Top 3 Things To Know Before Investing In Crypto This Christmas
The prudent application of due diligence, even though that does not sound very sexy.
- People
- Product
- Performance
If you have a short attention span you can stop reading now. If you want the details, keep on going.
The Basics
Crypto is NOT Blockchain! Blockchain is the Internet to Crypto’s Google, Amazon, Facebook or Netflix. Crypto works on Blockchain, Blockchain does not need Crypto.
“Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.”– Marc Kenigsberg
And if you can cast your memory back to the dark days of the early 90s before these Internet giants were heard of, you may even remember some names and brands that have fallen by the wayside.
To that point we don’t know who will be the Blockchain equivalent to Google et.al. which is part of the excitement of Crypto and a contributing factor to why the markets are so volatile.
Scarcity does not equal value
Whilst this is the premise that Bitcoin had inbuilt scarcity into its structure and was one of the bases it was founded on, it isn’t as important to its success as people’s belief in it.
It is a common thread for many Crypto currencies, scarcity is only really true in certain circumstances. The US Dollar, in fact every ‘fiat’ currency proves this. They are all based on the perceived value and thus confidence that the ‘market’ or the ‘public’ have in them. Both the fiat and crypto currencies have value because people believe in them. Which will lead us to volatility, if that is all they have.
If a government breaks the accepted rules, does anything that causes the markets to lose confidence then the currency plummets in value. See Ecuador pre 2000 prior to it converting its currency to USD, or Zimbabwe at time of writing has an inflation rate of 200%+. Likewise when people lose faith in a crypto currency there will be a crash. Doesn’t matter the level of scarcity built into the system.
Scarcity was to compensate for the loss of asset backed currency. When the Dollar was gold backed there could not be an over printing of money as it needed an equal amount of gold to balance the books. Thus hard assets have a real value, because they’re tangible, thus scarcity in Crypto aims to emulate this.
Decentralisation
Another founding principle of Blockchain is decentralisation. So Cryptos will, in words, emulate this principle. The value of a decentralised approach is varied, it is well laid out in this article The Importance of Decentralised Public Blockchains for DAO Formation, but to outline a couple of points. Social Hardness, Social Scalability, Security and their ability to challenge conventional institutions.
In part this is done because Blockchains can coordinate at scale and not be reliant on intermediaries, trusted or otherwise.
“So rather than trusting a human run institution, we can trust code.” @kleb
This also brings Decentralised Autonomous Organisations (DAOs) into the picture and how groups can be set up and by consensus agree strategy and actions.
The volume of ‘nodes’ on a Blockchain impacts on its hardness and security and thus the immutability of the code. In an ideal scenario no one person or group have the ability to control a Blockchain or Crypto project.
A fact that we do not see in all Crypto projects. So how do you measure the way the project is structured and works?
Naivety or Criminality
“We made some mistakes” might seem a fitting reason for financial implosion but an illegal action is still an illegal action. Promising and deliberately/knowingly breaking that promise is a lie and doing so in business is fraud especially if you’re taking other people’s money based on the initial promise.
Laws are in place for a couple of reasons generally.
- So we can protect everyone equally
- So we don’t have vigilante justice
Knowing what you can and cant do, gives you an advantage.
“If you can’t go over or under, go around” Joseph Morris
But there is a difference between going around and breaking the law. Ignorance is not a defence. At present far too many are citing this as a valid excuse and it is not. During the 1800s in America the carpet bagging, snake oil selling, charlatans would be given rough justice by the population if they were caught. Which is what the markets do now, if you’re watching.
Regulation vs Open Market
The big drive in the US is to heavily regulate any form of crypto activity. The reason being that “Crypto is unregulated” and therefore “dangerous” just look at the failure of some large scale Crypto projects.
The fact is unethical and dishonest people are everywhere, we only have to reflect on the news and we can see it with every form of public figure, every type of profession there are plenty of examples from comedians to politicians who are being flexible with the law. Some are caught and receive justice and some are sailing close enough to the wind to miss the justice system.
