90pc of ICOs will become worthless, expert says
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This month’s bitcoin bloodbath is a reminder that cryptocurrencies are a risky business, says expert Torsten Hoffmann.
How do you value a cryptocurrency?
Nobody in the world can really pretend to understand exactly how to value a token or a cryptocurrency. We are still in the early days.
Before blockchain you could copy and paste anything digital infinitely, so there is no way of representing value. But blockchain technology brings scarcity into the mix.
(Blockchain is the technology all cyptocurrencies are built on. It provides a public ledger of transactions where each “block” is like a bank statement that is connected to other blocks to form a chain.)
So, at its most basic, cryptocurrencies are decentralised new forms of money. There will only ever be 21 million Bitcoins for example and this is what gives them value. Many of the new “coins” are actually tokens that represent access to a network such as Ethereum.
Can all cryptocurrencies be trusted?
On the back of the success of major cryptocurrencies, there are many start-ups, entrepreneurs and even fraudsters who say that they can represent some sort of utility with their own currency.
They sell tokens in the same way as a conventional Initial Public Offering on the stock market — but with tokens in an Initial Coin Offering (ICO). The main caveat to remember here is that a lot are scams and frauds in the market.
Regulation is catching up and some of the opportunities in the market are closer to being a security rather than a token. This is a legal minefield.
How easy it is to start your own ICO?
We see new tokens that have different attributes in industries as broad ranging as logistics to Internet Of Things or even photography.
Plug-and-play solutions for anyone to start an ICO have become available, in the same way that you might set up a website.
Slowly, the market is becoming more sophisticated. You will need a proper accounting team, lawyers and board of advisors – people with a reputation in the industry.
What sets a worthwhile ICO apart from a dodgy one?
Researching the white papers I always look for the team. They need to be credible and need to have significant experience in their respective vertical.
You also need to look at the developers. They should have significant crypto expertise and a solid track record. Is the technology really a breakthrough?
The blockchain, in the form of Bitcoin, has been around for 9 years – there are people that have been in this space for a long time and have built and sold companies. I’d look for this experience in a team.
Then, just like you would in the ordinary markets, you evaluate the business, and whether it is a good market to be in.
Is the crypto market taking money away from retail investment in stockmarkets like the ASX?
In my opinion, at the moment, very little crypto investment is taking capital away from conventional markets.
There is $500 billion in value in the crypto ecosystem and that was as much as $700 million just a couple of days ago.
Most of these holders of coins had only a small amount in the beginning but as the valuations rose, their portfolios have grown enough to allow them to diversify.
This is what is driving the largest part of the ICO growth. Last week ICOs raised around $400 million dollars, and roughly 300 million dollars the week before.
And by the way: You participate in ICOs by contributing crypto currencies, not dollars – 90 per cent are based on Ethereum.
What tips can you share for new crypto investors?
The first step for outside investors is to understand and learn about the crypto world. I would say to recommend to put a tiny proportion of their portfolio into Bitcoin or Ethereum as a start. These are already highly risky and volatile. Other coins and new ICOs are even more risky.
I cannot stress enough that this is a super risky space that not even the biggest experts in the world fully understand. So please, investors beware.
Especially for those investors who don’t know much about blockchain technologies, I would advise them to stay away until they better understand this space.
I do expect more than 90 per cent of current coins will become worthless in time – only the remaining 10 percent will be breakouts and you will be see some huge gains for those select few. It will be a nasty couple of years with many coins becoming worthless, and maybe some high-profile lawsuits.
Torsten Hoffmann is a media entrepreneur, award-winning film maker, angel investor, deal maker and Virtual Reality guy. Follow him on LinkedIN.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.