The Seven Pillars of ICO Investing
The number of initial coin offerings (ICOs) is growing rapidly, having raised an astounding $5.6 billion in 2017 alone. More outrageous is that, by most estimates, over half the ICOs launched in 2017 have already failed.
In addition to the many ICOs being launched monthly , our management company Crypto Asset Management (CAM), also receives around a dozen emails per day from new companies planning on launching crypto tokens to boost capital. CAM, through the varied funds and share classes it manages, invests in but one out of each 100 ICOs that comes across its desk.
Out of absolute necessity, we've developed an analytical framework for ICOs, which CAM applies to each such opportunity it evaluates.
In this article we explain what we call The Seven Pillars Of ICO Investing™, which we’ve rigorously crafted over several years of investing in crypto and other assets.
Pillar #1: Team
The critical element which we are checking out is an experienced team, ideally with a robust diary in developing and launching blockchain technology. additionally , the team should have experience within the sell is targeting. A team that's not only competent, but capable of developing, completing and/or expanding the project is paramount to its success.
A couple of additional issues to think about are:
Does the team have a vesting token schedule which will properly incentivize it?
Do the advisors have the proper experience and are they actively engaged?
Does the project have any notable financial backers? (VCs, other hedge funds, etc.)
Pillar #2: Idea
Without a compelling, realistic and timely idea for a blockchain-based enterprise, the investment will almost certainly fail.
A few of the key things we glance for are:
Total addressable market: How large is that the opportunity? we would like as large of a market as possible (See: ethereum, filecoin).
Product-market fit: Does the address an urgent problem? (0x, ChainLink)
Unique value proposition: What facets of the technology enable it to face out from the competition? what proportion competition is there (Wax)? Ideally, the token has proprietary technology, and as little competition as possible (Orchid Protocol).
There is clearly an interrelationship between Pillars 1 and a couple of . However, if we had to settle on between them, we might clearly rather invest in an “A” team performing on a “B” idea than a “B” team performing on an “A” idea.
A talented group of individuals are the lifeblood of any business, and crypto is not any different.
Pillar #3: Execution
In the cut-throat business world we sleep in , the sole thing that matters is results.
A brilliant idea and great team are nice, but execution is everything. Is there a working prototype or does your idea only exist during a nebulously written white paper? We like better to invest during a product that already exists to a point (Presearch, Basic Attention Token, Superbloom, FunFair), whether within the crypto space or analogously within the fiat space (Wax).
Finally, we glance for a few kind of proof that the corporate are going to be ready to hit future milestones.
Pillar #4: Legal/Regulatory
This pillar is important given the present and growing regulatory uncertainty within the industry.
Almost hebdomadally , there's news of a governmental agency in one country or another taking regulatory action or making a replacement statement around ICO governance. Of course, almost as often, there's news of a special country considering crypto-favorable legislation. Comprehensive regulation in many marketplaces is on the horizon and it's imperative to make sure that ICOs vigilantly navigate the landscape to the simplest of their abilities.
The threshold issue is jurisdiction: in what country is or will the ICO company be incorporated and therefore the refore the ICO executed? This determines the principles which will apply to the company’s actions and the ICO.
Depending on the approach taken, we may apply the somewhat arcane rules of the Howey test (in the US or if US investors are targeted or allowed to invest), KYC/AML principles (which are essentially universal) and applicable law .
Pillar #5: Tokenization
A significant number of the ICOs we analyze don't really need the blockchain, tokenization or a public sale of their tokens to achieve success .
When this is often a problem , it's usually the last – public sale – which isn't necessary. (NASDAQ’s settlement system is a superb example of where tokenization may be a brilliant idea but a public market would be superfluous, or maybe counterproductive.) Also, they're sometimes glorified apps that would be built without creating a selected token, despite what proportion “utility” the founders may claim their token provides.
With the big amount useful exchanging hands over the blockchain and therefore the prospect of getting “free” money without abandoning any equity, it’s not hard to imagine why many industrious entrepreneurs attempt to identify any possible reason to launch an ICO.
That being said, one among the crucial things that each investment we make must have may be a legitimate reason for “tokenizing” their business, and for creating a public marketplace for that token (OmiseGo, Icon, Raiden Network, Cosmos).
Pillar #6: ICO Structure
Similar to traditional risk capital investing, the financial underpinnings of the deal ultimately determine the choice to take a position . The characteristics of an ICO can have important implications on the expected upside of the token.
