much as you can about a new business, including the target market, regulatory environment, and any likely competitors. This is another common pitfall: many new startups struggle to stand out, especially if another company has a first-mover advantage. If a startup is trying to launch an ICO in a saturated market, there should be something that sets it apart from the competition.

It's also important to ask what service the company plans to provide and whether there is enough demand to support it. If a company does not have any competitors, that may be a sign that other businesses do not think the model is a profitable one.

Tokenomics

ICOs allow companies to fund their projects by selling tokens to access a network or service. Investors buy the tokens hoping that they will gain value after a successful network launch.

To understand a token's potential value, you need to understand how and why it will be used. If there is a clear reason for people to own and use the token, the price will likely stabilize after a successful launch. If the main use for a token is market speculation, it may be susceptible to long-term volatility.

It's also critical to know how tokens are distributed. Much like an initial public offering, a company holding an ICO should clearly state the maximum coin supply, as well as the number of tokens allocated to founders, early investors, partners, and the company itself. In some cases, there may also be lock-up agreements that prevent the tokens from being sold immediately after the ICO.

Successful offerings need to strike a balance between a fair distribution and budgeting for the future. If a small group of owners controls a large share of the supply, there is a risk to other prospective investors that the price could fall when these owners decide to sell. On the other hand, if a company does not reserve enough tokens in its treasury, it may run into trouble paying future expenses. While there is no single model for token ownership and distribution, you should look for a plan that balances long- and short-term considerations.

The Bottom Line

There are ways to profit from an ICO investment. As with any investment, it's essential that you study the ICO, its team members, the research done beforehand, such as the white paper, and its target market, regulatory environment, and any likely competitors. By taking those actions upfront, you can more easily spot suspicious projects or hone in on solid investments. Once you've invested, it's best to hold on to at least half the your coins before you sell them again.