By Ryan Rafols, NewChip
“Cryptocurrency: Everything you don’t understand about money combined with everything you don’t understand about computers.” – John Oliver
Cryptocurrency, securitized tokens, and blockchain ledger technologies are the future. This is a disputed fact but its boom has captivated millions of new and sophisticated investors around the globe, helping build what some are saying will be a trillion-dollar industry in the very near future.
But like all technology, not every cryptocurrency, security token or blockchain ledger is built the same. In fact, many aren’t even “built” at all and likely never will be. This nascent industry is riddled with scammers, fakers, and those looking to make a quick buck off the hype. Remember “Long Blockchain Tea Company”?
Because the core vision behind the technology is a vision of open source and decentralized networks, often anyone can build a crypto token, security token or blockchain platform upon which coins can be launched, which is why TrumpCoin, TitCoin, DogeCoin, and Deep Onion (yes, those are all real) exist.
So, how do you know if you’re investing in a viable technology? How do you know it’s compliant and secure? Here are 5 things you need to do and 5 things you should avoid when making an investment in a cryptocurrency or blockchain technology.
- Do Your Research on The Team and Founders
Most early-stage investments are for the promise of a technology, good, or service and IN THE TEAM that is building it versus proven results, so you should absolutely do your due diligence on the founders and supporting team:
- Have they started companies before? What were the outcomes of those companies? Did they experience a positive exit?
- Do they have industry experience?
- What does the team look like?
- Who are the members of the executive management team?
- Have they raised capital before and if yes, from whom?
Hint: Not all VCs are built the same either. Utilize Crunchbase to see when funds launched, what exits they have had, and how much money they put into TrumpCoin. You can also use Angel.co and LinkedIn to research individual investors.
What you should be looking for is a solid team with a pattern of success in building and growing companies with proven results for their investors. Tommy from Iowa farm country with TommyCoin 2.0, a pitch deck, and a garage setup might be the future or might just be a scam. (There is no such thing as Tommy coin that we know of as of this writing, please don’t rip it.)
- Do Your Research on The Technology
As mentioned above, not all blockchain technology is the same so it’s imperative that you understand not only blockchain, but it’s use case in the proposed investment. Understanding its purpose and functionality is key. Is it tokenization? Inter-organizational data management? Does it utilize smart contracts? Do you know what a smart contract is? The more you comprehend the underlying technology the more informed you’ll be throughout the investment process.
- Do Your Research on The Industry
Blockchain technology is constantly evolving as is the industry. Pay attention to industry trends as they relate to the potential investment. Is it a strength, weakness, threat or opportunity? How is the overall industry doing in terms of valuations, exits, growth, and price of entry? Not to mention the competitive cost to enter
- Do Your Research on Competitors
The market is quickly becoming saturated with more than 1,000 ICOs (Initial Coin Offering) so far in 2018 and it shows no signs of slowing down in the near future. The number of successfully funded ICO’s is down the last quarter but overall it has still been a great year for the industry. It’s extremely important to learn, study and understand what the competition is doing, what the barriers to entry are, and how many players there are. This should always be part of the due diligence process.
- Do You Believe in The Vision?
This is one that is particularly important. Do you believe in the vision? Whether they are looking to democratize artificial intelligence technology to make it affordable to utilize AI in development or building a decentralized health economy to make it easy to pass records back and forth, it’s important that you believe in and share the vision of the business. With a shared vision, the investment process instantly becomes more fun and you have a vested interest in it’s success.
- Don’t Go with The Hype
This couldn’t be truer when it comes to the blockchain industry. Remember Bitconnect? What was once was hyped as a world-changing token, later crashed and was branded a high-yield Ponzi scheme. Every entrepreneur wants to believe that what they are building will change the world, but few ever do, so don’t underestimate the power of fundamental analysis. What’s the intrinsic value and other economic, financial and quantitative factors?
- Don’t Listen to Your Barista.
No, seriously. Or your barber. Or your dentist. Unless you have Gordon Gekko or Bobby Axelrod (which would probably land you in prison anyway) giving you information, the only person you need to trust is yourself and your ability to properly research and analyze an investment. One of the reasons the industry has grown so rapidly as well as the reasoning behind so many scams and lost potential is the HYPE TRAIN. Get on to learn and understand, get off before you make investment decisions without diligence. Conferences are a great place to learn but also a place where you’re likely to meet the next BitConnect and Coinbase right next to each other. Both selling the same pitch and both great on paper, but diligence and research are what separates surface level hype from real and valuable investment intelligence.
- Don’t Invest More Than You Can Afford to Lose
This is the golden rule of investing. Most startups fail, and many investments lose value. So, only invest money that you would be comfortable potentially losing. And remember, only in the rarest of circumstances do investments lead to near-term liquidity – they are meant to be held so be patient. If you’ve done your diligence, believe in the founders and their vision then it should be fun to celebrate their success together. As an early investor, you are part of the team. Don’t forget that. Alternative investments most importantly should be a “part of” a well-rounded portfolio, not your ENTIRE portfolio. Many crypto-millionaires are now living back with their parents and have lost everything.
- Don’t Invest Based on Promise of Future Returns
In fact, if you hear the words “it’s a sure thing” or “this is going to be huge”, or “you can sell after the launch and make 10x”, run and take your money too. No one and I don’t care if you’re Warren Buffett or Jimmy Buffett can predict the future value of any asset. This is why having a shared vision and strong belief in the founding team is so important as well as having a diverse portfolio.
- Don’t Invest Based on Emotion
More money has been burned investing based on emotion then almost anything else, say except for brazen stupidity or fraud. Any investment, whether a startup or a house should only be made when you are 100% comfortable with the details of the transaction. If there is a gnawing feeling you can’t shake, then the investment probably isn’t for you. That being said. Don’t sell based on emotion either. Smart investors understand that people will invest and sell, and the markets are susceptible to emotion. Don’t be that person that sold everything based on a random tweet or review online. But also don’t be that person that forked over their entire 401k based on the same circumstances.
Ryan Rafols is CEO & Cofounder of Newchip, the world’s largest private equity marketplace that connects people to startups, pre-IPO companies, real estate, and securitized token investment opportunities.