The secret to crypto investing is there is no secret

Navigating the crypto gold rush.
Navigating the crypto gold rush.
Image: Reuters/Mike Segar
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Wouldn’t it be great to know which crypto tokens will make you rich? Bahahahahah!

OK seriously. There’s no way to know which protocol, company, or project will make it big. Still, there’s enough data to at least look for signals amid the mayhem. Cryptopreneurs have launched thousands of ventures since the initial coin offering (ICO) gold rush took off. These projects, which resemble crowdfunding that’s been juiced with crypto speculation steroids, raised more than $11 billion (paywall) through May, about double the total amount in 2017.

Most ICO projects are yet to have a working product that can prove their commercial viability. But another measure of a token’s success is liquidity (a ready market for buying and selling a particular asset). This measurement can help demonstrate sustained interest and potential customers for a particular venture and its digital coin, according to a National Bureau of Economic Research working paper that compiled data on more than 400 ICOs.

The academics found that liquidity tends to be more robust when projects have these characteristics:

  • Disclosure This includes things like making source code public on Github, publishing a white paper, and providing a budget for use of proceeds.
  • Community engagement The number of Telegram group members can demonstrate community interest.
  • Commitment An insider vesting schedule is a measure of dedication to the project. For ICOs, this is coded into the token contract.
  • Leadership background An entrepreneurial background for the founder or chief executive is “strongly associated with success.” However, experience in the crypto community, as well as finance and computer science, is not.
  • Quality Venture-capital equity investment in the issuer is linked to better outcomes, as is a “pre-sale” before the public ICO.
  • Clear plan Projects that have tokens with a clear utility value are more successful, as are those that intend to create a new blockchain protocol. New software protocols can be the foundation for an ecosystem of new applications and so have much more upside for creating value (though they are riskier).

Many of these types of features are found in the documentation that comes with old-fashioned registered securities. An initial public offering (IPO) prospectus includes things like a detailed use of proceeds, the background of the leadership team, and information about how shares can be traded.

It pays to be discerning. More than half of last year’s ICO’s have already failed or are failures in the making, according a study by Bitcoin.com. And raising large sums of money is no guarantee of future riches for investors: Entrepreneurial experience and venture capital backing tend to predict that larger amounts will be raised, but are uncorrelated with ICO failure, according to the NBER working paper.

Even so, the study adds to research showing that investors tend to be better off when there’s more disclosure and transparency. It suggests that even when there’s financial (and technology) innovation, the basics of investing—like finding an experienced team that’s transparent, has demonstrated commitment to the project, and is open about their plans—remain the same.

The future of finance on Quartz

  • Why doesn’t Europe have a tech giant like the US and China? It comes down to differences in funding, culture, and stock options.
  • Speaking of China, here’s some insight into the portfolio of Chinese entrepreneur Lei Jun, who has backed everything from India’s top mobile browser to Hong Kong’s Uber for logistics.
  • Zimbabwe’s dominant electronic payment platform went down for two days, leaving many businesses floundering. The reliability of digital payments remains a global concern.
  • Monzo’s experience with the Ticketmaster hack highlights a problem of modern life: When your personal data is stolen, you can expect to be the last to know.
  • Here’s how India just about choked its crypto ecosystem into oblivion.

The future of finance elsewhere

  • Fintech companies are helping drive up consumer borrowing (paywall) in the US: Personal loans are the fastest growing category of consumer lending.
  • Another high-frequency trading (paywall) firm is making markets in crypto, or at least exchange-traded notes linked to things like ether and bitcoin.
  • About one-fifth of bitcoin, worth roughly $20 billion, has been lost. These crypto hunters (paywall), including a hypnotist, help people recover their lost passwords. Also, crypto theft surged this year.
  • The concept of digital money is a fallacy, according to the Bank of Finland (pdf). Cryptocurrencies do in fact have intermediaries, even though they are unidentified and randomly chosen.
  • Gig workers are an opportunity for digital-payment companies—as many as 50% of gig workers are paid by check, and more than 80% say they would do it more often if they were paid faster.

Previously, in Future of Finance Friday

July 5: Bitcoin has fallen more against the dollar than almost every other currency this year

June 22: Get ready for self-driving money

June 15: A philosopher thinks technology could make anarchists’ dreams come true