Emerging Investments in Tech: The Downfall, Rise, and Impact of Recession on Blockchain Ventures
We’ve all seen the bull and bear tech cycles with your favorite crypto coins, ICO’s, NFT’s, DeFi technologies and beyond. While many see the oncoming firesale as a good time to buy, the argument that few retail investors have taken time to evaluate the technology and value proposition behind these companies is very relevant, quicker to go searching for value on the charts and hype over long-term growth and sustainability.
The year is 2023, and the crypto markets have tanked yet again, taking many personal fortunes with them. You, however have gotten out in time or have funds put away to get a new investment at the firesale price, how do you determine which are worth your investment, and which will continue to be worthless in the long run? Let’s take a deeper dive into evaluating five key value-propositions of future/current tech within the blockchain industry as a whole.
The first value-proposition that comes to mind for blockchain technology is security. How safe are your funds by investing into that coin, NFT, or digital security? Is the asset tied to your personal information, and is the currency redeemable in a usable form such as fiat currency? There are many DeFi yield farms, NFT communities, and meme coins that appear to offer high returns, but will you be able to get out of the investment when it’s time to take profits?
While some platforms such as Solana would give you far lower transaction costs, you would benefit from a higher level of security when working with ethereum or bitcoin. Further, you would have the highest level of security under a security token, where tokens can be canceled out and re-issued to the security holder as there is a true tie to personal identity. Aside from that, it would be worth evaluating the security of the token wallet needed to transact the currency and what steps would need to be taken in order to invest and withdraw your investment.
The second value-proposition with blockchain companies is the trust that has been established with the community and founder/investment track-record. How long have the founders been in the space and how has their track record been with prior ventures? Have they handled investor money appropriately in the past? Who else is involved in the project and is there a retail community that has faith in the investment product?
This is where things can get tricky, as many opportunities in the blockchain space have celebrity endorsements, extensive marketing budgets, and all sorts of co-signs to illustrate the optimistic future of an ICO, NFT collection, crypto coin or digital security. It is essential to be aware of how perceptions can be misconstrued as many NFT’s had been purchased on behalf of the celebrity, however it wasn’t their individual decision to purchase the NFT out of their own funds. When looking into the founders of a blockchain venture you are going to invest into, it is valuable to see their past projects, and their own personal network indicating a level of integration into the industry as a whole. Generally, it is wise to use caution with newer founders/leaders of companies and communities as they will be more likely to be a flight-risk and avoid compliance measures, leaving yourself as the one truly at risk.
The third value-proposition is regulatory compliance and long-term viability within the investment. Are they selling a security without being registered as a security with the SEC? Is what you are investing into legal and redeemable in fiat currency? Is the company held up by its investor pool/market cap only or is there further intrinsic/intellectual property value behind the technology/proprietary value-adds of the investment? Who is responsible and accountable for the investor money being accessed and to what level is the retail or accredited investor protected in the investment?
There have been countless episodes of the same story, an up-and-coming hot investment comes along, fails to comply with securities laws, and the retail investors are the ones stuck holding the bag with unredeemable or now worthless tokens as the SEC clamps down on fraudulent or non-compliant investment vehicles. You have to look past the market cap and the current onslaught of price growth and further pay attention to if the coin has massive “whale” investors that if they were to sell their position would dramatically impact the retail investor. There are many investments in the space that are only as good as the investors willing to HODL in hopes of price growth, with no consideration to the true-value of the investment. It is a far better bet to invest into technology with the potential to decrease transaction costs, improve security, build better communities, streamline processes and provide value that has strong potential for future growth other than marketing hype.
If you were to invest your money into a blockchain venture, it is also important to know where your investment is being used to create value, how they plan to build out the community and gain critical-mass. The other horror story comes from bad founders who take out investment money for personal uses and later fold the company with many left holding worthless tokens. These types of investments generally are deemed illegal securities at best in the end and it’s ultimately the safest to invest in companies that are SEC compliant in the space such as real-world asset backed blockchain investments like security tokens. Longevity of the asset, compliance of the asset, and trustworthiness of the underlying tech and founders can go a long way for the retail investor that takes the time to evaluate these items.
