Would you invest in what is doomed to fail? Oh, it is already a case for you… Sorry to hear. However, we believe that failures of many businesses in crypto may be effectively anticipated, so we designed this handbook to help you become a better investor and crypto professional.
Almost everyone goes into crypto for the first time to earn a quick buck. Influencers and shillers make it look so easy and straightforward. “Invest — wait — sell — repeat”. This is a basic narrative nuked from all over the place in crypto socials. In fact, it is so basic that it is basically wrong.
So let us drop some unpleasant honest statements that certainly would never appear in the content of the majority of crypto influencers.
Crypto is hard. Investing is hard. 90+% of crypto projects fail.
You may get lucky and get yourself in “I’m a genius” trap. But luck is not scalable. Luck is not consistent. It is expertise that brings food on the table and money in the bags. It is the knowledge of the industry and investing specifics that makes your ratio of good/bad decisions more favorable.
So if you don’t want your investing portfolio to be represented by the infographic above, you’d better get busy and learn. We will help you along the way and share our most valuable insights. However, learning is on you.
On one hand, the inhabitants may form or alter the environment, in which they came into existence, but on the other hand they wouldn’t even be able to exist at first place if the environment was not appropriate for them. Even the most beautiful and precious golden fish will die out in the odorous swamp. Even the most promising project may fail in the destructive and depressing business environment.
Therefore, while investing, one cannot focus exclusively on the object of his investments, putting it out of the context. In business, timing is equally important as the product and business structure itself. It addresses the mentioned environment specifics that are crucial for success of any business endeavors.
The term “business environment” encompasses both general macroeconomic outlook, state of related industries and the condition of target industry (in which object of potential investments operates). Let’s dive deeper into each mentioned component using blockchain industry as a target one and a crypto project as an object of our potential investments.
Macroeconomic outlook. Macroeconomic policy is king. It dictates how much you would pay for anything by employing a variety of monetary and legal means. Actually, thoughtful investors should have anticipated the drastic price appreciation of risk technology-related assets (including crypto) in 2021 due to absurd money printing of Federal Reserve for its Quantitative Easing procedure. More financially-savvy investors could also foresee a subsequent raise in inflation due to the abundance of cheap money and elevated levels of consumer demand.
All businesses are affected by macroeconomic conditions. Crypto is no exception. Inflation, unemployment, Fed interest rates, GDP, reserve currency strength, etc. cumulatively affect the price of any asset in the blockchain industry and beyond, so it certainly should not be overlooked.
However, macroeconomic analysis is by no means easy and requires lots of time and dedication. But knowing how to interpret macro surely pays off in the long run.
State of related industries. The days when one could look at crypto in isolation are over. Was crypto detachment even a case at all? Or did we just agree that it was true for some period of time in the past? Anyway, blockchain industry finds itself in the intersection of technology with other industries. The most well-spread combinations include technology + financial services, technology + logistics/supply chain, technology + insurance and technology + healthcare.
As a result, the performance of any blockchain project should at least partially depend on the state of the related industries. For example, one should have a closer look at the technology and real estate market, while deciding to invest in the project trying to tokenize the purchase of real estate.
Condition of target industry. This aspect of business environment analysis is self-explanatory. Do you want to buy an NFT? Analyze what is up in NFT domain of crypto as well as in blockchain industry in general. Is liquidity draining or you see high inflows of funds in the sector? How is the business (trading) activity doing? Are we in a bull cycle or a bear one? What is the recent price action of industry (segment) benchmarks? This is the kind of questions you’d better ask yourself before jumping on the bandwagon of buying another crypto asset that seems to have a potential to become a thing in the future.
Do you have brothers or sisters? If so, you could relate to the fact that while growing together you had to share a lot. You shared your space, food, toys and so on. It is good when there is enough of that for you both, because then all are satisfied. But when there is a shortage of anything, it becomes a first come first serve or a merit-based kind of game.
Now imagine that in blockchain, like in all other industries, it is completely the same. Projects share the pie. And almost always the pie is customer liquidity. In most cases it is not enough for everyone, so it becomes a FCFS or a merit-based game. First comers that proved themselves to be healthy and well-rounded bite off the biggest chunk of the pie. Others are left with the remainder.
Do you know who usually gets the least bid out of the whole pie? Those who came later than others, but did not have any merits different from those who came before them. And there is an abundance of such cases in crypto. Since the majority of blockchain projects are open-source, it is not so hard to copy-paste the functionality of already existing project with user traction and steal part of its customer liquidity in a duplicate project with a slightly different UI.
