How to Assess Crypto Asset Risks

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There are a few valid crypto tokens in the market and many more should come to market over the years ahead as the industry matures that can and should find a home in your portfolio. But how can you tell them apart from the many others that are hyped to the rafters, but are more likely to be froth than solid investments?

 

Investment rules shouldn’t change

For reasons that are unfathomable, the classic investment rules have been thrown away when it comes to investing in crypto assets. It’s entirely analogous to the dotcom years where the emergence of a new dynamic in investment caused investors to throw money at racy domain names rather than examining whether the businesses behind them were capable of delivering valuable, functioning enterprise portals.

The recent massive success of the EOS launch is case in point: for three weeks of FinTech conventions and Meetups I asked everyone I met what the EOS business proposition was. “Revolutionising Blockchain” was the response. “How?” I asked. The response was invariably like Father Dougal from Craggy Island: “Revolutionising Blockchain.”

 

Asking the right questions

Purpose

The first decision an investor needs to make is whether he or she can discern a clarity of purpose in what is being offered.  Many crypto offerings fail at this point, stating boldly, “We are going to revolutionise air travel” and when asked how, simply repeating the claim. In any other business context, you would immediately start looking for a different opportunity in which to invest.   The mystery is why investors treat crypto assets differently; but they do.

Demand

Next consideration: Is there a genuine commercial demand for what is being proposed, just as you would ask for a traditional investment in a company producing widgets. If there is a clear cut commercial demand for the service being offered.

Value

Where is the value in the proposal – is it scalable?  Is there a compelling cost saving that moving from existing business practices to the proposed one would incentivise? If the solution proposed fails to offer significant value to drive adoption, then it won’t work.

People

The common question at events where people discuss new offerings is, “Who is on the team; who is the CTO?”

The bigger the names (even if just “advisors”) the more credibility is attached to the value, and with good reason. There are experienced designers, developers and business people even in this emerging sector, and they are key to driving success.  There are also many who are undoubtedly clever, but have no experience at all, and these represent a much bigger risk.

The asset classes

Most crypto tokens are a form of payment, not a token for utility.

This is important to understand because a payment for services to be rendered at some point in the future contains a risk of non-delivery. If you are paying for a service you call upon at some point in the future, ask the key question, “If all the income is paid up front at a claimed discount to value, will the company providing the service actually exist when all those services are called upon by people who have invested at an alleged discount?”

Am I afraid of missing out?

Finally, do not let an irrational dose of FOMO – Fear of Missing Out – on a bull run in pricing part you from your money in a crypto asset that fails your sensible analysis. There will be other opportunities including many that pass your rational analysis of their investment potential.