ICO investing guide especially in this turmoil times

ICO investing is like riding a bike. Always daunting the first time you try it, but you will soon get the hang of it.

Actually, any sort of investing is daunting at the start. Take your time to learn before diving in.

When you invest - whether in ICOs or not - there are certain general rules you always have to follow:
(1) Understand what your overall investment portfolio is - and how the investment category fits into your portfolio.

(2) Do your due diligence, including understanding the business (first) and then the investment structure e.g. ICO structure (second).

(3) Assess costs, risks and returns BEFORE determining your allocation (if you decide to proceed).

(1) Understanding what your overall investment portfolio is ?

When you are in your 20s, your investing goal (and risk/return profile) is likely different than in your 60s.

Generally speaking, all investments fall along a spectrum of risk/return.

Safe instruments are: Gold, fixed deposit accounts. These tend to form a good base that provides safe, low volatility payouts.

Properties are a mixed bag - not as safe as gold, and often not as risky as equities. If you focus on buying properties for the yield, then it is safer - buying for capital gains, is generally riskier.

Then you have corporate bonds and other structured instruments which sit in between equities and "safe haven" assets. Corporate bonds are slightly safer than equities in the same company as they (usually) have seniority in terms of claims in the event of defaults. But they still sit behind banks.

Then you have equities - you are starting to incorporate more business risk into your portfolio.

Even within equities, you have liquid/illiquid assets... generally, the more liquid an asset is, the lower the risk/return characteristics...

The more illiquid it is, the higher the risk/return characteristics.

As you move further up the risk/return curve, you come to startups and ICOs. Both are extremely high-risk investments

Which is riskier?

• Debatable. Conventionally, it should be startups as they are often highly illiquid with multi-year exit horizon.

• Right now, ICOs with little pedigree try to find a quick liquid market (exchanges).

An ok asset with liquidity options vs better asset with less liquidity - challenging to evaluate
If you are in your 20s, you may set up your portfolio to be 60% equities, 20% property, 10% safe haven buffer, 10% speculative (startups, ICOs).

If you are in your 60s, it may be 40% property, 40% safe haven buffer, 15% equities, 5% speculative.

Ponzi schemes are not an investment class, they are just a money-drainer.

(2) Do your due diligence:

(i) Understanding/analyzing the Business
(ii) Understanding/analyzing the investment structure e.g. the ICO structure

Business due diligence

These are some of the questions you need to ask:

• Do you understand the business model?

• Unless you are really donating your money/crypto for the fun of it (and be aware that many ICOs use donation language), make sure you understand what the assumptions and potential returns to your investments are.

• What are the legal entities involved? Where are they based?

• Who are the team members? Have you talked to them? Do they appear credible? Have you connected with ppl who can help you understand it?

• If they have published historical financials or operating numbers, have you vetted them?

• If they make any claims, have you researched them?

• Do you understand the landscape they operate in and what alternatives users/consumers have?

• Do you understand the risks to the business? What will prevent them from reaching their goals? How will they manage these risks?

Effectively, you want to do:

• Commercial due diligence (study of industry and competitors)
• Financial due diligence (study of historicals and projections)
• Operational due diligence (study of business processes)
• HR due diligence (study of key team)
• Legal due diligence (study of legal documentation in relation to the business)
  edited
  Even if you understand the business, and it checks a lot of boxes, it still may not meet the threshold for an investment

This is because other factors come into play. I am not sure about you, but I am here to make money and add it to my investment portfolio :blush:

So, as with any investment, there are several elements:

• Cost/price of the investment
• Expected return to the investment
• Time horizon of the investment

Together these factors result in you being able to measure the internal rate of return (IRR) and money multiple (MM) of your investments.

Money multiple is strictly a worse measure than IRR. Making 80x your money in 4 months is better than making 80x your money in 4 years.

There will be great businesses & great teams that make poor investment opportunities

That is why you should separate the 2 parts of the due diligence

• Understanding & analyzing the business
• Understanding & analyzing the structure of the investment.

When it comes to meeting the threshold of an investment, there is an important concept (that even some startup founders don't seem to fully grasp).

Since this is meant to be Investing 101, I will start with the basics first before moving specifically to ICO investment structures.

This is the concept of pre-money equity value vs post-money equity value.

Pre-money is money prior to the subscription.

Post-money is pre-money + subscription.

So, when we consider making an investment, we have to first ask ourselves (after understandng the business), "What is the pre-money value of the business?"

E.g. A company could tell you they are US$1 mil pre-money, and they are raising US$500k.
That means their post-money is US$1.5 mil. The new subscribers own 33.3% (500k / 1.5mil).

This is why startups have something called a capitalisation table. The cap table is important as it tells everyone what they own on a fully diluted basis.

Lesson: Don't get seduced by the post-money. It is the pre-money that matters.

As usual this is for reference only do your own due diligence as I am not a Professional advisor.

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Source by Mark