SmartCredit.io
Jul 21, 2017 · 5 min read

Tokenmarket.net lists more than 270 ICOs (many of them completed, some ongoing and many others upcoming). Some ICOs are supported by lots of PR and advertising, while others less so. There is certainly a “get rich quick” hype in the ICO space. How should an ICO investor decide where to invest? This article proposes an unorthodox investment approach: the lazy investment strategy. Of course, read at your discretion; this is not financial advice.

First we compare the market capitalizations after the ICO phase with current market capitalizations (based on the market capitalizations listed on coinmarketcap.com). As coinmarketcap.com does not always show the market capitalizations from the first day, in some cases these figures have to be estimated (applying the following: coin price after issuing X available supply). The current market capitalizations are indicated as at July 20th, 2017. The last column shows the growth factor — by how many multiples has the market capitalization grown since the ICO launch.

This table is not representative for all ICOs but is intended to provide a factual basis for the investment approach below.

The ICOs can be clustered into three groups:

  1. ICOs for which the current market cap is more than 3 times the issuing price
  2. ICOs for which the current market cap is between a factor of 1 and 3
  3. ICOs for which the current market cap is below the issuing price

Group 1: High performers

The first group contains the ICOs with good business models, also combined with some effective PR/marketing:

Group 1

irst, let’s look at the coins with good business models (in the author’s opinion). These include the following examples:

  • Antshares (now NEO): for issuing digital tokens. There is clear business demand for this application.
  • Ark: for bridging between different blockchains. There is clear business demand for this application.
  • Komodo: a private, untraceable coin. There is clear business demand for this application.
  • SingularDTV: for digital rights management. There is clear market demand for this application.

Are these coins a good investment? They already have high prices, but there is also market demand. We can short-list them and keep an eye on them during dips.

The “high performers” group also includes PR coins:

  • Veritaseum: There is certainly market demand for P2P financial products. However, how should this model work in real life? Let’s start with some basic questions. How are risk and collateral handled? The business plan does not answer this question.

The Veritaseum token has only one operation, “assigntoken”. It’s not clear how they would generate revenue for shareholders with only one operation in their contract?

The available supply of Veritaseum is 2 percent of total supply. The market cap of 2 percent of supply is USD 384 million; the market cap of total supply would therefore be USD 19 billion… Time for a reality check — would you invest in a business valued at USD 19 billion without a clear revenue generation scheme and in which key business case topics are not addressed?

Should one invest in Veritaseum? Short answer — No.

  • Lykke: This is a “decentralized exchange”, but with a central matching engine. Decentralized exchanges do not hold private keys; those stay with the clients. But, does this model justify the USD 63 million valuation of circulating supply? This translates into a total valuation of USD 317 million (approximately 20 percent of the total supply of Lykke is in circulation). What about AML (anti-money laundering) and KYC (“Know Your Client”) obligations? Could the regulator shut down this “decentralized” exchange? Actually yes, it could. All you would need to do is switch off the central matching engine…

We should also keep in mind that Bitfinex carried out an equity offering after a hack with a “post-money” valuation of USD 200 million, and Bitstamp had an equity offering with a total valuation of USD 60 million. Both of them are established exchanges with a proven ability to generate revenue, a stable client basis and functional regulatory compliance (KYC, AML, etc).

Group 2: Performers

The market cap of these coins has increased between 1 and 3 times. Some of them have clear revenue-generating business models and are therefore worth considering as investment candidates:

Group 2

Group 3 — Potentials

The last group represents the coins for which the issuing price is higher than the market price.

These are the potentials. For example, NVO, Encryprotel, Mysterium, and Tokencard have clearly defined revenue-generating business models and they are valued below the issuing price:

Group 3

Lazy investment strategy

Instead of dealing with the hassle of investing in ICOs (setting up wallets, trying to submit transactions by a specific time, waiting until the coins are assigned, etc.), you could follow the “ICO pattern”:

  • The demand for coins and the market cap of many ICOs are high during the launch phase
  • The price corrects after the launch

The ICO launch phase involves a lot of marketing and PR. As emotions and excitement tend to cool off after the ICO, the question remains: What is the real value of certain ICOs? Without continued PR backing, we will likely see a price correction.

These assumptions can be used to create the following strategy:

  • Wait for the market correction of the ICO coin
  • Analyze which price-corrected coins have real revenue-generating business models
  • Analyze which of these price-corrected coins have an alpha product ready and their first customers using the product
  • The coins that pass all these test will be our investment candidates

Follow the business model and choose the entry point

Ultimately, the business model is the deciding factor:

- Is there market demand?

- Is there a clear business model?

- Does the business model have a network effect (Metcalfe’s law: the value of a network is O(n2))? If yes, the model is easily scalable. If no, it’s rather a traditional business model that may not require a blockchain.

- Does the business model have a revenue-generating scheme?

- Is the alpha software/alpha product ready? Are there initial beta customers using this product?

Note: This article is provided for educational purposes only. For actual investment advice, always consult your professional investment advisor. The author accepts no liability for any consequences of decisions taken on the basis of the information contained in this article, nor does the author guarantee the correctness or up-to-dateness of the information contained herein despite the author’s best faith.

Additional information:

1. Coinmarketcap

2. Tokenmarket.net

3. Metcalfe’s law

References:

Web Site: https://smartwealth.io

Blog (first article from Jan 2014): https://medium.com/smartwealth

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