A Framework For Investing in the Early Stage Crypto Space
Since launching in September 2020, Binance Smart Chain (BSC) has positioned itself as a cheap, fast, reliable and user friendly blockchain — making it the preferred platform for many developers focussed on the growing ‘DeFi’ space. As of March 2021 it boasts over 60m active users and Total Value Locked (TVL) has gown from 1bn to 40bn over the last 12 months, dragging entrepreneurs into the fast growing space. Given the relative freshness, the BSC network provides investors the opportunity to buy into growing innovations that haven’t yet hit the market at attractive prices.
Early investors have been heavily rewarded by taking early stakes in projects. Last month alone saw Fairmoon move 30,000% in 7 days, SafeGalaxy rise 2,800% in 2 days, and even smaller, less known launches doubling within 10 minutes. These are completely incomprehensible moves in the traditional finance world, where an interest bearing account yields 0.1% per year or a ‘market beating’ 8–10% is considered a good year. ‘Cash flows where innovation grows’ is a core principle of classical economics and the massive incentives linked to successful projects has attracted some seriously innovative teams aiming to disrupt, solve real problems and build long term products.
BSC is just one bockchain where early stage innovators are looking to deploy cutting edge solutions, projects, and protocols. The space is exploding. History has shown that fraud can be rife in opaque, unregulated growing industries and the early stage crypto world is no exception. According to the Crypto currency scam report:
“Perhaps the starkest condition we observed is the correlation between cryptocurrency value and hype and fraud. Across virtually all the major cryptocurrencies that we monitored, we observed a direct correlation between increases in individual cryptocurrency trade volumes and value and phishing and scam-related activity”
Many projects have been launched with the sole intend of stealing money from investors — for example Meerkat lost $31m via a network hack, and the ‘founders’ of Turtledex rug pulled their investors to the tune of $2.5m. These are just a couple of examples, but its no secret the space is full of cowboys looking to make a quick buck. This hurts the industries goal of establishing credibility as an asset class and prevents people participating in what is possibly one of the best wealth creation opportunities of our lifetime.
Early stage investing usually involves a combination of unproven technologies, inexperienced teams, undeveloped markets, and untested business models. This makes failure come at a high cost, and even the most experienced teams with the best products have a high chance of coming up short. Add in the element of fraud and scams and this makes it incredibly difficult for individuals to participate without getting burnt. Humans are notoriously bad at making decisions within this environment, prone to succumbing to the many biases and errors outlined in Kahneman and Tversky’s papers and commercialised in their seminal book ‘Thinking fast and slow’.
“What we aspire to do is, invest in the start-ups that have really really extreme strength in a long and important dimension.” — Marc Andreessen
To maximise the probability of success within extreme uncertainty and dynamic markets, its imperative to internalise what can be controlled. To stack the deck in our favour, we have adapted traditional best practices designed to rigorously analyse early stage projects and applied these directly into the early stage market. We understand, accept, and use our cognitive biases to our advantage and in turn simplify the complex problem of early stage investing. Our framework identifies the most important factors and quite simply — ignores the rest.
This enables us to filter through thousands of potential investments, participate in the upside and lower the standard deviation of returns. In the coming weeks I will be expanding on this model, providing insight into the investment process designed to assess the validity of a Project, Market, Team & Code.