This is the first instalment of a series in which I interview Crypto Investors. I try to understand how they approach the art of trading and investing in this new and volatile asset class.

James McDowall was a PGA Golf Professional and Semi-Professional Boxer. He spent a lot of time competing at a high level in sports and teaching golfers how to improve their techniques and lower their scores. It was during these days when he would get talking to clients about their jobs and passions that he got hooked into the world of finance and investments. He started to work closely with a partner at St. James’s Place — a UK FTSE 100 Wealth Management Group that specialises in delivering face-to-face wealth management advice to individuals, trustees and businesses — and he soon realised that there were ways to become financially free, and that they did not involve selling time for money like most people are accustomed to. Soon after, he found himself engrossed, studying the financial markets and cryptocurrencies, how they work and how they are traded.

Fast-forward a couple years and now he is a successful crypto trader and investor, manager of several investor communities and advisor to some groundbreaking companies and projects around the world.

But how did he do it? The first question that I asked him was…

What kind of research do you do before investing in a cryptocurrency?

“This is not easy money, you have to be smart, and you have to understand what you are investing in and why. On top of this, timing matters”

Before investing in any crypto project James advises that you should have a deep understanding of what you are investing in. “Firstly get your head around Blockchain technology and why it is important and what the implications are. When you get your lightbulb moment you won’t be able to resist learning more and more about the space.”

Then, after realising there are good investment opportunities, start with what exactly a particular project is trying to achieve, who is in the team? Look into their roadmap. Is this something that is unique and that solves a real problem and is going to take off? It’s very much like analysing a traditional start-up company but often without the cash flow projections. It’s all about community, usage and adoption and those that will be successful are the ones who will scale to large numbers of users because of a strong team and real use case, not just a fancy idea. Most of these cryptocurrencies have a finite supply so with usage and adoption comes increase in price. “If everyone wants something and there is a finite amount (of tokens or coins that allow a holder to take part in a particular network or platform) then the price will rise. It’s economics 101 — supply and demand. ” James explained.

Then we look at who’s steering the ship? Who is the CEO or who are the founders? Who are the advisors? Do they have credentials in the crypto space or in the technology used by the project? Are there a lot of advisors on the website with no real credentials, experience or knowledge needed in order to help the project going forward?

“Who is involved? Are they already successful entrepreneurs with track records? Who are the other team members? Are they qualified for the roles they cover? What kind of experience do they have? What have they worked on in the past? What technologies did they work on?

Crypto projects are tech startups, some in the idea stage, some in the development stage, some in the implementation and adoption stages, so it’s also really important to understand what stage the project is at and how much of a gamble your investment actually might be.”

James is constantly looking for signals to increase his confidence that a smart and diverse team will execute and scale a groundbreaking vision that a strong leader or leaders have laid out.

“I saw it get to the stage where people were literally seeing a cool logo, watching a fancy promo video and glancing at the first couple of paragraphs of a half decent white-paper, backed up by someone anonymous on twitter saying what they are looking at is “going to the moon” and start throwing money at it, it was insane…

It really got out of hand towards the end of last year and a lot of people who didn’t quite understand what they were getting themselves into, struggled to control their emotions, are underwater and will probably ride the wrong investment all the way down to zero, or sell at a heavy loss. I regularly told my communities to never invest money that they could not afford to lose, to do in depth technical and fundamental analysis before allocating capital and to always diversify. I also ran trading courses teaching people to spot key price levels, uptrends and bear markets, and how to always have appropriate position sizing and risk management strategies in place. It’s not a game.

It’s also useful to investigate if there are any institutional or big private investors who funded the team you’re looking at. Are there VCs or big funds who are renowned to have invested in other successful companies or projects early on who are now leading the space?

Other questions James asks himself are:

“Is there a need for this on the blockchain?

“Is there really a need for a native token or are they just trying to create a useless currency?” “Could this problem be solved better without implementing a blockchain technology backed digital asset?”

What other things do you take into account before pulling the trigger?

