My first ICO investment

Disclaimer: This article is not investment advice nor does it endorse initial coin offerings as a sound investment vehicle. Every person should consider their personal circumstances and seek investment advice from a professional. Initial Coin Offerings are high risk investments and the correct due diligence should be done before investing any hard earned money into them

In the last few months I have discovered a keen interest in Initial Coin Offerings or ICO.  The sheer amount of money that has been generated and the exciting startups in the blockchain space has made the whole area very attractive. I have wanted to invest in Startups for over a year now but found that the traditional investing methods have a great deal of complexity and also requires large sums to be invested. The attractive part about an ICO is the simplicity of it and that it opens the startup investing space to people with just small amounts of capital to invest. A few weeks ago I decided to make a first attempt at investing in an ICO.  This article will explain my exact investment process and the results thereof.

I used a website called www.coinschedule.com to get a list of projects worth investing in. This website has platinum and gold ratings which is not an indication of how good the opportunity is but rather the fact that they paid to be marketed and helped by Coinschedule. The ICO which caught my eye was Monkey Capital which was platinum listed on Coinschedules. Monkey Capital describes itself as follows: A venture capital group and a family office combine forces to create a decentralized hedge fund that will invest in SpaceX contracts, digital assets and hostile takeovers, generating profits by engaging in creative destruction.

The following table shows the criteria that was used to evaluate the ICO. These are my own opinions on how due diligence should be conducted and is not necessarily best practice even though much of it is derived from criteria used by angel investors.
Criteria How to assess
Owner
  1. Startup experience of Owner. Look at Linkedin to see if they have started up other companies.
  2. Integrity of owner. Look at endorsements and reviews on linkedin.
  3. Passion of owner. Look at videos, blogs and articles that the owner has published.
  4. Domain Expertise. This is how experienced they are in the industry that their offering is based on.
  5. Operating skills. Have the founders held COO or CEO positions before?
  6. Leadership ability. Check if the founders have managed teams at different levels in an organisation.
  7. Commitment to the venture. The owner must use his own money for initial capital.
  8. Long term vision. The vision must be clear and focused and easily understandable.
  9. Pragmatism and realism. Beware of statements that seek to exaggerate the opportunity.
  10. Education. The owners must have completed a degree from an accredited institute, the vast majority of successful people are educated.
Product
  1. Size of the opportunity. How big is the market for the product or service?
  2. Potential for revenue within 5 years. Financial plan showing income and expenses for 5 years.
  3. Strength of competition. Are there any large established players in the market already?
  4. Clear definition of the need for the product. The product must make sense and there must be a market for it.
  5. Barriers to entry. Are there any legislative or regulatory barriers for this product?
  6. Source code ownership. The source code must not be owned by a third party.
  7. Sales and marketing channels. Is there a plan to reach and attract customers?
  8. Is the product or idea potentially disruptive to the industry?Disruptive ideas are the ones that are more successful.
Token
  1. Stage of business. What investment round is the business?. Try not to invest in the first investment round but second or third.
  2. Size of investment round. Can you afford the price that the tokens are being sold at?
  3. Location. Some countries or locations are very favorable towards the product or service and some are not.
  4. Type of industry. It should be an industry that you understand.
  5. Look at the companys past financial information to date and projections five years going forward.
  6. Check that costs are not almost equal to revenue because even a slight mishap could ruin the company.
  7. Sales and marketing channels. Is there a plan to reach and attract customers?
  8. The token should be listed on an exchange so that it can be traded after the ICO.
  9. Where is the value of the token derived? It must be backed by an asset, distribute dividends or the company must use profit to buy back the tokens.
Documents and communication
  1. A whitepaper with very detailed and technical explanations of the product or value that the company is bringing to the market.
  2. A functional website with dates of the ICO’s countdown and also a place to register.
  3. A short video pitch describing the opportunity.
  4. A forum like slack or any other that allows potential investors to ask questions and stay abreast of updates.
  5. A document that describes just the token and provides the initial pricing, the exchange it will be listed on.
  6. A financial plan that shows the current balance sheet, the budget and also the financial plan for the next five years.
I analysed monkey capital according to the above points and found that it scored very favorably. The most impressive was the founders of the company. They all had strong startup experience and knew how to create sophisticated investments. Furthermore, the idea of creating a hedge fund linked to Cryptocurrencies was a new and disruptive idea. Hedge funds are normally restricted to accredited investors and this idea was opening up the benefits of hedge funds to everybody. The founders had already created value in the token by using part of the equity in their own companies to provide capital. The other trend setting idea was that purchasing MNY or the Monkey token allowed claiming dividends from all tokens issued by Monkey in the future. This allowed the creation of infinite value as Monkey would keep generating dividends from tokens for years to come.

