Cryptocurrencies were arguably the most debated asset class of 2017. Research shows that investing 100 USD in a portfolio of ten of the top 20 cryptocurrencies (in terms of the market cap) that existed on January 1st, 2017, the portfolio would be worth at least 50,000 USD at the end of the 2017. That is an outstanding average return of 50 times in one year. It should be noted that out of those ten cryptocurrencies, Bitcoin, including all its forks, has actually been the worst performing. Therefore, one of the key takeaways from 2017 is that investments in ICOs would have been significantly more profitable. Moving forward into 2018, it is worth taking a look at what we can learn from the experience with ICOs so far to make even better and more informed investment decisions in the current market.
The fundamental question that any token buyer begins with is the potential future value of a particular token. In the so-called “traditional” securities industry (where the same question is the foundation of almost any transaction) answers range from pseudo — scientific (for instance, CAPM[1] and Modern Portfolio Theory[2]) to purely esoteric (such as Gann Angles[3]). Similarly, in the crypto industry explanations for the outstanding rise of various tokens and currencies are also in high demand. In reality, most of these theories are no more than 50% accurate — as reliable as flipping a coin. As of early 2018, there is no credible theory that could explain it. However, the unprecedented rise of cryptocurrencies within a relatively short period of time cannot also be described as a purely random price movement[4].
Fundamental features of good ICO projects
From the extensive ICO experience in 2017 we have learnt the fundamental factors that ultimately determine if a given token is going to become more successful than other tokens. It all boils down to these fundamentals:
The feasibility and future applicability of the project. The first fundamental factor to consider when evaluating an ICO project is the feasibility of the project’s business idea. There must be a clear indication of a sustainable business model; otherwise the project won’t survive much longer than after the ICO funds are spent. Since the token supply is fixed in most cases, in the long term, the token value is reflected by the demand. Continuous demand will only exist if the project that requires tokens will actually be used. If the demand for a given token will be created not only by investors and traders, but also by its end users due to the token’s intrinsic value, the price of the token will be increasing or at least stable regardless of market conditions.
Where the token is traded. When it comes to taking profits, liquidity plays a key role. Tokens that after the ICO get registered on large exchanges, gain a significant advantage. In order to maintain their reputation, the large exchanges almost always allow listing tokens only after the ICO has ended and the team has made further progress in their project development. No major exchange will allow selling tokens on their exchange in the ICO phase! Those ICOs that guarantee specific trading conditions are misleading their investors. The best action that any ICO can take is to communicate with exchanges early on to speed up the listing process in the future, after the ICO has successfully ended. This means that during the time between the end of the ICO and until the token has started to trade on major exchanges, investors inevitably face some risks. Therefore, it is crucial for any investor to research and evaluate ICO projects they invest in to ensure that these risks are marginal.
Market conditions to consider when making an investment
Any investor should also pay close attention to the cryptocurrency market conditions, follow the most recent developments and also learn from the historical data. From the current ICO experience we can deduce what so far has been the best time to buy into a project and try to determine how to replicate the most successful strategies in the future.
When and in what market conditions tokens are bought. High volatility is one of the key characteristics of the cryptocurrency market. The last few months have shown the extent to which speculative frenzy and the fear of missing out can drive up prices in the crypto industry. Even in an intraday timeframe the value of tokens can significantly fluctuate. Given the vast size of all altcoins, there are hundreds of tokens that have the potential to create higher returns (in percentage terms) than Bitcoin or Ethereum. However, not all of these price increases can be turned into profitable transactions — liquidity and slippage can have a significant effect, especially for altcoins with low liquidity.
The token price. Buyers who purchase tokens in the ICO and especially in the Pre-ICO phase have a significant price advantage — they buy tokens at a discount relative to the initial market price. In stock markets a similar strategy is employed — investing in pre-IPO shares. This strategy is usually restricted to institutional investors (such as venture capital funds, hedge funds, private equity funds) and investment banks, providing a cornerstone for their profitability. The cryptocurrency market has now created a similar opportunity for individuals, since participation in ICOs is not limited to institutional investors. This development has created an unprecedented opportunity for individuals to make investments in a similar way as institutions and professionals have done for years.
