ICO: Burnt fingers or red hot opportunity?

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs). SEC Chairman Jay Clayton

What follows assumes some grasp of what blockchain and Initial Coin Offerings are.

If you are toiling away in a 9 to 5 job, dreaming of retirement, hoping that the respectable single-digit growth in your equities portfolio will keep you in green fees and luxury cruises for the rest of your natural life... Well, all I can say is that you really should have a bad case of FOMO.

Because, perhaps unknown to you, the tectonic plates of the financial world have shifted deep below your feet, creating the kind of opportunities for those of us who are nimble and only moderately brave that could propel us into orbit with Tim Draper, Winklevoss brothers and Roger Ver.

I’m talking about blockchain.

If seeing the word makes you flinch and want to hide under the bed, you are not alone. WTF is a blockchain anyway? Sometimes it feels like the more you read about the technology, the more confusing and absurd it gets. It seems about as real as, oh, I don’t know, Donald Trump’s plan to build a wall and make Mexico pay for it. Not the kind of thing you would want to invest your life savings in, or even a small portion of them.

Fear and loathing is the natural reaction to blockchain, but not the right one. Take the case of Ignaz Semmelweis, who, nearly 200 years ago, gave the world the then revolutionary technology of hand-washing. Semmelweis was a doctor working in a Vienna hospital who theorized that the reason scores of pregnant women were dying was that their physicians inspected them straight from having dissected corpses in the morgue. Hey, let’s wash our hands before we touch the women, he suggested.

Nobody listened though, because science hadn’t invented germs yet (Semmelweis-reflex). They seemed about as real as Trump’s plan for a Mexican-funded wall.

People don’t like leaving their comfort zones. They see new
technologies as a sinister threat and ignore them for as long as they
can…

Back in the 1990s, I tried to explain to my parents what this thing the Internet was all about, and how it was going to change the world, but they didn’t really want to know. Not because they weren’t smart enough to understand, but because it was disturbing for them — it required them to venture far out of their comfort zone into dangerous, unexplored territory.

People don’t like leaving their comfort zones. They see new technologies as a sinister threat and ignore them for as long as they can, hoping they will just go away, and they make dismissive comments about them in hopes of speeding up that departure. “Cryptocurrency? It’s a bubble!”

But we don’t need to be so scared. It’s all a matter of perception — at one time, in some quarters, “disruption” was a dirty word that meant bad things were happening. Now, those of us who are a little more broadminded can’t get enough of it. Those are the guys I’m with. I love the new, I love change. For me, it’s a synonym for opportunity.

This brings us back to blockchain.

OK, it does sound like it might be some kind of mediaeval instrument of torture, and that can be off-putting. What can also be off-putting is if you immediately think “Bitcoin”, and then: “It’s a bubble! Like the tulip thing in the Netherlands in the 1600s! I’m not going anywhere near it.”

Well, Bitcoin might be a bubble, or it might not, but the blockchain technology itself is no passing fancy. It’s a paradigm shift and it’s here to stay. So keep calm and ignore the Bitcoin mania, because it’s drowning out the other exciting opportunities popping up in its shadow — Initial Coin Offerings. (Yes, it sounds a lot like “Initial Public Offerings”, and we all know what a good idea those can be.)

But you have to be very careful — I’d say 90% of all ICOs are either flat-out scams or they are driven purely by utopian idealism. These latter may not intentionally set out to defraud anyone, but they address a utopian idea and lack any substance.

With more than seven years of experience in capital markets and investment management, I am interested only in ICOs that address a real-life business case and position themselves to claim a big, yummy slice of existing, well-established multibillion-dollar markets, but use blockchain advantages such as super-low (or even zero) transaction costs, speed and transparency. What’s more, the technology cuts out the middleman — decentralization is the core idea in our future technological evolution.

So what’s the next step? First, educate yourself — nobody will do it for you! But hey, you also could buy me a beer and we could discuss it in a deep dive. But educate yourself anyway.

The reason you want to get into ICOs is simple: money.

Second, I don’t invest in so-called altcoins-ICOs. (Investopedia: “Altcoins are the alternative cryptocurrencies launched after the success of Bitcoin. Generally, they project themselves as better substitutes to Bitcoin.”)

What I do is, I find rising blockchain stars through research into startups before they hit any exchange, and ask these questions:

• Does this startup address a real-life business case and does it offer
  a competitive advantage?
• Is there an existing and developed market, and does the blockchain ingredient give the startup any significant advantages over the conventional, existing players?
• What are the barriers to market entry (costs, regulations, natural
  monopolies, etc.)?
• Does the team behind the startup have experience or a track record
  in what they are trying to build?
• What legal aspects such as ownership, distribution of tokens, and incorporation of the company and so on, are relevant? It is crucial to understand these issues before you invest in something.

After the research I also check ICOBench to see what they say about it, as a benchmark for my evaluation. Most important though, are the secret ingredients: my gut feeling, and a quick consultation with some blockchain experts whose acquaintance I have been fortunate enough to make.

The reason you want to get into ICOs is simple: money. According to CoinDesk, the ICO market has raised approx. $4-billion so far.

As with any investment, there is risk, exacerbated here by the lack of regulation. It’s the Wild West, but it always is when there’s a gold rush. In the words of Bill Maris: “The reality is regulation often lags behind innovation.” Because it’s relatively unexplored territory, without a tried and tested valuation model, the traditional venture capital people are reluctant to get involved. Robert Shiller, who won the Nobel economics prize in 2013 for assessing asset prices, has described the value of crypto assets as “ambiguous”.

So do whatever you can to mitigate the risk — apply some kind of qualitative evaluation model, consult all available sources for your analysis, seek advice from those with experience, check sites like ICOBench — and also act fast before the opportunity slips away.

Having been involved in several ICOs, all of which exceeded my expectations by far, I am a believer. Participating in profound ICOs is the best bet to score on the crypto-market.

Watch this space — every two weeks or so I will share my insights about the market and write about promising upcoming ICOs; revolutionary ones based on real-market ideas, not on utopian or fantasy business cases. Think Amazon. It came out of the dotcom bubble as a shining star because it reinvented the old-fashioned book business. It’s a model for the kind of hidden stars we will hunt among the upcoming ICOs.

In my next reach-out to you fellas, I will share one special ICO which is a high flyer and has already spread its wings! Stay tuned.

Disclosure: The author invests in cryptocurrency markets. The author does not endorse participation in any token sale or cryptocurrency investment, all of which have significant inherent risk. Seek advice from a financial advisor as well as do your own due diligence before considering investment. The author is not responsible for any losses. the author is advisor to various ICOs.