But this path is doomed. Such projects do not have both first-mover advantage and merit-based benefit. At any point in time there is a possibility that more and more similar mediocre copy-paste projects will appear in the same niche decreasing the share of the pie available for each of them.
Therefore, it is always worth identifying the pain-point that the object of potential investments is trying to tackle. And by checking its competition one should answer himself a question “Is it a twin trying to feed himself with crumbs left by those who came before him or a new member with innovative approach capable of biting off the big chunk of the pie?”
Crypto is the most socially-centered domain of technology. Therefore, social sentiment is one of the most important components of any project’s success. Mediocre crypto business with a strong community may see much more user traction and liquidity inflows than the a top-notch solution with lack of support from the masses.
However, one should not confuse social sentiment and real utility of any business in crypto. Since many blockchain entrepreneurs understand the importance of community base in the industry, they often may artificially boost social sentiment surrounding their project to gain a competitive edge or quickly loot some cash from socially-driven investors.
That is why a profound investor, while analyzing social perception of any crypto project, should also keep an eye on the quality of its community base. Who are those people who show support for this project? Do the majority of them wholeheartedly believe in the success of the project and its real utility? Or are they a bunch of unprincipled speculators who are trying to pump and dump honest naive folks not giving a damn about the project itself? Or is the supportive community in reality a herd of mischievous bots ran from a single server of some random Indian guy, who was industrious and quick-minded enough to earn a living like that?
As a common phrase indicates: “Birds of a feather flock together.” But are those birds worth flying together with?
In the battle of Gaugamela Alexander the Great managed to win and end the domination of the Persian Empire despite being significantly outnumbered. How did he achieve that? The main strategy was to target the Persian emperor Darius making him flee the battlegrounds. Seeing their leader running for good, Persians lost all their fighting spirit and followed his retreat.
Leaders define the direction and pace of development for any organized endeavors. There are many cases in business when a good team made a breakthrough out of a desperate situation. However, at the same time often bad leaders led a prosperous and successful companies in the disastrous and fatal dead-ends.
Crypto is highly associated with scams and fraud and to our mind it is not unjustified. There are still too many rug-pulls existing only to screw you over. But in scams there is rarely open and strong leadership. The fraudster naturally wants to stay in the shadow. So by analyzing the executive team behind any crypto project one could already disarm the majority of scam traps scattered all over the industry.
Even if the project is non-fraudulent, it still may fail completely leaving you ashore with no hopes to refund even a part of your invested funds. This risk is also mitigated by having a thorough preliminary review of the people responsible for the project’s success. In the end, if people are carefully selected to be granted a salary after they do some work for enterprises, why should you be so superficial while providing money to a person upfront for something that might never happen? Answer yourself: who is the war-chief? Will he flee in face of danger like Darius or will he win in an unfair game as Alexander the Great?
Business is a game with high stakes. And each game has its own set of rules. It would be ridiculous to try to become a winner or bet on the win of other players without knowing the underlying principles of the game itself. Such attempts would be at best a blind reliance on the benevolence of luck. So before getting anywhere near being able to consistently score or have winning bets, one should study the rules of the game as thoroughly as possible.
In traditional markets these rules are defined by legislation, economics and generally accepted standards of business conduct. Unlike other industries, the field of blockchain is governed by them only to the limited extent giving the way to the code as a main source of rules for crypto businesses. Moreover, the blockchain industry makes everything fully transparent, which allows any crypto user to examine and review not only the rules of the game (network) itself, but also the rules behind the operation of any particular crypto business. It becomes possible through the analysis of the company’s smart contracts, which should be fully public and reachable. All crypto businesses are based on specific transparent logical algorithms set in those contracts, which makes understanding them a game-changer in terms of business analysis and evaluation.
It is a great asset to any blockchain investor if he knows how to read the code or has an assistant who helps him in that. This should allow him to understand all possible implications of the current algorithmic business model of any crypto enterprise. In turn, it may lead to risk mitigation, more reasonable decision-making and overall understanding of the project’s utility.
This article should provide you with general understanding of important aspects to look into while deciding to invest in any crypto project. We firmly believe that if you implement our advice in your project analysis, it will positively affect your investment decision-making.
We did not aim to describe specific strategies for analyzing each of the aspect covered in this article, but, please, let us know through your comments and reactions whether you are interested in us explaining them in the following educational materials.
Thank you for reading and stay tuned for more!
PS And remember: ignorance drains your pockets.
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