Editor's note: When it comes to investing in cryptocurrencies, our friend and colleague Tama Churchouse is the first person we listen to. Tama has an extensive background in the industry, both as an investor and as a shareholder for a popular blockchain company. Whether you already own cryptos or you're simply interested in learning more about this major technological trend, today's essay is a must-read...
Cryptocurrencies are often viewed as the "Wild West" for investors...
As you know, equity markets are highly regulated.
The buying and selling of securities is controlled... And laws require companies to share detailed information about their operations with investors and potential investors.
Companies must give regular updates... like annual reports and quarterly earnings reports. Plus, they have annual shareholders' meetings, boards of directors, and more.
And tens of thousands of high-paid equity analysts and institutional investors cover stocks and quiz management teams about what's going on. The media constantly ask questions.
But practically none of this exists in the cryptocurrency space...
Not only is the mainstream media coverage of cryptos poor – I've seen Wall Street Journal articles with basic factual errors, for example – but the crypto media is also not great.
People who write about cryptos often have their own agendas... They could own tokens in a crypto that competes against the one that they're writing an article about, for example. As a result, their coverage could be extremely negative. Or the opposite could be true, where they give extremely positive coverage for a low-quality crypto that they have a stake in.
You'll find a huge number of trolls, pumpers and dumpers, and liars and cheats in the space. So if you're going to invest in cryptos, make sure you're investing in the right ones.
Here are a few key attributes to look for...
- Problem solving
The first thing to ask yourself is: What is the problem that this project is solving? Is this technology leveraging blockchain to solve a difficult problem that can't be solved without blockchain?
I'm dismissive of companies that are just jumping on the crypto bandwagon by trying to transfer an existing business to the blockchain. I'm looking for something that truly benefits from decentralization... a crypto asset that solves a problem that can't be solved without blockchain.
- The addressable market should be global
At this early stage in the development of the blockchain ecosystem, everything is a land grab. We want to maximize our bang for our buck. We want a company that has the capacity to go global. We want a crypto asset that can potentially be used by everyone on Earth, not just a narrow market.
- Launch horizon proximity
The way a lot of initial coin offerings (ICOs) work is: The company produces a "white paper" that outlines the technology it plans to build. Then, the company funds it by issuing some tokens in return for capital (in the form of bitcoin and/or other cryptos).
The key phrase here is "plans to build." There's an ocean of difference between putting an idea down on a white paper and building and executing a successful launch. This is one of the main reasons I rarely advocate participating in ICOs.
- The team
I want to see a team comprised of developers who have a track record of building and deploying blockchain technology.
Now, they don't necessarily need to have been successful in prior ventures. After all, Microsoft (MSFT) CEO Bill Gates and late Apple (AAPL) CEO Steve Jobs failed in some of their early ventures.
A CEO doesn't need to be a computer scientist, but the team needs to have a strong understanding of how its project will address the points I just mentioned.
- The community
You have to ask, "Does this project have a large community of followers and early adopters who will actually use whatever is being built?" A crypto asset is no good if nobody is using it and the token isn't widely distributed.
Blockchain protocols like Ethereum are valuable because a huge number of users are behind them. If nobody is building on them or using the application, they don't have much value.
- The token economics
Crypto tokens all have varying characteristics, but scarcity is an important one. Would you buy into a token that had 1 billion tokens currently issued if you knew that in three months, it would issue another 2 billion? Probably not.
All cryptos have completely different token economics underpinning them. Bitcoin, for example, has around 16.5 million in circulation at the moment. New bitcoins are mined every day, but the total supply will only ever be about 21 million.
Other tokens are created in a single launch with a permanent fixed supply. And some specify an annual "inflation" to be distributed every year based on a predefined mechanism. Token supply has infinite permutations, so you need to analyze them accordingly.
These are just a handful of high-level things I look for before I recommend cryptos. Keep them in mind as you consider buying.
Editor's note: Bitcoin prices have been on a wild ride over the past few months, doing a round trip from $6,000 to almost $20,000 and back. The volatility has some worried that the "crypto boom" is dead.
That's why on Thursday, February 15, at 8 p.m. Eastern time, Tama will host an emergency bitcoin briefing where he'll share his latest thoughts on the space... reveal a shocking prediction... and explain what you should be doing with your money right now. Save your seat for the free event here.