Bitcoin and other cryptocurrencies have captured the imagination of millions of people around the globe. And that’s well deserved - they are bringing well-needed innovation in the world of finance.
Along the way, as you might have heard… they've made a bunch of people extremely rich. Like Scrooge McDuck rich.
And of course, this type of crazy wealth growth attracts fast followers that want to follow suit. But as is the case with every fast-growing asset class: there are plenty of opportunities to lose money in crypto as well.
That's why we’ll guide you through everything you need to know in order to invest responsibly in crypto projects.
Let’s look at some of the things we’ll cover:
You might be confused about the above terms. And it’s OK. They get used interchangeably in the mainstream media, which leads to confusion.
It’s important to be clear about these terms so let’s look at each one more closely:
Please note: this guide to crypto investment is crypto project stage agnostic - it doesn’t matter if you wish to invest in long-established cryptocurrencies like Bitcoin or evaluate upcoming ICO type crowdsales. Fundamentals for an investment have to make sense in all cases.
Investing in cryptocurrencies isn’t much different to traditional investing. The most important thing is to deeply understand the fundamentals of what you’re investing in and build strong conviction around your investment decision.
Why understanding fundamentals is crucial: The early Bitcoin adopters believed strongly in the soundness of Bitcoin’s protocol and its future potential use-cases. I’ve written about this in our previous article on why Bitcoin is valuable.
The early adopters recognised how Satoshi Nakamoto’s invention elegantly solved the double-spending problem for the first time in history. This was a big technological breakthrough and early adopters have since been well rewarded.
That’s also the reason why Bitcoin survived its many up and down cycles and its price continues to trend up over the years. More and more people believe in its technology and promise and decide to invest in it.
About bubbles: Sure, sometimes public mania takes over and a lot more people buy in within a short time frame. This leads to short-term price bubbles. As is the case with all bubbles, they eventually burst. Most people that didn’t buy it because of the fundamentals then sell. See the sarcastic image below:
To not get carried away in the up and downturns, I suggest you build strong conviction in any given crypto project. Here are a few parameters I would look into before investing:
Let’s dig a bit deeper into each one of these investment criteria.
Questions to ask:
The team is the single most important component of every new project - be it crypto or non-crypto related.
Even when I invest in traditional publicly listed companies, I often check their Glassdoor reviews from past and current employees.
These kind of employee reviews reveal a lot about the state of a team. And if it’s worth thinking about the team when companies employ thousands of people, it’s probably even more crucial when it’s only a tiny fragile project with a handful of people on board.
Mark Suster, one of the most successful recent early-stage investors, puts it succinctly in his blog post:
I am fond of quoting that about 70% of my investment decision of an early-stage company is the team. My rationale is simple: everything goes wrong and only great teams can respond to competitors, markets, funding environments, staff departures, PR disasters and the like.
Questions to ask:
Almost all of these questions are the same as you would ask any other early-stage startup team. The difference between the two is that early stage startups usually raise a few hundred thousand dollars.
New tokens, on the other hand, try to raise a much more substantial amount of money without giving away any equity in the underlying company. That’s why we should be asking even much tougher questions.
It’s worth noting that currently not many tokens actually have working products that produce real value. Most of them are still either in early planning, development or testing phases.
Example of Bitcoin’s value: Bitcoin is primarily considered digital gold. It might one day be very useful as a transactional currency as well. Based on what your future expectation of Bitcoin value is, you might value it completely differently. That’s the beauty of investing.
Example of Ethereum’s value: Ethereum is a platform that enables the creation and continuous service of many other tokens. This was its initial value proposition and we can argue that throughout 2017 and the rise of many ERC-20 tokens, it is starting to fulfil its initial vision. From this perspective, its market cap growth potentially makes sense.
Below you can see how Andreas Antonopoulos, one of the most prominent public speakers in the space, thinks about value of Bitcoin:
Questions to ask:
In case you are a developer: You can look at the code itself. Check how the project is architected, how the code is structured and determine whether it fits your investment criteria. A good investment heuristic here would be to ask yourself whether you admire this project and its codebase enough to actually work on it if you had a chance.
Open-source code and tokens: Token projects don’t need an open-source protocol as they are built on top of one of the existing blockchains (like Ethereum, NEO, etc.) That said, most of the well-known projects still open source a lot of their development work. This helps to attract other developers, goodwill, decrease bugs and indirectly ensures better code quality.
Questions to ask:
There have been ICOs that have raised an extraordinary amount of money without delivering any kind of product (even not a prototype). This, in the normal investment world, doesn’t make much sense. If a token’s implied market cap is $25M, there needs to be some real value and traction behind it.
Secondly, even if a team manages to eventually release a product - do they have a viable plan for how it’s going to be distributed? For example a project like Iryo that plans to disrupt the medical patient records industry. I would look into their plans on how they will cooperate with the established players in the healthcare sector. It's widely understood that most startups fail because of lack of a market and not because the tech doesn’t work.