The Law does not stop them.
Ponzi schemes, named after the crook who started it Charles Ponzi, although let’s be honest he was the one that got caught in recent history, doesn’t mean other people have not been doing this before and for longer. Or Bernie Madoff or Lou Pearlman both emulating the scheme and search the current crop of Crypto projects and you will find them there too. Indeed examples appear in all industries.
A simple Google search will give you all you need. These cases predate anything Crypto, they were operating in regulated financial markets, there were laws in place to protect innocent people and yet they carried on with their scams.
A criminal will always be a criminal. If a person does not have the ethical character to know doing something is wrong then they will do it. They will do it because they a) believe they are justified in doing this and b) if they do think it’s against the law they also think they won’t get caught.
Too good to be true.
Sometimes a banana is just a banana, but other times you have to realise that ‘the deal’ you’re looking at is too good to be true. How to tell the difference? That is something that experience and judgement will help answer over time.
There is a difference between a ‘con’ and a ‘no brainer’. And this is where your experience and judgement comes in. For me, I look at what I get, then what does the other party get? If the exchange seems reasonable, or even weighted in my favour then I see it as a no brainer. If it is all in my favour and I see no benefit to them I ask ‘why are they doing this?’
To some degree this is where the due diligence comes in, have you understood who they are, what their purpose is, how their operation works, does everything add up? If you understand what they are doing and you trust they will do what they say they will do, then you can make your own judgement on whether to invest or not.
To invest in something on the off chance that it might spiral up like Bitcoin did… Not understanding what the actual offer is. That is why the market is so volatile. Opportunistic sellers with opportunistic buyers.
Dot Com Bubble.
In the late 1990s when everybody started to understand that the Internet was a force to be reckoned with. That its uptake was certain, that our collective future lay in its hands. There was a rampant investment in Tech. Specifically anything Internet related. People wanted to try and buy the Internet, next they would invest wildly in fast growth companies that promised the Internet and their idea would see growth beyond anything previously experienced.
Then people started to realise that there was a slowing of the return on investment, that the promises were not coming true, that growth was slowing. The bubble burst.
The major difference between then and now, is you could ‘see’ the companies, they operated within the standard definition of what a company should look like, centralised structure, office environment, clear product/service, head count, people, customers. These are all tangible elements that an investor can judge.
Didn’t stop Enron, in a highly regulated industry from breaking the law. And with remote working and global supply a company can be multi-national in concept and activity immediately. With Crypto they can hide much.
What are the three things to know about the crypto you want to invest in?
- People
- Product
- Performance
People
Who is behind the entity? What is their experience? Where are they based? What do you know about them? Would you trust them with your life savings? How clear are their goals?
Product
What is it that they are trying to achieve? How well defined is their offer? What value does it bring to the marketplace? How useful is this as a service? Who will want to use this and why?
Performance
How much profit is in the service? What numbers are already available? How much is pure speculation? How measurable is the whole offer? Would you consider this a ‘no brainer’ or ‘too good to be true’?
Transparency and Self-Regulation
If you can see who they are and what they are doing then this gives an open window into the organisation. This is a first step in trusting they are credible. To be honest, speaking as an average investor, I am not an accredited financial advisor, (so I have no legal grounds to offer any investment advise on specific entities) have very little ability to see into organisations. The regulations are set in place for anyone to have an opportunity to see inside a traded stock or company, but who actually does?
If you have an opinion of what the real value of something is then you can make an informed decision on whether to invest in it, or not.
Organisations that offer up transparency will have less to hide. With the understanding of how Blockchain works this too will bring a new dynamic to the ‘transparency’ conversation.
Force for Good
All things in life can be a force for good. Open markets, freedom of trade, expression, are all valuable means of progression. With the caveat that it does not subject, vilify, bind, defraud, or cheat others.
The power of Blockchain is it will be a means of generating:
- Progress in how we operate
- Wealth for those that adopt early
- Mechanisms for improving what we already do
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