Suggested musical pairing: Handsome Boy Modeling School — The Truth

Boring disclaimer: This is not investment advice and I am not a financial advisor, nor do I play one on the Internet. Please seek appropriate financial advice and do not invest more than you can afford to lose.

Setting the scene

Initial Coin Offerings raised a mindblowing net $5.6B USD last year (an average raise of $12.7M) with a huge proportion of this not from institutional investors and traditional investment firms, but from amateur investors and crypto-speculators.

Source: Fabric Ventures

In effect, in an ICO, investors are taking the place of angel investors in traditional investment hierarchy — super-early stage, high risk, high return. However, past that, the analogy breaks down a little. Unlike angels, who often aim to invest in companies where they can make a tangible non-economic investment alongside their capital (eg, mentoring entrepreneurs and leveraging their existing network), token holders are generally not expected (or able) to make any kind of input besides economic into a venture.

As such, even though token investors are engaging in early stage and speculative investment, the ‘control’ they exert over their investment is more akin to purchasing a publicly traded stock. In other words, they have just one variable of control for their investments — where they put their money.

This unusual combination of passive yet highly speculative investment has funded a plethora of worthy projects…alongside a significant number of their unworthy counterparts (with recent numbers suggesting 81% of recent ICOs were ‘scams’).

One popular strategy thrown frequently around the crypto-investment scene is the idea of shotgun investing — namely, spraying your investments over a wide area with little thought in the hope that one of them returns exponential profit. Be under no illusion, this is not a strategy, this is bulk purchasing lottery tickets.

Risk diversification is one essential part of speculative investment, and even the best positioned product can collapse due to unknown extraneous variables, but investing in concepts you do not know or understand is a recipe for disaster.

As such, it is vital for any crypto-investor to understand how to analyze an ICO or token, and the entire ecosystem powering the underlying business.

nb: The following is focused on identifying the important things to know and understand before considering contributing to a legitimate token sale. Your first priority should always be to make sure that the team and the project are legitimate and you are not simply being scammed of your hard earned tokens.

1) Do they understand business?

You are not ‘pre-purchasing a product’, whether a token has utility or is a security — fundamentally, you are funding a business.

Even if a project has a incredible idea, brilliant technology and a fantastic team…if they are unable to operate as a business, they will fail.

Look for tangible sense of business acumen within the team. In general, it’s preferable if at least one of the founders has experience running a business (startup or larger) before. It’s not inherently problematic if a team has little business experience, but in this case it’s preferable that at least some of their advisors can offer them guidance in this area.

Crypto is an extremely tech heavy industry, but ultimately it’s still just that — an industry. The skills required to operate a company in the crypto space extend far beyond technical prowess, and unfortunately the venn intersect between technical ability and business skill is often slim.

Bonus points if the team have worked on a business together before — this demonstrates that they are not only familiar with working together, but thrive together.

2) Do you understand the market?

If we cut back to traditional investment models, you’ll remember that angel investors typically invest in areas where they have an asymmetric information advantage in comparison to the ‘general investor’.

Your investments should be no different. If you do not understand the market you are funding a company within, you should not be funding the company.

This isn’t to say that you need to have a ten years experience in the advertising industry to fund a project aiming to revolutionize online advertising — but you should at minimum understand some fundamentals about the market.

The specifics here depend greatly on what tokens you’re looking at, but a good few things to think about from the start are:

Regulation — How much regulatory oversight exists in the market? While this isn’t inherently a problem, regulation takes time and most regulatory bodies are generally wary of change.

Competitors — Are other companies already doing this? If so, how much progression have they made? If not, why not? Be sure to consider traditional as well as crypto enterprises.

History — How long has this industry existed, and what has shaped the current market? You don’t need to spend months reading through the entire history of economics to fund a remittance token, but you should probably know how long the market has been around.

If you’re investing into a project, then take care to heed the immortal business acumen of the Fresh Prince himself

3) What is the project timeline?

In an ideal world, every team pitching a token sale would already have a working MVP [Minimum Viable Product] to demonstrate their concept to potential investors.

Unfortunately, we do not live in an ideal world, and it may not be possible for the developers to put together an MVP for a complex concept without raising some initial funds to demonstrate investment interest.

However, you should always know when you will be able to see the first viable minimum product being built by a team, and you should have expectations for how long development will take.

Sometimes, this may be weeks, and sometimes this may be many months away. Neither of these necessarily signify an underlying problem but any project should have a clear defined timeline with various milestone goals and their expected achievement date (for more than just technical development, preferably).

As a final note on timelines, they do not have to be rigid, but the team should nonetheless be held accountable to them. Missing a milestone once is life, missing a milestone twice is unfortunate, but missing every milestone multiple times is nothing but good ol’ fashioned negligence.

4) Does it need blockchain?

Blockchain is an incredible, revolutionary, technology — it is not a one-size-fits-all protocol suited for every need and requirement. Any development proposal involving blockchain should need blockchain technology, not just being used as a way to raise funding while bypassing regulation.

Not only is this likely to land you in hot water with the SEC (or whatever your local flavor of securities authority) as would almost certainly be considered a security, but is also pretty strong evidence suggesting that the team have no interest in building using the blockchain and their token sale is exactly what the SEC is trying to target — an unlicensed and unregulated security sale.

While this is not an exclusive list by any means, try to look for some kind of leverage of the unique offerings of blockchain technology such as decentralization, trustlessness, autonomy, etc.

“Yeah but that’s the beauty of this token sale — it’s really just an app that doesn’t even *need* the blockchain to work!” — Some dude on /r/ethtrader, probably

5) Do the underlying token economics work?