In connection with the previous point, crypto projects have lately found a new proxy for traction: partnership announcements with larger companies. Especially towards the end of 2017, when the cryptocurrency prices were hitting new all-time highs every hour, crypto projects kept coming out with various press releases announcing their new partnerships.
Bad example of traction: Be careful of investing into projects based on these announcements alone. They are rarely anything more than words on a paper, usually with a very soft commitment to maybe, one day, test the technology. Well, sometimes they are even less than that. As an example, a crypto project Carvertical was caught empty-handed announcing a “fake” partnership with BMW:
BMW has not entered into a cooperation/partnership with CarVertical. The company is using our BMW CarData interface available to any third party.— BMW USA (@BMWUSA) March 20, 2018
Positive example of traction: Let’s look at Civic. 1. they have started the company in the early 2016 and raised $3M in early (traditional) seed investment. Only then, after about 18 months and after they had a decent idea of what they are doing, they issued a utility token through an ICO. Now, the other thing that impressed me is how deliberate they are in thinking through their go-to-market strategy.
The important bit here isn’t that their strategy will pan out exactly as they lined it out. It probably won’t. But even just the exercise and the thought of them thinking through these different scenarios can give you as an investor much more confidence and conviction. And that’s what we are aiming for.
Questions to ask:
Tokens are created out of nothing and the team behind each one has complete freedom to dictate how the crypto tokens are being distributed.
You want to look for signs that the team has thought long and hard about different incentives that play a part here. Too much money too quickly in the hands of the founding team can create misaligned incentives and potentially endanger the whole project.
Sure, it’s important that there is a way for the crypto team to be handsomely awarded - but only after they have actually delivered a working product that delivers value.
Good example: If you want to see an example learn more about responsible team vesting structure check out this post by Civic's CEO.
Questions to ask:
Looking at the community in various Telegram groups or on Reddit can be extremely revealing.
In the early days of Bitcoin and Ethereum their communities were small but full of crypto enthusiasts. They cared more about the promise and future use-cases than a possibility of a major price increase.
Price increase needs to be a consequence of a great, unique product that has traction in the market. And that’s often how the most lucrative long-term investments look like. Avoid crypto projects that seem to be all about making a quick buck.
I don’t want to advocate for investing in any specific crypto project. That said, it’s important to point out that just like any other mature assets, cryptocurrencies have different risk profiles too.
Every crypto project can go to $0: Crypto projects are one of the riskiest investments you can make. Maybe it doesn’t look so today. But there is already a long list of coins that have bit the dust during the last couple of years. That said, it’s probably fair to say that it’s harder for Bitcoin to go to $0 than a newly released token.
This doesn’t mean you should never invest in a newly released coin. Not at all - they can lead to incredible returns if successful. You should understand though that new coins are much riskier investments, no matter how strong the fundamentals are.
Why are new crypto projects so risky? In a lot of cases, new crypto projects are trying to solve really big fundamental technology problems. The promises sound grand and the potential enormous. But please note that you are investing in a research phase of an early technology - which is much riskier than someone investing in a new iOS app.
Think like an angel investor: Because of these risks, think about investing in fresh crypto projects like a sophisticated angel investor would invest into early-stage startups. The common advice in the angel investment community is to allocate enough funds to make at least 20-30 different investments.
And, as mentioned before, the risks are most often even greater in the crypto world. Be careful. You can do that by either tilting the portfolio more in favour of the established “safer” crypto projects (like Bitcoin and Ethereum) or greater diversification of small crypto bets.
I want to present a bit more general advice when it comes to the difference between investing and day trading. You can win in both - but you should understand them and the differences between them very well.
The father of value investing, Benjamin Graham, explained this concept very well:
In the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company.
In general, if you want to win in trading you have to have some kind of information advantage. In crypto that’s about being close to the pre-sale ICO communities, being a part of various tight-knit Telegram crypto trading groups, having an understanding of technical analysis, etc.
It’s definitely possible to make a lot of money this way, but be prepared to spend hours on this on a daily basis. Otherwise, you risk losing your hard-earned money to more informed members of the community. This is quite similar to the traditional stock and forex markets.
Bad quality content warning: There is a ton of content around crypto trading out there of dubious quality. People who are subtly promoting their friends’ crypto scams and so on. If you want to consistently up your game at this, I would suggest you follow Crypto Trader on Youtube. He has over the time built a credibility in the space and churns out very good content on a regular basis. Here is an example below:
Investing is quite the opposite to trading. Knowledge and information still count, but the big difference here is that you can do it on your own schedule. What does that mean?
Let’s look at a simple example. A developer who first learned about Bitcoin in 2011 on Hacker News and ignored it. Then she heard about it again from a friend a few months later - but thought the friend was out of her mind.
Then let’s say she accidentally stumbled across a Youtube video of a guy called Andreas Antonopoulos (he has great educational videos). It finally got her excited. She went and read the original whitepaper. But again, she was too lazy to buy some (remember: it wasn’t as easy to buy crypto in 2013 as it is now).
