I recently started a small cryptocurrency fund for investing in new / alternative blockchain protocols.
Something I noticed as an investor is that there’s a huge learning-curve advantage that can be leveraged in the cryptocurrency space to create an overall profitable investment strategy.
Today, there’s a flood of new information and new protocols popping up every day, and if a speculator doesn’t understand the underlying technology behind each of the protocols, they’re going to have a tough time picking winners.
You can check out all the upcoming alt-coins here: https://bitcointalk.org/index.php?board=159.0
That means if you can parse out the good stuff from this chaotic sea of information, you can start to build a portfolio of ‘good bets’.
While this doesn’t mean everything you pick will be a winner (markets are still irrational, and the humans behind each project are still human) – but on the few bets you do win, the returns will be in the order of 10-15x, and in some cases even 100x the initial investment.
In this post I’m going to outline our investment thesis as well as talk about a few of the new protocols that I’m watching closely.
The black swan investment strategy is a somewhat common investment strategy in the VC / startup world, and the logic is as follows.
The idea behind ‘farming’ black swans is that you’re looking for outliers – and missing an outlier is much more harmful to your strategy than making a bet and it turning out to not be an outlier.
The reason you’re searching for an outlier is because their returns are such that they cover all of your losses + a significant amount of profit. Once you find a winner, it should be game over.
The goal is to invest early in a bunch of things that COULD become black swans. If there’s an idea that looks likely to succeed, but not on the scale needed to be considered an outlier – it’s actually not a great bet for this investment strategy.
There are tons of great, profitable businesses, but if their return can’t cover the losses of your other investments, then it doesn’t fit in this particular strategy.
You can read more about the black swan investment strategy here: http://www.paulgraham.com/swan.html
There are several key factors to take into consideration when investing in an early crypto protocol. The first and easiest way is to read the white-paper and decide if they’re doing something actually interesting / innovative, or if the coin is simply a re-branded version of something else. If there’s nothing novel about the system, it’s probably not a good bet.
The next thing to look at is the team behind the project, how many people on the team are on the marketing / community / growth side versus development. For the first 1-3 years of a cryptocurrencies life, a huge portion of the work is on the development side. If that works smoothly, the community will take care of the marketing and growth. Being too marketing focused is a sign that their intentions may not be as pure as presented.
The final ‘pre diligence’ thing to look at is how many coins there are, how they’re distributed initially, and how many ‘whales’ there are compared to small-holders. You want a cryptocurrency that is evenly and fairly distributed – otherwise you’ll be holding the bag when a bunch of early whales liquidate (unless you get in early enough to be a whale, then by all means do your thing).
ICO’s are the new fad in cryptocurrency at the moment, and they’re definitely shady for a bunch of reasons (mostly misaligned incentives), but investing in an ICO can also show some crazy returns. My philosophy is you can dislike ICO’s on principal, but money is still being made so as an investor I have to pay attention.
Some Interesting Blockchains to Watch:
There are a ton of cryptocurrencies out there, and the truth is you’re going to need to take on a lot of risk if you want to get in early. A lot of times there’s a 50% chance that what you’re investing into is actually just a scam, and the earlier you invest, the more likely that is to be the case.
Below are a few of the most interesting blockchain projects i’ve found – some of them are a bit further into their lifecycle now and don’t make sense as a black swan investment, but are still great for holding, day trading or arbitrage.
Etherum – Programmable Blockchain
Etherum is a turing complete blockchain, meaning it can be used as a programming language to create a bunch of other interesting blockchain applications including colored coins, smart contracts, and decentralized autonomous organizations (DAO).
Golem, Urbit — Distributed Supercomputer
There are a lot of computing intensive tasks that need to be carried out on a daily basis – everything from protein folding to shipping route calculations to animation renderings.
It’s expensive, and tricky to setup a supercomputer (servers, cooling, electricity, etc.) that can do these calculations – and it’s unlikely a small-medium sized project would be able to afford or gain access to the computing power they need (unless they’re at a university with millions of dollars in funding for these types of things).
Golem (and others) essentially create a distributed supercomputer that anyone can tap into for calculations, or get paid to add computing power to the system. It splits tasks up and sends little pieces of calculations to a bunch of nodes, which do the calculation and send the final results back.
AUGUR – Prediction Market
Augur is a decentralized network for peer-to-peer ‘betting’ , but really it’s creating a first of it’s kind prediction market. Since the network knows what people are betting on, and what odds they’re betting at, you can start to paint a picture of what may happen in the future (with higher probability than a blind guess).
The wisdom of the crowd shows that if you ask a bunch of people about some future event, they’re likely to be correct more often than the lone expert.
Ripple – Global Settlement Network
There are lots of crypto and fiat currencies, and transferring between them is tricky. Ripple is a settlement layer that allows for the instant conversion between different currencies.
Ripple allows you to hold multiple currencies in your wallet at one time, and seamlessly transact in any currency without a long wait time, or any conversion fees. Typically if you have USD and want to get some other currency, you’re paying anywhere from 15% – 30% markup in exchange rate.
Also, Ripple is working directly with banks and has probably the most institutional momentum of all the cryptocurrencies.
IOTA – Distributed Internet of Things
Smart things are popping up everywhere – almost all new products are coming with wifi or sensor capabilities built in.
With these new sensors being deployed into all these devices, there needs to be some way for these products to communicate and share data between each other.
Wifi or Bluetooth LE seem like good options, but the problem is how congested our WIFI networks will become when we have trillions of packets of information being sent and received every second by these machines.
We need a new network to handle this increase in machine-talking, and IOTA’s tangle poses a solution to that.
Decred – Blockchain with Voting
This protocol is actually not very different from bitcoin but there was one aspect I found interesting.
Currently, there are a lot of problems in the bitcoin network via the developers who disagree on how / what features should be integrated into the protocol. Essentially, they’re deadlocked and now progress is slowing down.
This COULD be a fatal flaw to bitcoin, and Decred solves this by adding voting to every aspect of the protocol. The people who own the coin and secure the network are also the ones voting on how the protocol should be built.
If bitcoin fails due to developers not being able to decide what’s next – Decred would be in an interesting position.
There’s a huge opportunity to make money investing in blockchain technologies, especially with how early these technologies are, and how big of an impact they could have should the find their way mainstream.
It’s likely that blockchain technologies will underpin most of the things we do in the future, from currency, to gambling, legal contracts, internet of things, and much much more.
If you’re interested in chatting more about new blockchains and interesting projects – drop a comment or shoot me a message!