Crypto experiment strategy and projects we will be looking at (part 1)
“Many shall be restored that now are fallen, and many shall fall that now are in honor.”
HORACE — ARS POETICA.
Following from my previous article , we have decided to come up with a list of criteria to look at and rank out of 10. We will set a benchmark score, and only the projects that reach that overall score will be considered for investment. The most important factor that will determine whether a project will be invested in will be the price. This excerpt from Benjamin Graham’s ‘Intelligent Investor’, where he is using an overvalued public company to explain why one should not overpay for any stock, “If VA Linux were a private company owned by the guy who lives next door, and he leaned over the picket fence and asked you how much you would pay to take his struggling little business off his hands, would you answer, ‘Oh, $12.7 billion sounds about right to me’? Or would you, instead, smile politely, turn back to your barbecue grill, and wonder what on earth your neighbor (sic) had been smoking? Relying exclusively on our own judgment, none of us would be caught dead agreeing to pay nearly $13 billion for a money loser that was already $30 million in the hole.
But when we’re in public instead of in private, when valuation suddenly becomes a popularity contest, the price of a stock seems more important than the value of the business it represents. As long as someone else will pay even more than you did for a stock, why does it matter what the business is worth?”. No matter how solid a project seems to be, if the only way we can acquire its tokens is to pay more than it is worth, we will not make the trade. Here we run into another problem, cryptocurrencies are not businesses, so how do we know what they’re worth ?
Valuing Cryptocurrencies.
This is a big question in the crypto world at the moment. How do I know what a coin is actually worth ? Most cryptocurrencies are not backed by any physical assets, most do not pay dividends, most do not have companies behind them. So what is it that gives these coins value, and how do I put a number on that value ? The best place to start is to realise that, cryptocurrencies at their simplest, are just the currencies of a network. So from there we can ask, how does one value a network ? Robert Metcalfe, known for being the co-inventor of the ethernet, proposed a law stating that the value of a network is proportional to the number of connected users squared (n²), this law is known as Metcalfe’s law (more about it here). Other research has shown that when the network grows large enough, the value can be modelled as proportional to n x log(n) instead (where n is the number of active users). How does this relate to valuing cryptocurrencies ? It isn’t easy to determine how many users there are in a crypto network as any individual can own as many wallets as they please, so what can we use to as measure of how many active users there are ? One method is to look at the number of unique active addresses, another is to consider the transactional volume moving through the network, each have their various advantages and drawbacks and a lot more research will be done in the coming years in this field. I myself will continue doing my own research into the economics of networks over the coming weeks and will have to settle on what approach will best fit what we are trying to achieve.
Criteria for investment.
The things i’ve shortlisted for consideration are as follows:
- Uniqueness of idea
- How important decentralisation is
- Whether they have a working product and how well it works
- Barriers to entry for competition
- Does the idea necessarily need its own token/currency ?
- Strength of core team
- How large is the developer base ?
- Ease of adoption / target users
- Current user base
- Growth rate
- Network value to Metcalfe ratio (see here)
- Network value to transaction value ratio (see here)
It is important to realise that for each individual project, some criteria may be more important than others, for example how widely adopted a digital currency is may be more important to its value than say how many developers are working on the project. While for protocols, such as Ethereum and EOS, how many developers are building dapps (decentralised apps) on top of the protocol may be more important than widespread adoption of its token. One solution I have considered for this is to alter the weightings of the criteria for different types of projects (e.g for digital currencies adoption can count more to the overall score of the project than the developer base). More thought will be given to this and any suggestions/ideas you have about this will be appreciated in our telegram channel !
I will breakdown and explain exactly how I will give a score out of 10 to each of these criteria after more thought is given to this.
List of projects we are going to to be looking at (subject to change)
- Bitcoin (obviously)
- Ethereum (obviously again !)
- XRP
- EOS
- IOTA
- DASH
- NEO
- 0x
- Nano
- Zilliqa
- Golem
- Chainlink
- Loom Network
- Syscoin
- Polymath
- Cortex
- Dent
- Nexo
- Enjin Coin
- Simple token
- Polyswarm
- Melon
- Intelligent trading tech
Yes it is a really long list and realistically we may not be able to cover them all! However this is a community experiment so we will be consulting with you (our community) in our telegram channel to discuss what projects are worth looking at first and which to discard. Personally, I think the most exciting projects are towards the end of the list, but they also the most risky ! Let us know your thoughts in our telegram channel (link below).
The crypto market this week
The market has been up the past week and the good news seems plentiful, it has taken a lot of effort not to start thinking the market will not come back down again ! I’ve been itching to buy, which normally means patience is needed. The market is up at 237 billion USD from about 190 billion USD two weeks ago, if you check the markets everyday like myself you’ll know it happened almost over night ! I think it’s gonna be important to watch the market more and not get caught in FOMO just because the market is up, many technical analyst still believe the market is due another dip soon in the future. All we can do is wait and see what happens !
Everyday brings another story about how adoption is gearing up, from Venezuela and Iran creating their own cryptocurrencies, Ripple showing how aggressive they’re being bringing financial institutions to their tech, IOTA and Volkswagen announcing blockchain cars as soon as 2019 and more and more stores starting to accept cryptocurrencies as payments. A lot seems to be going on in the crypto world, whether this translates into wide stream adoption sooner rather than later we can only wait and see (or hope).
That’s it for this weeks article ! Watch out for part 2 coming to you soon, also don’t forget to join our telegram channel and like our facebook page !
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