The biggest Ponzi scheme ever was conducted by Bernie Madoff with an estimated loss of $20 Billion to 4,800 investors. What is scary is that when I look at those figures compared to the Blockchain ICO numbers from 2016 they don’t even look that big. There have been many ICO’s that have raised more than $10 Million each. Some have even raised $100+ Million. Last year ICO’s raised over $6 Billion. It is still early days but if 80–90% of these and subsequent ICO’s go bust like few experts are predicting, it could be possible that collectively the ICO may go down in history as the biggest scam the world will ever see.
But if you still insist and really really really want to chase those 1000x returns then this is one set of guidelines that I follow.
What to look for when deciding on whether to invest into an ICO…
A Valid Blockchain Use Case
When I look at an ICO project and what they are trying to achieve I decide if they fit into either 1 of these 3 areas:
1. Removes Middle Man in a Current Process
Essentially one of the most important concepts of Blockchain technology is that it aims to cut out a middle man in a current process. We need that trust when facilitating transactions between parties and for that we pay a premium.
But now comes the Blockchain that allows us to transact with each other without that middle man taking his cut. That trust is baked into the technology.
So does it make sense then why there are so many project teams coming into this space with profit and revenue generation models for themselves?
“Same Same but different”
Most ICO projects out there are just aiming to replace one middle man with themselves. Instead of the current someone taking high fees on a process they claim to make a process cheaper by taking a smaller cut.
Visa takes a 3% cut from merchants whenever you use your credit card to make a purchase. But instead of the Visa network should we use a blockchain payments network instead because they will charge 2%? Visa does a fair bit for that 3% such as providing support, protection against fraud and misuse. What will another Blockchain payments network offer me instead? I’m not waiting 20–30 mins for my payment to go through when I buy something on my credit card. It takes seconds then I am on my way. For me to benefit, a Blockchain solution should remove most of that 3% fee so that the merchant can sell me the goods for cheaper.
A Blockchain payments network is NOT useless. But how a Blockchain payment network should be implemented is to not allow for a central entity to profit at all. The participants in the network should be the consumers and merchants together with the network validators. The beauty of blockchain is that the consumer and merchant can be the network validators if they so choose, thereby all benefiting.
Be very wary of centralised entities claiming to revolutionise an industry but really just replacing one entity with themselves.
Crypto Exchanges are great businesses for generating millions in revenue and getting you to Unicorn status. But don’t be confused that they are here to revolutionise the industry for the transferring of digital assets. Be careful of the Exchange Token that promises some kind of revenue sharing. Most of the Tokens will be held by the exchange themselves. Instead wait till we see the next version Decentralised Exchanges.
This is why I love Bitcoin. Bitcoin is a store of value that completely 100% removes the middle man. There is no other way you can store value as efficiently as Bitcoin without a third party taking a fee from providing custody services. Banks exist because they look after your money. Regardless on if you do something with the money or nothing with it, you will still pay a fee to the bank. With Bitcoin there is no one there taking a cut for you simply owning it.
2. New Process Previously Not Possible
Google wasn’t possible before the internet came along. Who could have imagined that one of the world’s biggest companies came about because of the invention of the internet? Similarly the biggest killer application of Blockchain technology most likely is not clear in this early stage. Most if not all of what I am seeing besides the protocol layer blockchains themselves are just cleverly disguised projects offering solutions already solved. With a white paper that promises innovation and the disruption of this and that industry. I am sorry but it is going to take more than that for me.
Therefore I am more biased towards protocol level Blockchains such as Ethereum that offers Smart Contract capability. A concept that has not been successfully executed by any previous application.
Ethereum has had a big head start already and it has the biggest development community. For another type of ICO to really impress me in this area they really need to bring something new to the table.
If I was to look at a DAPP related ICO and not another protocol layer it would really need to allow for a new way to complete what we haven’t seen before.
To throw something out there as an example it could be a non fungible digital asset in the gaming world. People spend crazy amounts of money buying in game weapons, armour or other items but they can only be used within that game world by that developer. What if the same weapon can now be used across platforms between various game developers? A common digital asset that is now able to be shared between different companies, how much of that can be disrupted? Think $50 Billion.
3. Improves a Current Process
This is the least attractive project to back because there are already solutions out there that addresses a problem. To disrupt something that currently works you better have a pretty innovative way to tackle the same problem.
In these types of projects I really think about the core benefits of what Blockchain technology brings.
I ask simple things such as:
- Does it become cheaper for the parties involved?
- Does it become faster?
A large percentage of the worlds population is unbanked. Meaning they don’t even have access to basic finance like owning a bank account. The banks mostly ignore these people because the costs of servicing them is just not profitable. It could be because KYC is too hard with current processes. These people might not have government issued identification.
If a finance institution had a trustworthy way to access third party data of someone’s ID and history they could now take them onboard as clients.
A blockchain for Digital Identity is one such use case that aims to improve upon the process of how we identify ourselves to others for the purpose of receiving a service.
If executed successfully by one of the numerous ICO startups tackling this, it now suddenly becomes profitable for a bank to service the Unbanked. The question is then who is really going to be able to tackle this? If I can’t see a clear enough leader I am staying away for now.
I don’t want to use another Facebook, Amazon or Netflix if it’s not going to be better than those. Thank You but you can keep your “ecosystem token”.
Many ICO’s will not give you an ROI so be careful and do your own research on what you think may be a good investment. I have my own methodology I follow but you should take what I say with a grain of salt.
80–90% is a number being thrown around for all the ICO’s that will end up failing. I really hope you catch a few of those 10–20% that end up giving you a decent ROI.
Don’t get Rekt.