“I’m an enterprise investor and my function is currently being made redundant by the blockchain. And I’m having fun,” Tim Draper, blockchain investor
“Bitcoin is an experiment and like all experiments, it can fail. So don’t invest what you can’t afford to lose”, Mike Hearn, Bitcoin developer
‘Put 1% of your net worth in #Bitcoin and forget about it for 10 years.’’
— Wences Casares, board member of PayPal
Almost all blockchain companies and projects are based on one or more tokens (or coins). The token for the Bitcoin project is obviously Bitcoin. There are currently 16 million of them, and each has a negotiable value. Bitcoin itself isn’t a company but a software that is managed by a kind of association. The second most valuable cryptocurrency is Ether. They are tokens of the company Ethereum.
Ether has two uses: on the one hand you can use and pay for the services of Ethereum, on the other hand you can use it as a currency — just like Bitcoin. If you buy tokens on a public exchange, you acquire a share in the company. But other than with stocks, you haven’t bought any ownership and therefore usually also no say in the company decisions. Basically, all you’re buying is a virtual (token) value that is only useful if the price goes up and you can sell it at a profit later on.
There are currently more than 1,500 cryptocurrencies that are traded on public exchanges. Every month, 10 to 20 new currencies emerge. Behind almost every currency — therefore every token — is a company that has a special goal and whose success is supposed to be displayed through the value of its token. Almost like with a stock company.
This introduction is helpful for understanding that investing in a crypto company and speculating about the token value is the same thing. The only difference is in how long you’re planning on owning the token.
As we can see throughout the entire book, crypto companies will establish themselves in many industries, and will also push through in some of them. Just like Uber is taking business away from the traditional taxi services, a blockchain-based marketing company will threaten Google. A blockchain bank will compete with PayPal and Western Union. Social media companies based on blockchain will put pressure on Facebook, Twitter and YouTube. Likewise, we will see services assert themselves that aren’t accepted without blockchain, such as digital medical records. We’ll be able to buy or sell properties with a click on a button, ownership will be listed in the blockchain and replace the notary.
Crypto companies can already be found in almost every industry. They all start very small, with a handful of employees and very basic business models. They then look for capital in the form of crowdfunding — in the crypto space, this is called a token sale (or initial coin offering). For instance, there are at least nine companies in the online marketing industry that have sold tokens and are being traded on the crypto exchanges. However, it’s likely only one or two of them will establish themselves in the market. They all advertise with the fact that you only need one percent of the market power of Google. But most of them won’t even reach that one percent. Nonetheless, investors know: if they invest in ten crypto companies, then they can make huge profits even if only one of them becomes successful. After all, Google is worth 100 times the investors’ capital from 15 years ago.
Every person can take part in token sales without any large administrative or financial effort. You can make an investment within minutes. But what are you actually investing in, and when can you do it? The latter is easier to answer. There are three points in time when you can invest. When a company still consists of the founders and their dog, they will first look for venture capital from investors. At this point, your investment will buy you a share of the company. This type of financing is usually only available to professional investors.
The first opportunity for small investors is the initial coin offering (ICO), also called token sale. This often starts with a pre-ICO where investors can buy tokens at a discount if they buy a certain amount (e.g. from US$ 10,000). The total sum of the capital raised this way is a good indicator for whether the token sale will be successful. That’s because if you can’t convince larger investors, then you probably don’t have a good business model.
Next up is the start of the ICO. For a limited duration of roughly 30–60 days, you can now buy tokens. To do so, you transfer the desired sum from a private Bitcoin, Ether, Litecoin or Waves address. After the ICO is over, the corresponding amount of new tokens will be transferred to the sender address.
So far, this process was completely anonymous, all you needed to invest was a cryptocurrency address. This is likely going to change due to ongoing government regulation, and you will probably have to give your identity when buying tokens in the future. After the buyers have received their tokens, they can trade them on public crypto exchanges. Depending on the plans of the company that is issuing the tokens, this either happens straight away or after a waiting period of a few months. Companies that are currently performing an ICO want to generate as much capital as possible within a short period of time. That’s why they’re trying to make you believe that you have to invest straight away. They limit the duration of the sale and even offer discounts at the start.
People who invest at this stage believe that the price of the token will immediately increase after it is issued.
That is very risky. Immediately after a new token can be traded on the exchanges, the price usually increases significantly for around half a day and then drops to well below the initial purchase price. That’s why it’s recommended that beginners buy at a later stage.
Finally, you can obviously invest in a cryptocurrency at any point after the token sale. You then simply buy tokens on the free market.
Basis for Decision-Making
How do you now decide which company or which token is a good investment? Venture capital investor Tim Draper has a simple rule: “Is it a social transformation? Are people behind the project risking their lives in order to achieve this social change? You have to be able to say: This is a movement and I want to be part of this movement.”
That’s good advice, but how do you find out whether this is the case? You have to do your homework. Every company has a whitepaper that contains the most important things about the token and the business model. The paper usually consists of economic and technical chapters. If you’re not familiar with the crypto business yet, you can use the following points:
- If the paper is shorter than 8 pages, the project probably doesn’t have a lot of substance.
- If there is no technical part or if there is no explanation for how the token is issued, then watch out.
- The same applies if the company is keeping more than 30% of the tokens for itself. This can later bring down the price.
- If the team has more marketing people than technicians or if the members don’t have profiles on LinkedIn or Facebook and have left clear traces on the internet, this is bad.
- If the company wants to sell property over the blockchain but nobody in the core team has experience in the property sector, then the company probably doesn’t have a clue how the business works.
- Not everything that can be run on blockchain is a good fit for it.
- If the company advertises with the fact that the CEO is a former beauty queen, as is the case with Paragon, then you might not want to invest in them.
- If you cannot figure out what the product or the service does, then you should stay away.
- Most projects need a lot of users to work. If the paper doesn’t specify how the company plans to generate users, then this is questionable.
- If there is no clear timeline that looks realistic, then the company doesn’t have a plan. There have been quite a few projects that have shown that they didn’t have a plan for after the ICO.
- Sometimes, the truth is only a Google search away. The name of the ICO together with the word “scam” might show a lot of entries.
Every Beginning is Difficult
The authors have invested small sums in ICOs as well. After all, you can only understand how things work through trial and error. Some investments have brought fivefold returns in a very short time. Other coins are now only worth 10% of the invested sum. These days, we are not investing in ICOs anymore because the market is oversaturated, many companies only spread hot air and want to make a quick profit.
In a high-risk market, ICOs are the riskiest investments of all. However, you can simply wait and only invest once the company or currency has been in the market for a while. The transition from investment to speculation is seamless.