This can be split out into two categories – ICO mechanics and ICO deal structure.
ICO Mechanics – Historically, ICOs with a lower hard cap tend to outperform ICOs with massive hard caps. While it's important that the parent companies be funded and have sufficient runway to figure with, ICOs got to have a convincing plan to be used of proceeds because the potential upside decreases in proportion to the quantity raised. The precise metric here is valuation of the behavior therapy – a derivation of the hard cap. Both the valuation in light of circulating tokens at launch and therefore the valuation upon release of all tokens are factors that we consider.
ICO Deal Structure – The deal should be structured during a way in order that investors aren't at a disadvantageous position to the market.These are a couple of of our considerations:
Distribution: The team should have a compelling structure for the distribution of tokens, fair allocation among team/advisors and investors, programs for market uptake, etc.
Distribution Schedule: Given the fast-moving pace of the crypto market, the distribution schedule shouldn't massively favor specific parties. While long distribution periods are often considered acceptable for high-potential ICOs, individual liquidity preferences should be considered.
Discounts: Discounts are ubiquitous within the ICO environment, so examining the discount levels given to different tranches allows investors to know where they substitute reference to other stakeholders.
Equity Stakes: At Crypto Asset Management, we wish to be a part of the expansion of the corporate and investing directly into the equity of a corporation allows us to play a greater role therein development. within the world of token sales and short-term liquidity, people often forget that the worth proposition of a corporation are often even as great or maybe greater than the token ecosystem it's developing.
Pillar #7: Price Drivers
Even if we believe a team is in a position to make an excellent product that comes with a token with an important use case, this doesn't necessarily mean that we'll want to carry the token or invest within the ICO. A token must additionally have a mechanism to drive price appreciation.
A token with constant supply with none incentive to carry , won't be subject to purchasing pressure which significantly outweighs selling pressure over the end of the day (Votes). this is often underpinned by the concept of price risk, during which individuals will lean towards reducing their exposure to cost volatility in favor of fiat or a sort of stable currency. (Kyle Samani has written an in-depth piece on this velocity problem here.)
A few of the worth drivers we glance for include:
Network Volume: In almost every instance the worth of a token increases because the number of transactions on the blockchain increases (bitcoin, ethereum). this is often one among the foremost basic, yet influential, indicators of demand, and is additionally the rationale we invest primarily in protocols instead of dapps.
Market Leadership: we glance to take a position only in tokens that are clear market leaders, or have the potential to be within the near future. Usually, these tokens have a definite and growing unique advantage over their competition (Practical VR).
Incentives to Hold: there's a transparent reason why a user would rather hold than spend the token, which may be related specifically to speculated price increases or other non-monetary rewards (Presearch, PROPS). We won’t invest during a token that’s only purpose may be a medium of exchange.
Supply Changes: this will include limiting inflation, meaning the token supply doesn't dilute the worth of all tokens over time, or token burning, where the availability of tokens within the system decreases over time (Binance Coin, Iconomi).
Profit Sharing: a part of the worth that's extracted from the system is given back to the token holders (Augur, NEO, Neon Exchange, Ethorse).
Staking: Having users of a network to lock up their tokens either for network consensus or as a requirement in certain processes. (Bee Network, Open Platform, NuCypher, Video Coin).
Sufficient Liquidity: If the project isn’t proactive about getting listed on multiple exchanges, preferably top-tier exchanges, we'll likely not make an investment.
Please note that, as a general rule, we aren't in favor of asset-backed tokens as an investment vehicle at this point . There are not any real drivers of price formation after an initial, relatively small boost for convenience (Sandcoin, OneGram) and therefore the cost is consequently too high (there are far greater returns elsewhere).
Importantly, the effect of implementing strong incentives to carry is multiplicative. Not only will the worth increase be driven by the inherent tokenomics design, but also by speculation directly associated with the implementation of those drivers.
Despite the incredible number of fly-by-night operations within the world of ICOs, it's certain that token generation events are here to remain . Such events are completely transforming the normal risk capital industry and, for savvy investors, are creating fortunes literally overnight. For unsophisticated or undisciplined investors, ICOs are a minefield that ought to probably be avoided. However, for those that perform proper due diligence, the chances increase for realizing breathtaking returns on your investments.
This article is an abbreviated summary of our process for investing in ICOs.
Here at Crypto Asset Management, we’ve also developed more in-depth tools, like our innovative 64-point ICO Scorecard and a more traditional Private Equity Due Diligence Checklist.