James told me that the next step is to understand how the particular digital asset in question comes up against the Howey Test. Is it a Security or a Utility Token? James told me that there are many legal and regulatory implications based on how the asset can / will be classified, and with regulation usually following innovation, things are still unclear.

James also recommends knowing where a project’s team or company is based, and to have an understanding of what the regulatory landscape looks like in that particular jurisdiction:

“You kind of have to figure out what regulators are thinking; look into the future, and try to predict which projects are going to remain compliant and which might get into trouble. You don’t want to have money tied up in a company or project that’s going to get heavily fined or shut down by regulators.” Therefore James avoids investments which could easily be deemed securities but do not seem to be following current regulatory guidelines.

So how do you see the future of security tokens?

Given that regulations will get clearer on the matter, and standards will be set, they are incredibly exciting. According to James, we will be able to tokenise all sort of assets, from collectibles like art and classic cars, to commodities such as Gold and Diamonds, to real estate, and of course companies’ stocks and shares. “It will dramatically increase the liquidity of these kind of assets and will broaden the number of assets which everyone can invest in, opening up the free market to anyone with an internet connection, globally.” One company that James follows very closely and was immediately attracted to is Polymath who are playing a big part in the tokenising of securities. “You can put the whole of Wall Street on the Blockchain and these guys have an amazing team and are doing really exciting things” He added.

There are even implications such as if and when decentralised exchanges become mainstream, the role of brokers could become almost obsolete. James sees this as a good thing because too often third parties’ incentives are not aligned with their customers’. “Lots of things in the financial services industry will become fairer, faster, cheaper and easier, and it’s really exciting” A market with less cost and more aligned incentives should benefit everyone, right?

Here are more details on the benefits of tokenising securities — and why it seems this is the next big trend to play out.

What data do you look for when investigating a project?

James taught me that looking at things such the previous price action, current and future potential market capitalisations, and distribution data of a coin or token is essential.

“If for example the team holds the vast majority of the tokens then it’s not a great example of the value of the network being fairly distributed and therefore decentralised, which is what Blockchain and Crypto are all about”.

Token distribution is key to understanding how stable the coin is, how manipulable or illiquid and how subject to ‘pump & dump’ some of these assets might be. If the team holds a minority of of the tokens and the rest is distributed widely amongst a strong community, then it’s more likely to be a fair and sustainable economy. If the majority is concentrated amongst a few actors then it’s a sign that incentives might not be aligned.

“You also don’t want to be investing in any assets at the top of a mania. Find ones you like and think will do well, be patient and wait for a good entry. These things are extremely volatile”

Which leads nicely onto my final question:

What is your best advice for other crypto investors?

“Try not to follow the masses, in fact, often do the opposite. You have to think for yourself, which is what most people who lose money in the financial markets struggle to do”.

James went on to explain that in his eyes most people are very emotional — they are easily influenced by the news and by what other people think and say. Generally, it’s always a good idea to make your own points of view and opinions and stick with them, no-one can predict the future and so you shouldn’t pass the responsibility and start trusting the opinions of people that you don’t know online and in chat groups — “they probably either want to create a positive or negative sentiment to suit their own agenda, have already been influenced by the sentiment of the masses, or are influenced by their own disadvantageous cognitive biases.” James often refers to Warren Buffet’s famous 2004 quote “be fearful when others are greedy and greedy only when others are fearful”. He added: “All financial markets are cyclical and are controlled by human psychology and emotions; some play out quicker, some play out slower, but they are essentially all the same — fear and greed — and you don’t want to get caught up on the wrong side. Financial markets are a zero-sum game where for someone to win, someone has to lose, so you’d better be smart”

If we want to get more of your advice or to reach out to you, where do we find you?

James is active on all the main social networks. He is available to share insights and to discuss everything crypto. You can find him on LinkedIn, Twitter, Facebook and Instagram. He also has a Facebook discussion group.

Thanks for the chat James, and we’ll be watching you closely!