What if you only had $1000 and you want to invest it in a cryptocurrency or token?
If the token’s/coin's value grows 200x, you will get $199,000 net income right? -But not too fast! As I have discussed in one of my my posts in the Warren Buffett series, Warren has a small circle, his strike zone. He only ‘swings’ at investments in that zone, no matter how much other people encourage him to make a move. He follows his own principles and does his own research before making his move.
Circle of competence
Warren read a book where there’s a picture of a baseball batter and the strike zone is broken into multiple squares. The batter would essentially aim at a particular region depending on how the ball was pitched. While this technique is good for baseball, Warren says that in investing, he’s in a no-called-strike business which is the best business one can be in.
With cryptocurrencies, we can also implement a ‘strike zone’ and a ‘no-strike zone’. We must set parameters or guidelines in order to know which ICOs to invest in. Each ICO should go through your own screening process and I want to share with you some of the benchmarks I have established over time. As before, this is not financial advice and I won’t tell you anything specific to do with your money. Each investor must do their homework.
A Strict Approach
It is really necessary to implement a ‘strict approach’ with regard to ICOs. Hundreds of ICOs come out every week and it makes sense to make a few ‘rules of thumb’ in order to make the screening process simpler. It does, in essence, define a small ‘strike zone’ and a very large ‘no strike zone’ which helps screen out scams and non-worthy ICOs. I believe that there is no sustainable ‘get-rich quick’ scheme. If you don’t want to lose all your money, do your own research and set your own parameters. You don’t necessarily have to implement the same screening process. Each one of us remains responsible for our own results.
The Pareto Principle
Applying the Pareto principle means that assuming 80% or more of the ICOs are just being hyped up and form part of the cryptocurrency bubble. Many of them are downright scams. The other 20% or less yield positive results to varying degrees. That 20% can still be sorted by removing 80% of that from your list, all of those that won’t meet all of your criteria. Still, you will end up with a handful of ICOs to choose from. Though it’s not possible to thoroughly research all the ICOs that come out everyday, here are some of the categories I use to evaluate and screen ICOs and cryptocurrency investment opportunities in general.
Minimum Viable Product
No matter how fancy their ads and websites look like, you want to first look for a minimum viable product. It must be something consumable or of lasting value. -Something that solves a problem or with enough uniqueness that merit the attention of the public. I have seen many new apps, for example that only mimic the mainstream app which performs the same functions. People don’t have enough reasons to switch from the mainstream app to the new less-known app. That way, the product won’t be profitable.
All-Star Team
They don’t necessarily have to be popular on mainstream media. What this means is the members of the team must be reachable and they must be reputable in their respective fields. You can check their backgrounds and they might even confirm that they are involved in the project on their official social media accounts. The team is the driving force behind the product, so, in effect, we are investing in the team. The company is only a bunch of papers in a folder. People with reputation and integrity are what we are looking for. No matter how good the idea is, without enough good people working on the project, it would just die.
Token Utility
The coin or token must be of real value. Utility gives value. Look at the business model and see if it’s not going to function without the token. An easy example to discuss is Steem. It fuels the blockchain where Steemit and now, many new other projects like Zappl run. It is an absolute necessity for everything to work. In contrast, If the token you buy is not an integral part of the business model, there’s a huge possibility that the token’s value will drop to zero, once the ICO is over. In other words, they just took your money to fund a project and gave useless tokens in return.
Satisfied Customers
Although testimonials can be faked and word-of-mouth may be unreliable, you can still factor those in. If a trusted friend has already researched the coin or ICO and invested in it with satisfactory results, you can count it as a single valid testimonial.
Long-term Plans
This is a huge reason the read the white paper from cover-to-cover (is there’s any cover page). Look for their map and see how they have progressed so far. Are they hitting their targets or having problems with the whole project?
The Hard Cap
Having too high of a hard cap, say $250 million means it will take too long to get your ROI. Having said that, it doesn’t automatically mean having a low hard cap of $20M alone will make it a good deal. We just have to factor this in.
Regulations
2018 turns out to be the year of regulations! Those projects which started just before the SEC hammered down new rules and regulations might be in jeopardy. Be careful of token sales (not to be confused with ICOs) where the tokens may be classified as securities, where you get paid interest. They may not be listed on many exchanges if they are classified as securities, unless SEC rules allow.
In my next posts, we will take a closer loot at each criterion and discuss a few more examples. Please stick around!