Opportunities in the altcoin market
The decrease in Bitcoin dominance indicates that market participants are following these developments, and are gradually shifting from Bitcoin to altcoin market. As a result, many altcoins have shown higher growth rates in months than Bitcoin has in a year. One of the most recent prominent examples is Ripple, which increased more than 150[5] fold compared to BTC rise of 10 fold. But that is only the tip of the iceberg, because small tokens with relatively small ICOs have shown similar growth rates:
- Publica ICO attracted only 1 million USD and yet its market cap rose to 50 million USD in early January 2018[6]. Buyers who participated in the Publica ICO and pre-ICO gained over 30 fold investment in less than 6 months[7].
- Tron is another example. ICO for this project ended on September 2nd , 2017 and token has risen more than seventy fold in only five months [8]
- Perhaps the most spectacular example is Dentcoin.[9] It had a small ICO that raised relatively small amount of funds — less than 2 million USD in November, 2017[10]. In mid-January 2018 the market cap of Dentcoin has already exceeded one billion USD.[11]
The data shows that there are and will be opportunities to make money in ICOs and a smart investor will learn from the ICO experience so far to uncover opportunities before they appear on news. The tokens mentioned earlier have already made most of their gains. Therefore, smart investors won’t try to rush into the market at its peak, but will search for the next best tokens.
RxEAL
Here at RxEAL, we started with the first fundamental in mind — the feasibility and future applicability of our business idea. We wanted to create a practical, usable solution to a real problem, because we understand that only those businesses that deliver actual value and become widely used, become successful in the long run. It may sound primitive, yet there are many ICOs that promise unrealistic deliverables and mislead their investors.
Therefore, we decided to focus on a specific, increasing problem in rental markets that urgently needs a solution — the high rate of security deposit disputes. We saw that this problem can be solved with the blockchain technology in a relatively simple way. Hence, we know that there is a big market for our product — as the volume of rental transactions continues to increase, so does the demand for a better way of storing security deposits; and we are highly confident about creating a working product that will solve this problem. The RxEAL solution doesn’t require an enormous capital expenditure and is not taking away business from existing service providers, but, on the contrary, creates added value. Therefore, the business model allows both competitive pricing and good profit margins.
In terms of business valuation, we also see a good potential. If the average security deposit value deposited on the RxEAL platform is 900 USD (less than the average security deposit value in the USA)[12], and there is on average 30 000 daily transactions (which is a negligible number in the real estate rent industry)[13], it would require around 350 million USD worth of RXL tokens per annum only for the platform use (the RXL turnover in USD). IT companies’ that are trading on NASDAQ and even businesses included in S&P 500 are trading at around 15 times their turnover relative to price (price to sales ratio)[14]. Applying similar calculations to our business, the valuation of RxEAL could reach more than five billions USD. If we would compare these calculations to other cryptocurrencies (such as the projects mentioned earlier) and would include the speculative motivation for cryptocurrency trading, then this valuation would look even conservative. Given the real life applicability of the RxEAL platform, we are confident that it is one of the projects that has a great potential to accelerate mass adaption of cryptocurrency and blockchain solutions.
Any investment is inherently risky, but the cryptocurrency market has proven that ICOs have provided at times incredible investment opportunities that until now had not been available to non-professionals. The current average return rate for ICO participants shows a strong indication that also in 2018 there will be ICOs that will provide their holders growth rates comparable to the success stories of 2017. One of the key lessons is that those who make early investments in tokens with a feasible business model and a good long-term project potential stand the best chance to replicate these returns. If the price increase is covered in the news headlines, the best returns are most likely gone, and it is already too late.
[1] https://www.investopedia.com/terms/c/capm.asp
[2] https://www.investopedia.com/walkthrough/fund-guide/introduction/1/modern-portfolio-theory-mpt.aspx
[3] https://www.investopedia.com/articles/technical/04/042804.asp
[4] https://www.investopedia.com/terms/r/randomwalktheory.asp
[5] https://coinmarketcap.com/currencies/ripple/
[6] https://coinmarketcap.com/currencies/publica/
[7] https://icodrops.com/publica/
[8] https://icodrops.com/tron/
[10] https://icodrops.com/dentacoin/
[11] https://coinmarketcap.com/currencies/dentacoin/
[12] https://www.abodo.com/blog/annual-rent-report/
[13] https://www.rentalprotectionagency.com/rentalstatistics.php