Once I had completed my analysis I had to buy tokens on the Waves Exchange. The ICO was offering COEVAL tokens pre-ICO and Monkey tokens during the ICO. On the waves platform it is necessary to have at least 0.003 waves before trading can take place. I had bitcoin in my waves wallet so I used that to buy waves on the waves decentralized exchange called DEX. It is worthwhile showing more detail on how the exchange works. The following screenshot is that of the Waves DEX.


The first thing to do is to look at the order books, this shows the list of buy and sell orders that were recently done on the exchange. The image below shows the sell list because we want to know what price sellers are asking for. The prices are in Bitcoin in this instance .
As can be seen in the image, the lowest ask price is 0.00109299. If I decide to buy at that price then I can enter the amounts into the order entry screen as follows:
Once the buy button is pressed then the order is executed. I had a wave token in my wallet and could now buy Monkey tokens. I typed in Monkey on the Decentralised exchange and I was able to find it and trade. I bought 10 000 Monkey tokens and though that might seem quite a bit, it cost me about 10 USD so it was not expensive. Once I had bought my tokens then it appeared under my assets in the Waves wallet:


It was my fervent wish that the price of monkey tokens would double in about a week. That was not to be though. When I went in to check pricing the next day I could not find the token on the Waves exchange. I went to the Monkey website and found that the site was no longer in operation. I was now very curious and I went to the twitter account of the owner and found out that the entire ICO had degenerated into chaos.  The ICO had been stopped because the value of the tokens had just fallen while the volume had risen. The theory put forward by the owner was that the Waves exchange had used his token to try and increase the price of the Waves token. They tried to do this by buying large quantities of the COEval token to push the Waves token higher and then selling it on the exchange pushing the prices down. The other theory was that the founders of the Monkey Capital hedge fund bought large quantities of the COEval token to push the price up and then just dumped them to make some quick money. The Monkey and Coeval tokens are now worthless and all the people that invested have lost money.  I am going to spare you any ranting from my part and will move on to what I learnt from this experience.

  1. Initial Coin Offerings are very risky so only use money that you can afford to lose.
  2. There is an 80% chance that the company running the ICO will fail
  3. An investor must research the owner or founders very thoroughly. Understand their background and careers. Look at videos and articles that they have done. Trust your instincts and if you don’t like something about them then don’t invest.
  4. You must understand the value of what this company is offering. It is best that you understand the domain they are in and stay away from complex products that are difficult to comprehend.
  5. If the website or whitepapers have spelling or grammatical errors then immediately reject the ICO.
  6. Ask questions about the ICO on the communication channels that are offered. If you don’t get a response then reject the ICO.
  7. An investor must be absolutely ruthless about the criteria used to evaluate offerings, there must be no compromise, it is your hard earned money

My conclusion is that an ICO does offer significant value to the person that is disciplined and does the proper due diligence. I ignored the warning signs like poor spelling in the whitepaper and the fact that the Owner had only partially completed studies twice. Fortunately, it was a very small amount but I am glad that it happened because now I can truly understand how badly things can go wrong with an ICO. If my first investment had been successful I may have been tempted to push larger sums into the next ICO which could have resulted in painful losses.  I have a better understanding of how the ICO process and exchanges work and feel more confident about success in my next ICO investment.

My first ICO investment

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