Let me start by sharing that I am positioned on both sides of the market: In the last six months I participated in implementing nearly a dozen ICO projects (both as part of ICOBox and as a private advisor), and as a token holder I contributed to over 40 projects (both as a private actor and as a consultant to institutional token buyers).
Often times the success of an ICO boils down to a simple question. Why buy tokens?
There are typically two large groups of token-buyers.
The first one plans to use tokes for products and services they enable. The expertise that you need to evaluate a project from this point of view is virtually identical to the expertise you apply when buying an interesting gadget or another product on Kickstarter.
The second plans to benefit from the rising token value. Here you need to remember that 21.5 of tokens dropped in price after being issued. It is important to have a deep grasp of what the token offers, rather than blindly believe the team's claims.
So what are some of the key due diligence tactics that have worked for me in the past?
The most important parameter is an overlap between the project's token holders and project users. The greater the overlap the higher the shortage of tokens. This is the key component, and it always affects first the user base and its potential expansion, then the shortage and, lastly and indirectly, the token price.
The second parameter is the project’s contribution to the blockchain technology, market development, and infrastructure. If the project is in fact significant and facilitates market development, brings new users to the ecosystem, and showcases new uses of blockchain technology it has every chance of winning.
The third and final parameter is economic expediency as a synergy of economic advantages of token buying and usage. Clearly, in addition to creating a shortage a project should meaningfully impact the entire industry and its token has to be economically beneficial.
Besides these rather high level insights there are more granular tactics you could employ.
Let's start with the project audit. This means looking at three components of the project – people, business and token.
The project's team, advisors – famous people helping the team with their advice based on their vast experience, and project's backers – people who are supporting the project, often also the earliest token buyers, usually through the closed presale – these are the people you should look at.
Considering that an average contribution in our industry is relatively high (around $3.5K per backer), it follows that there is no need to engage a particularly large number of people. So by bringing to the fold a thousand buyers just by word of mouth one can ensure a $30 million haul. This is why in every project the team is in charge of the quality, advisors handle the project promotion, and backers who buy tokens at presale and announce it on the web guarantee its attractiveness to prospective buyers. When each of these team members plays their role well the likelihood of the tokens selling out is very high.
On to business. It is hardly worth it to try to evaluate a project in terms of your potential use of the product. But you should definitely assess the overlap between the product user community and the blockchain community. You must be clear about the potential interest the project will generate.
The token. You have to understand how the project's token works. For instance, if it burns up in the course of the system's operations this results in its depletion, i.e. shortage. Alternatively, the token price may go up, which improves its benefit and also causes shortage. Any detail which improves the token's worth is important.
A great many product ICOs employ the model in which the token is used as a legal tender within the service, or an access key, or a discount system, and one can observe over time (and this is part of the very basic mechanics of the project) that the token's worth is creeping up. This expands the project's horizons, widens its user community, and creates the shortage we are aiming for.