Want to become a millionaire? Stop investing in current ICOs.
“Where to invest to become a millionaire?”, was one of the most popular questions that we heard last year.
Together with a group of friends we invested in various blockchain related projects and ICOs for the last 5 years, but we discontinued our operations. Here are some reasons, why one should stop investing in ICOs now or at least think very carefully.
The current ICOs are simply not mature!
The market is immature. Blockchain technology is here, but it is at a very early stage of development which allows to make prototypes and run experiments. It is not ready yet to put everything on-chain, as many ICOs claim. As a professional investor, the main deal breaker for me for almost any ICO now is the question:
“Why the f##k do you need 50 million dollars, what are you going to do with it?”
Especially if your job experience is being a celebrity, professional guitar player or a dishwasher. Get 50k, prove that you can build something and go to the market again, asking for 500k for the next stage. You will not only be able to get money from the market, but you will have a huge queue in front of your ICO when you wake up the next morning. In fact, following this way, you will be able to get money cheaper (get a better valuation) and even attract debt financing for your project while investors will have much less risk and more comfort.
In this way of ICO, you don’t share all of your company but also manage the risks, so you can combine your capital into debt and equity, which has different costs. But I am dreaming too far away…
What is happening now, is that everybody is putting everything on the blockchain. But what is even more interesting, is that almost everybody gets the money they are aiming for!
Our short comment on this:
“The idiot is not who is taking the money from the ground, but who puts it there!”
A lot of people got rich fast by investing in Bitcoin at the right time. They were libertarians, programmers, Chinese miners or just speculators, but they are far away from professional investors.
Law and regulation
The current drivers of successful ICOs are mostly fair and unfair marketing, PR, buying the community, kickbacks and increasing risks. Most projects can not deliver, so they start to bring money back, grow their community, stimulate demand by adding risk and do non-profile activities (which is even a relatively good scenario). We have seen projects spent tons of money for marketing to inflate the price of their token further. It is a classical shareholder-management conflict (Principal-Agent Problem), but in this case with zero regulation.
Most of the time, “managers” can not be legally responsible for their actions and they can not be audited. It is cool that we are getting rid of unnecessary bureaucracy, but no regulation is another extreme.
There are no clear mechanisms of evaluation
Many of the things that are happening right now are even illegal in the real financial world.
At the current market, people say that a project is successful if the price is high, not when the product is good.
People don’t understand the underlying price of tokens or fair value of the new products. Bullshit stories drive the crypto market all the time. For example, when governments bring some not very relevant or fair news we see extreme movements and volatility of crypto prices
We see that blockchain technology and the successful experiment of Bitcoin brings large wealth redistribution, but at the moment there is wealth redistribution within the community from early believers and technical people to all kind of entrepreneurs who are good in Powerpoint and have reputable advisors or are able to hire marketing people.
Room for improvement
At dib.one we have designed mathematical models for risks and ICO funding which we find a fair application of classical risk/return theories.
Our thesis is that the financial sector should be reformed because of many reasons, but fundamental models and theories are correct and should not be ignored.
It is not good to have 200+ regulators, but Markovitz’ Modern Portfolio Theory is a beautiful thing!
We propose an ICO round structure alike the venture capital process. This starts with a seed investment of family and friends, so an MVP can be developed. After an MVP and proven demand, a second investment round can be held where venture capital funds buy 15 to 25% of the company’s shares. With this injection, existing products can be further developed and money can be used for marketing. Second or third investment rounds can have different purposes, but at each round only a part of the shares are being sold.
So again, why does a company suddenly need $50 million to start? People don’t think about it. The great Ethereum project was funded with an ICO of only around $15 million. We propose the structure that is known as “tapping” in the classical market. The main advantages of an ICO are that you can run it virtually for free, at any time, with minimum regulations. So, going to the market every time you need does not sound like a stupid idea.
True success factors
We believe that key success factors of innovative blockchain projects are very obvious. Mathematicians are valuable and not serious looking advisors with red ties, neither great marketing. Decentralised systems can be described as motivation vs. punishment vs. robustness of the system with value at risk on top of it.
All parameters here are important. Specialists in theory of probability and queue theories are needed to design such systems and limit the risks. Different risk management systems are needed.
In fact, almost everything in distributed systems is based on probabilities, nothing is a certainty. So systems should be sustainable and should avoid tail risks.
Traders and investment bankers bring the value, not developers or a team of hipsters. They know exactly how to manage risks, who are consumers, and who are creators and takers of financial risks. It is more important to understand the interconnections between global economy, politics, central bank’s policies, financial markets and real business. They bring their solid experience into the new innovative sector.
Crypto economics is not isolated from the real economy, it is part of it.
The real consumer is still a human and most of humans’ life and needs are still the same. Blockchain technology can also make certain processes faster and some risks bigger. That is why the importance of mathematicians, investors and economists is even higher in the blockchain space.
“What has been will be again, what has been done will be done again; there is nothing new under the sun”,
King Solomon
About the author: Andrey is a member of the CFA Institute, professional derivative trader and fund manager with 10 years of experience with 20 billion EUR AUM portfolios. Andrey is an entrepreneur, private venture investor and advisor of several fintech start ups. Ex- KPMG, Transamerica and Aegon Asset Management. He had a career in mathematics and two master degrees (Mathematics from Moscow State University, Corporate Finance from Amsterdam Business School). During his mathematical career Andrey was working on Queue Theory for large distributed systems and Theory of Probabilities in Moscow State University as early as 2004–2009. From the first day he supported the Ethereum community and started to develop distributed financial applications in early 2015.
