While I don’t consider myself an expert on Crypotocurrency, Blockchain or investing in general, I do possess some experience collecting and analyzing data. Having reviewed dozens of whitepapers and tracked the prices of dozens of currencies and tokens over the past few months I have come to the conclusion that while most ICOs you choose will eventually be profitable if you hold long enough, most of them also fail a basic risk reward analysis for reasons that most investors don’t consider. So while most investors will show a great track record of success from ICOs that showed amazing gains, these results from simply buying low and holding until its high do not hold up quite as well when the opportunity cost is factored in. I will list reasons why the opportunity cost for most ICOs can fail the risk/reward calculation. I intend to make a compelling argument for why the best time to invest in an ICO may sometimes be after the ICO is already over.
Duration of ICO
The ICO investment period can range from one day to several months. However, since even post ICO the tokens may not be immediately tradeable, or may only be tradeable on a low volume exchange, the ICO investment period should be defined as the period from the launch of the ICO to when the tokens become tradeable on a highly liquid large volume exchange. Why is this important? Because your gains cannot be truly measured/realized until you sell your investment at market value. Hence despite achieving 10x gains, there is an opportunity cost to doing so if it takes you 4 months to do so. This is particularly important because most ICOs are priced in currencies like BTC and ETH which continue to increase in value month over month. So, in order to really measure your gains you must measure them against the gains you would have had by simply holding your ETH. If you invest BTC in an ICO when it was worth $5,000 and BTC rises to $15,000 before you can sell your ICO token, the token must also sell at 3x the price just for you to break even. If you do the math you can see why some 10x gains already look less impressive.
Liquidity Dead Period
It has become clear that exchange listings are a significant catalyst for price growth. Hence the first question that is often asked after a token sale is over is when it will be listed on exchanges. And it also follows that the best exchanges for spurring price increases are the ones with the largest trading volume. A more recent trend that is ignored is the cost and legal burden of getting listed on the best exchanges. This is an aspect that most ICO investors are shielded from and it is easy to be overly optimistic about how quickly an ICO token will land on an exchange. Suffice it to say that this process will only become more difficult and as an ICO investor, without a large volume exchange you may be stuck waiting with an illiquid asset while other assets are outperforming. This is a big factor in negating the profit gains from an ICO. If you cannot get a fair market price for your token because of a lack of trading volume there is an opportunity cost there particularly if you are looking to divest some profits and reinvest in other opportunities.
Development Dead Period
Most ICOs have a significant development dead period built in. The development dead period is the duration of time from the end of the ICO to the launch of a working platform that utilizes the ICO token. This is typically stated in the whitepaper but often glossed over. Most ICOs have development dead periods of 3 anywhere from 3 months to a year. While the token price might rise during the development dead period from marketing, exchange listings, or intermediate milestones such as a demo or alpha platform, all of this price increase is by definition speculative. Speculative price increases are simply earlier buyers selling tokens to later buyers as compared to organic price increase from users selling to other users. Now this doesn’t mean that speculative price increases are bad for investors, in fact it is the opposite. Most ICO profits come from speculative price increases and this where most ICO investors can reap those 10x rewards. However, this is also where most ICO investors can see their investment growth stagnate even when the product is good, because another project has better marketing. Holding through the dead period is often recommended as a strategy however with no functioning product or users to drive growth, the gains go to the product which can get listed on the most exchanges and announce the best partnerships while even great products can hit a price ceiling for months without a consistent stream of new developments to drive further speculation.
User Adoption Dead Period
A good amount of ICO investors are not the actual target market for the ICO product. I can give many examples of this phenomenon but with many platforms in the development stage it can be easy for investors to convince themselves they are users based on an imaginary conception of what the platform will be like and it is hard to refute this point without an actual platform with usage statistics. However, even if the group of ICO investors were actually the target user market they would be an insufficient user base to justify the valuation of most ICOs at the time of product launch. Hence what most ICO investors base their valuations on is future usage based on the use cases of the platform as described in the whitepaper. Unfortunately, despite many compelling use cases, most investors fail to factor in the amount of time it would take from product launch to actually building a user base that can utilize the ICO token in enough volume to generate value growth. This factor has not yet come into play as an opportunity cost yet because many of the ICOs that have launched so far in 2017 have platform launch dates in 2018. They have not yet had to justify their current valuations with actual usage metrics so their growth has not yet had to be driven by selling tokens to users. They can simply sell tokens to a larger and larger investor base who all anticipate that when the platforms launch in 2018 the user base will enthusiastically pay the current market price for the tokens they need to use these platforms. On this point only time will tell. I suspect 2018 will be a make or break year for many ICOs as they have to meet their self-imposed deadlines they give on their roadmaps and eventually deliver something tangible that will appeal to a larger customer base than the current ICO investment community.
How to benefit from skipping the ICO
- Invest at the end of the ICO.
-While investing early in an ICO can net you a presale bonus, investing at the end of an ICO can actually get you the best discount. Because ICOs are priced in BTC and ETH, holding BTC and ETH during the ICO while they appreciate means you can often get more ICO tokens for the same amount of BTC/ETH at the end of an ICO than if you had invested in the beginning. - Invest immediately prior to an exchange listing
-This is a strategy that is currently very commonly used and it has a good track record of success. There is very often a large price increase that comes with being listed on a large volume exchange. The difficulty in this is that exchange listings may not be announced in advance and by waiting you risk missing the boat. However, by holding your liquid assets like BTC and ETH for as long as possible you can benefit from their growth and use that larger purchasing power to get a better value for your investment. - Invest close to platform launch
This strategy is more difficult to follow because a huge amount of gains in ICOs come after exchange listings but prior to platform launch. However, with projects that have long development dead periods, this strategy can allow you to mitigate the risk of investing in a project with bad marketing or stagnant growth and allow you to always direct your funds to the highest performing asset in your portfolio. - Do your valuation, pick your price and wait for it
This is actually my favorite strategy because it allows you to invest as early or late and is not dependent on marketing or exchange listings. It also allows you to benefit from large market corrections and also at times gives you a better price than an ICO. If you use the existing market data to accurately value a project based on existing comparisons, you can determine not how much a project will be worth in the future but how much a product is actually worth now. By committing to a strict valuation/price you can simply watch the market and invest when the market value is less than or equal to your valuation. Given the volatility in ICO prices you will be surprised at how often corrections in the market can make the difference between a bad investment and a good investment. A project that is a bad investment at its current price can easily become a great investment in a day with a 20% market correction. If you are patient enough to wait and trust in the price you value a project at you can often get much better ROI on an investment than had you bought in at the ICO price and held indefinitely.