So the you think the project is legitimate and understand the problem it’s trying to solve — but how are you going to make a return?

An often overlooked aspect of crypto investing is the token economics behind the project itself. Think about the following questions:

How are your tokens used in the ecosystem?

Are time moves on, what will happen to the global token supply? Are tokens being burned during use? Staked? etc

How is the project going to generate a return for token holders, and what form will that return take?

Specifically with respect to token distribution, do any of the team/advisors/etc allocated tokens in the presale have an vesting period before they can access their tokens?

6) Do they value their community?

Token sales are community funded ventures, and as such, it’s absolutely essential for a team to value the community which funds them. This doesn’t mean that the company has to bend to your every whim or answer your questions instantly, but it does mean that the team has a duty to keep investors appraised of progression and major events with the potential to impact the company.

Community management can take different forms, so it’s hard to pin down any specific areas essential to look out for besides solid communication from the company to the token holders. If you don’t feel valued, don’t invest value.

You should look out for at least some of the following:

Active community mailing list keeping the community appraised of both good and bad news impacting the project

Online community forums, whether they take the form of a subreddit, dedicated forums or any other form of solution allowing for transparent community-to-team and community-to-community discussions

Dedicated community manager, or community management team. Anyone who raises a reasonable amount of money should have someone dedicated to this job

Quality and honest responses to the community. As mentioned previously, you can’t expect a team to answer all your questions instantly, but if the community has concerns, they need to be answered

Community response (see what I did there?) should be proactive and should keep investors appraised of important information long before everything is ablaze

7) Do you understand the solution?

You don’t need a PhD in Computer Science to invest in a tech company, but you should be damn sure that you understand how the company is going to solve the problem they’re targeting.

There is an abundance of free accessible resources and communities who can help explain the more intricate details of a project and you should be sure to leverage this to the full extent possible.

While many projects provide ample resource detailing how they intend to solve a problem (and stay the hell away from those who do not), there is inherent bias in this information and a tendency for material to be buzzword-heavy and content-light.

Seek out experts in your network or community who can explain how the solution will work, the limitations and future potential for the project.

A good general rule of thumb, if you can’t explain the solution to someone else, you shouldn’t be investing in it.

8) Do you know how your money will be spent?

There are very few projects which give full financial transparency (although, that would be fantastic — for example proposed DAICO model) but it’s a reasonable expectation as an investor to know and understand where your money will be spent.

The more transparent a team is on this, the better. At absolute minimum you should have clear knowledge and understanding of how the underlying asset you’re investing in (the tokens) are being distributed between the team, advisors, the company, investors (early and public), etc.

Don’t expect to be an expert in running a company if you haven’t done it before — it’s unlikely even if you have that you’ll be able to accurately price the various areas of expertise work required to bring together a complex project. This being said, there are many, many people who can help you understand whether estimates are realistic — search out the online communities or ask colleagues or friends in the specific industry.

Another important question to ask, are there any potential significant capital drains that the team haven’t budgeted for? If they’re entering a regulation heavy market, and have absolutely no mention of spending money on legal consultation or advice, that’s probably a red flag.

If a company cannot justify why they are raising $10,000,000 they should not be raising $10,000,000.

“Yeah so we’re going to need maybe $2M to build out an MVP of our Android app, $4M tops” — Some douchebag CEO of half the coins in the market, probably

9) What is the community perception of the project?

If you’ve read through and considered all the other points in this guide, you should already have a pretty good idea of how to gauge the potential upside and downsides of a token investment, but it’s always prudent to leverage the wisdom of the crowd too.

Even the most adept researcher can miss something obvious on occasion, but a clear problem will typically be noticed by someone in the crypto community.

Read community forums and press coverage of the projects that you’re interested in, but do take everything you read with a healthy pinch of salt. It’s easy to be drawn into either FUD [Fear, Uncertainty, Doubt] or equally so, the “we’ll-all-be-millionaires” hype train.

If the community perception of the project is broadly positive and this confirms your own research, you may be on to a winner. And if the community perception conflicts with your own research — try to identify why.

Although confirmation from conflated sources is typically positive, some of the best investments you can make will come from ascertaining why the wisdom of the crowd is wrong, and you’re right.

10) Can you sleep at night?

Finally, and perhaps most importantly — will you be able to sleep soundly investing in this company?

Investing in any speculative market always carries a significant amount of risk, but it is vital to be happy enough in your investment that you’ll be able to trust the team to execute on their vision in the market and return value to investors.

Risk diversification also plays a factor here, and despite my earlier warnings of ‘bulk purchasing lottery tickets’, this is an important thing to bear in mind. Blockchain technology has the potential to revolutionize a huge number of industries, but it is highly unlikely they will all reach this point overnight — and it’s difficult to predict when a major player may enter the market with a new solution.

Spreading your investments across a varied portfolio of token projects (and hopefully investments completely outside the cryptosphere) will help to reduce your risks and dampen the fear that your investments are putting your eggs all in one basket.

While gut-feeling is hard to quantify, it’s one of the most important factors to consider — ultimately, your peace of mind should come first, and if you don’t trust the company, don’t trust them with your money.

You should put your peace of mind and mental health above the potential of economic return. Your time is the most valuable commodity you have, and stress will bleed into every aspect of your life if you invest where you aren’t comfortable doing so.

Further Discussion

I’d love to chat about any of this further, just drop a comment below or reach out to me on Twitter. I’ll try to answer any questions you have, and am more than happy to have my views challenged.