Globally, the amount invested in ICOs (initial coin offerings) for blockchain companies has increased by over 400% since 2014. With more and more blockchain companies launching and growing awareness of the benefits of using blockchain, more people are looking to invest in these innovative companies.
However, as with any investment, it's important to thoroughly understand what you're investing in before taking part. And because blockchain technology and ICOs are still a relatively new concept, it can be difficult to know how blockchain investment works.
In this article, we look at five of the most important factors to consider before investing in blockchain technology. Hopefully, by using this criteria as a general guide, you’ll be better prepared to make your own investment choices.
1. Understand the Purpose Behind a Blockchain Startup
Not all blockchain startups are alike. While cryptocurrency projects do make up a large portion of blockchain startups and are probably the most accessible to smaller investors, they are not the only companies in this space. For example, cryptocurrency exchanges, private blockchain initiatives, and bitcoin ETFs are just a few of the various types of companies in blockchain.
Regardless of what type of blockchain startup you invest in, it’s essential to understand the purpose of the project. For example, if you’re investing in an ICO, you should establish an evaluation standard. It’s also crucial to understand the market solution that a blockchain startup offers, and how sustainable it is in the real world. For example, is the market large enough? Is the startup vision too broad or undefined? This will help you focus on the important details and real-world solutions, rather than getting caught up in hype or buzzwords.
2. Examine the Protocol: Technical Capabilities and Limitations
In the blockchain space, we see technical innovations happen on an almost daily basis. From an end user perspective, this is certainly good news. However, from an investor perspective, this adds a degree of difficulty in determining the right startups to invest in. As an investor, you should consider the underlying technology behind a project.
For example, many cryptocurrency projects rely upon existing blockchain protocols to launch their own tokens and added functionalities. Utility tokens allow users to send and receive access to specific products and/or services on the blockchain. For example, the Certitude Token (CERTI) enables CERTI ecosystem participants to access the SingleSource Protocol to perform services. When we think about investing in blockchain, it’s important to not equate blockchain as cryptocurrencies. A cryptocurrency is just one use case for blockchain technology. Blockchain investors should also look to other potential use cases of a particular blockchain protocol, as well as blockchain projects built on a particular protocol.
As another example, Ethereum is a popular platform for blockchain projects and decentralised applications. So, this means that an investor must consider the capabilities and limitations of Ethereum as well as its competitors. It’s good to ask questions like… how many transactions per second are possible on a given blockchain? How are developers working to increase functionality for future use and to overcome current limitations? What makes this solution more secure than other competing protocols? Then, an investor should consider why a particular project can contribute technical innovations that empower innovative, in-demand use cases.
3. Keep Up-to-date with the Regulatory Environment
Much like technical innovation, regulations are constantly changing. The major difference is that regulations can be a bit more unpredictable. When we look at the current regulatory environment surrounding blockchain and cryptocurrencies around the globe, it’s clear that there is a lack of uniformity. In some locations, we have seen outright investment bans. In others, only large investors can participate in ICOs or ETFs. Meanwhile, some places are actively encouraging investment and user adoption. Even more prominent are cases where there is a lack of regulations, vague policies, or no evidence as to how policymakers will establish future laws.
So, what does this mean for investors? First, regulations impact who can invest. For example, many projects include geographic restrictions on investors from the United States, China, and other locations to avoid potential regulatory issues. Second, regulations in one nation can act as a standard for other nations as well as the entire market. For example, recent delays on bitcoin ETF rulings in the US can impact the short-term prices of all cryptocurrencies, which impacts investors from around the globe. The ultimate ruling on this issue or other blockchain policies can also have long-term implications (positive or negative) on the market.
4. Consider Cryptocurrency Market Volatility Before Investing - Avoid the FUD
The cryptocurrency market has been highly volatile in its early history. Whether you’re a cryptocurrency advocate or not, this is a reality. In late 2017, the market was more bullish than ever before. In 2018, the market is/was probably more bearish than ever before. Unfortunately, this sudden change impacts all investors. Investors that realised losses on investment are more likely to be skeptical of blockchain and cryptocurrency today. Still, it’s essential to not continue to buy into the FUD (fear, uncertainty, and doubt) surrounding the industry.
Cryptocurrency exchanges have also continued to play an important role in blockchain investment. We’ve seen a number of large investments go towards crypto exchanges in recent years. For example, Institutional Venture Partners (IVP) led Coinbase’s Series D funding round of $100 million in 2017. Now, we are also beginning to see a trend where highly-profitable exchanges are making their own investments within the industry. In 2018, Binance announced it would create a $1 billion fund to back blockchain and crypto startups. From an investor’s perspective, it’s also essential to consider the technical innovations and functionalities offered by exchanges before investing. Is a particular exchange centralised or decentralised, custodial or non-custodial?
Potential investors should assess the market risk and look at how the market has changed over time. For example, in June 2011, the price of Bitcoin (BTC) reached a peak of $32. By November 2011, the price bottomed out at $2 per BTC. Prices didn’t return to June 2011 price heights until 2013. The rise afterwards is well-documented. If history is any indicator, the market can rebound. Looking at volatility objectively might be difficult to do when you’ve already invested, but this mindset can ensure that an investor is neither overly optimistic nor overly pessimistic.
5. Evaluate Your Own Goals: Short-term vs. Long-term
Traditionally, investing is generally considered to be a long-term activity. This began to change significantly within the past decade, as technologies like online stock market trading and forex trading became popular. In the blockchain space, low trading fees on many cryptocurrency exchanges means that short-term investing is now more practical and accessible than ever before. While this change is a positive change for many reasons, it also presents investors with a choice.
Should investing be for the short-term or for the long-term? This influences investment criteria. If someone wants to be a cryptocurrency day trader, micro trends are important. This could include trend lines, resistance and support levels, 24-hour trading volume, and/or other factors. The strategies for someone who is planning to HODL are likely to be much different. It could be useful to conduct technical analysis as well; however, it might be better to consider macro factors like the ability of a project team to reach milestones or to establish industry partnerships that drive adoption forward. In other words, investors should ask themselves why they are investing and what do they aim to achieve.
Want to know more about investing in ICOs? Read our in-depth guide for ICO investment basics here.