The fourth value-proposition is considering the width of the market that already exists for a blockchain product that you’re investing into. How many companies are working in the same space of technology (ie. NFT marketplaces, crypto exchanges, etc.)? Does the investment have a competitive edge in the space or is it a near-copy of a more successful company? Does the investment have a first-to-market advantage with few players in the space and how does it set up the company growth prospects due to being a firstcomer? How many communities in the industry space do the same thing, and is the lower priced investment better than the whale?
If everyone is doing the same thing with tiny iterations of the same kind of technology, either the technology is going to change the world, or it is a signal of the top and can be plagued by oversaturation. There may be NFT exchanges that sell “cheaper” NFT’s, but are they truly worth anything at all besides a digital picture without a community? Sometimes you will truly get what you pay for in the space, and it is more a dime-a-dozen to invest in extremely low cost investments expecting 100x returns every time. There is certainly a difference from investing smart and taking gambles on what the next collection or ICO or crypto coin will be, and it truly pays to see if the company has a competitive-edge in a saturated space, or to see if the company in an unsaturated
space has potential for strong growth and mass-adoption in the next couple of years. There are many new-to-market technologies that have massive growth potential, and it goes back to weeding out the technology behind the investments and who is behind it and their trustworthiness. It is even more important to see who holds what amount of the investment for something such as a crypto coin. If one person holds over 30% of the tokens, it will be a nightmare for the retail investor if they were to remove their position from the market. Newer ICO’s had massive growth potential, however bitcoin and ethereum have been able to keep a more stable price growth comparatively over time. It is also worth noting how one could get over 10x on an ICO, and lose it all within the same week if they weren’t evaluating these value-propositions/exit strategies effectively.
The fifth and final high level value-proposition has to do with how the company is creating shareholder value with consideration to investment rounds and tokenomics. How many tokens are issued and how do the tokens get burned/how is supply reduced over time if applicable? How is the investment money being used to create shareholder value? How much does it cost to transact with the coin and convert to fiat currency with taxes considered? What is the company’s roadmap and at what levels of financing will milestones come into play to increase shareholder value?
When a company comes up with its tokenomics, price levels can be manipulated to appear surprisingly cheap or expensive depending on the supply of tokens in the market at a given place and time. Getting in early before tokens are burned down can set you up for long-term growth given the utility and value-adds for the coin are legitimate. It is important to see how your investment will be used, whether to run systems, create unique roadmap value-adds for the token holder, or to scale up the company operations further with financing. You will often see financing milestones and goals for new coins and NFT projects and it comes back to a matter of if the money will actually be used to better the shareholder value, which boils down further to its ability to be compliant to regulators like the SEC. Knowing how much it costs to buy something such as ethereum and its gas fees or to sell and convert something to fiat from a defi protocol and at what points you will be paying taxes on your investment is key to generating profits and investing wisely and must not be ignored or taken lightly.
In the end, there will always be stories of those who “got rich quick” on a meme-coin, along with those who lost it all on the same coin at a different time. The goal of this blog post ultimately is to help those getting into the space in the current tumultuous markets to not buy into a worthless firesale, and to shift focus onto those companies that are a value-buy for a longer term based on real growth prospects, and not those artificially inflated by other means. With these high level value-adds to be aware of, you can quickly make sense of if there is even a slight prospect for true success in your investment, or if you are truly gambling on something that cannot even pass the howey test. Do your own research, this is not financial advice on WHAT to invest in, but simply a reminder to evaluate all aspects possible before you invest your hard-earned money. Happy tokenizing! I’ll see you on the other side of the blockchain.
Nick Steffen, Associate, Security Token Advisors
Linkedin: Nicholas Steffen
Twitter: @tokennick
Disclosures; Nothing in the site constitutes professional and/or financial advice, nor does any information on the site constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. All investments are highly speculative in nature and involves substantial risk of loss.
