With the current frenzy of interest in bitcoin, there is an increasing number of people interested in trying to ride the ‘hype’ wave and invest in blockchain. And like any investment, you should always do your research. This article is not a recommendation or endorsement for any specific token or platform.
So if you’re looking for the latest tips from the ‘crypto-shills’ this technology sector seems awash in – you’ll need to go back to your Telegram groups. Sorry!
Unlike a lot of articles that lead you on a merry jaunt through the forest before getting to the point, let’s get down to the brass tacks straight away:
- Consortia or industry associations run the largest and most successful blockchain networks. They are non-profit in nature and structure and are therefore not suitable for investing.
- Many blockchain technology solutions are for new and emerging protocols. The companies developing these protocols are eager for your investment but are averse to equity investment.
- Nearly every month, we see companies announcing new blockchain patents. Patents are typically a hallmark of intellectual property worthy of investing. In almost all of these cases the technology isn’t ‘pure’ blockchain, but more likely a distributed ledger technology (DLT) combined with blockchain’s ethos being about open source and collaboration, with the best ideas being built better by an open-source community.
- Buying tokens is one means of investing in a project, but be sure to understand the obligations of the project to token holders fully – i.e. Read the fine print carefully: In many cases, tokens come with ZERO rights for token holders.
- Don’t be fooled by the thousands of startups claiming “blockchain” on their pitch decks. Learn how to ask the right questions to see exactly where and how blockchain is (or ,more the case right now, is not) essential to their business model.
The inspiration for this piece comes from the recent event I attended for Go Beyond Investing. I was on a panel (with my amazing co-panellist Flavia Richardson and moderator Ramona Liberoff) asking if blockchain was ‘critical infrastructure or just a nice to have’. During the discussion, I got this question, “Where do you see great investment opportunities in blockchain?”
Where do I see great investment opportunities in blockchain?
“I don’t. I don’t see any investment opportunities in blockchain.” – after a moment’s pause, I continued with – “I do see opportunities to invest in companies who are helping enterprises to integrate legacy systems with blockchain. I also see opportunities to invest with companies who are building credible businesses and solving real problems where storing information in a blockchain is critical to the success of the business.”
What do people think of when they think blockchain?
Blockchain: Ledger, Protocol or Network
Blockchain: Distributed, Decentralised, Immutable
Blockchain: Open, Collaborative, Transparent
During the boom and bust of initial coin offerings (ICOs) in 2017 – and the subsequent whimper and bust of security token offerings (STOs) in 2018 and early 2019 – it finally dawned on both investors and entrepreneurs that using tokens to raise funds was a short-lived opportunity. An opportunity which was ruthlessly abused by an unscrupulous few to the detriment of the many.
That hasn’t stopped all projects. To add some (questionable) credibility, some projects listed their new tokens on crypto exchanges (through Initial Exchange Offerings or IEOs). Currently the dominant token launch events are those focused on the DeFi wave.
In nearly all cases, the hard truth is that these companies (from 2017 to today) did not and do not have one or (atypically) all of the following:: A credible business model, product-market fit, proven team and sufficient drive to get angel, seed or venture capital investment – They just would fail the stringent ‘would this work in the real world and create a profit’ processes these investment groups would subject them to.
Tokens were seen as the “easier, softer way”. And maybe it looked that way, but with investors getting repeatedly burned during pump and dump scams, exit scams and more, there was no choice but for regulators to get involved, thus closing the token loop-hole.
And yet, there are thousands of new startups everyday purporting to be the next great opportunity to invest in blockchain. It is one of the more en vogue words to make your startup look sexy.
Most of them never like to see me on an invite list because I ask questions. You know, the standard business questions that they don’t want to answer (and would have faced in the venture/angel etc worlds):
- Tell me exactly what information you are storing in a blockchain? (and which blockchain?)
- Explain to me exactly why you chose this blockchain and how putting this information onto the blockchain provides trust between counterparties?
- If your business model is to sit in the middle of a transaction, then you are centralised by nature. Why aren’t you just using a database?
Startups who put blockchain in their pitch decks never like to see my name on the invite list.
And those are just my opening questions. It typically doesn’t go very well for the startup. However, in my experience, there are some founders who “own up” (or wake up perhaps) to the situation immediately with me and together we change their tack and return back to their passion: Solving a particular problem for a customer who is willing to pay.
But what about Defi? Decentralised finance or DeFi has had a roller coaster few months of ups and downs. It was such a popular topic that I wrote a three-part series just looking at DeFi (Here 1, 2, 3). Bottom line, in case you don’t want to read the articles: “DeFi is another attempt to circumvent regulation and provide access to extremely complex crypto products for retail investors.” If investing in crypto is like a 3-Day trip to Vegas, playing in the DeFi space is like playing any of several carnival games with thousands of your hard-earned cash.
Always “follow the money” and make sure you completely understand how value is created, transferred and extracted at every stage of the market.
There are no opportunities to invest in blockchain consortia. Investing in tokens and DeFi is exceptionally complex and high-risk. If putting money into companies trying to patent blockchain technology means either a) it isn’t blockchain or b)the ideas will likely be outperformed by an open-source community.
So: Where is the opportunity?
Straight Answer: There isn’t one. Stop looking.
Get back to basics and invest in teams of people who can execute on an idea that has a great product-market fit. Blockchain (as well as artificial intelligence, machine learning, virtual/augmented reality, Internet of Things IoT and other buzzwords) are just technologies.
The real investment opportunities are with the fantastic new business models and opportunities arising through the adoption of blockchain. You know, just as it has always been in the technologies market.
Get in touch with us firstname.lastname@example.org / Twitter @igetblockchain.
Troy Norcross, Co-Founder Blockchain Rookies