However, she started seeing famous technologists on Twitter like Naval, Chamath started to talk openly about Bitcoin. It was the turning point. She understood the fundamentals and now she also had a decent social proof. She finally decided to buy a few bitcoins, secure them on a paper wallet and throw them in a safe for the next 20 years.
She witnessed the ups and downs - going all the way above $1000 in late 2013, then back down below $200. But it didn’t sway her - she believed in the technology and actually even bought a few more when the price was around $300 in 2015. Because she understood it and thought it was a good bargain.
And that’s called investing: You buy in when you understand something, believe in its future value and the price makes sense for you.
In case you want to dig more into value investing, I would suggest you read Warren Buffet’s letters to shareholders. Here’s a quick preview of his thinking:
Side note about Warren Buffet and crypto: Warren Buffet doesn’t like and understand cryptocurrencies. Don’t worry too much though - he also missed the whole internet boom cycle. But that’s not the point here. He admits that he doesn’t understand a lot of businesses - and when that's the case, he doesn’t invest in them.
Just like Buffet, you and I have the privilege to pick and invest only in the assets we understand. Investments in which we build a conviction and where we like the price. And that’s the important bit of advice that we can all learn from Warren Buffet.
The more educated you are, the more conviction you can put behind your investments. And, as we learned earlier, having conviction is the crucial ingredient for smart investing.
It’s easy to have conviction when the markets are up and to the right. Every fool can do that. Instead, your conviction really gets tested in a down market. When your friends are making fun of you. When your parents are asking how your funny virtual money is doing. That’s when conviction matters and that’s when the real fortunes are built.
Here are a few pointers I would suggest you dig in to build your knowledge moat:
You can find more than 1000 coins on our crypto portfolio site Coincall. It’s very easy to follow the coins you’re interested in and learn more about them. You can also see the descriptions of all the coins, links to their official websites and find exchanges that sell the given crypto project you’re interested in.
In case you want to be on top of all the upcoming ICOs, I would recommend you check this ICO calendar.
Securely storing your crypto assets is unfortunately still not a trivial endeavour. I would really like to say otherwise, but there is still a long way to go in terms of UX and security features built for normal users.
That said, let’s consider where we were just 4 years ago. It was widely expected that the largest exchange back then Mt. Gox would get hacked sooner or later. That was normal. Hacks were terrifying - but normal.
Nowadays exchanges don’t get hacked on a regular basis. There are also a couple of decent hardware wallet choices and mobile wallets are getting better and better.
But I would still encourage you to spend some time thinking through your crypto security setup, especially if you plan to invest a considerable amount of your net worth into crypto.
A general rule of thumb: dedicated hardware wallets are the safest option for storing large amounts of crypto. But there are now quite a few different options for storing your crypto investments. See them below.
This is the easiest way to store your cryptos - directly on the exchange where you bought them. At the same time, it’s also quite risky - you don’t control your private keys this way, so you are completely dependent on the security and trustworthiness of the exchange.
People have lost money this way. That’s why crypto enthusiasts will probably call me out here and advise you to never leave your crypto on exchanges (or other fully hosted wallet services). I would take this advice with a grain of salt - I believe it’s still safer to leave your crypto investments on a reputable exchange like Coinbase when you’re a complete beginner.
Later invest some time in learning about other options and transfer your cryptos to your own wallet once you’re truly ready. Coinbase for example also doesn’t enable you to store ERC-20 based crypto tokens yet on their exchange so in case you’re investing in them, you’ll have to switch to some other solution. This might change soon though.
Browser-based wallets can be a great, simple & fairly secure way to store all sorts of crypto assets. That said, for larger amounts of crypto investments you should use other solutions.
There are actually not that many desktop first wallets that are focused on providing great user experience for normal users. So I’ll only recommend one here:
There are three types of mobile wallets:
Please note that the mobile wallets below all fit the “autonomous” wallets category:
Hardware wallets are currently widely considered the most secure option to store your crypto assets. Hardware wallet is a dedicated hardware device (that looks like a USB key) that stores your encrypted private keys.
This way your private keys are always stored offline and never touch the internet. Thus they are immune to any sorts of viruses or malware that you might have on your computer.
This is an exciting time for an average investor. For the first time in history, you are able to invest in a wide range of products from an early development stage. Traditionally, this sort of early stage investing has been limited to only wealthy individuals or financial institutions.
That said, there is also one good reason for it. Most early-stage investments end up being worth $0. That’s why it’s important to build up a diversified portfolio, so you’re not emotionally attached to an outcome of one single crypto investment.
And please be aware that we are still in the very early stage of this crypto cycle. It might look like right now any kind of token going to 0 is lunacy. But it will happen. People will lose money. Scams will happen, founder disputes will happen, hacks will happen. Everything bad you can imagine - it has happened before and it is bound to happen again.
Your most important asset can be to build conviction in what you invest and follow a few simple rules:
And that’s it. If you found this article useful please share it with your friends!
Disclaimer: Please note that this is an opinion piece and for information purposes only and not be taken as financial, legal or accounting advice. Always consult your trusted advisor, accountant or lawyer when making financial decisions.