Expert Guide: What to look for when investing in Initial Coin Offerings
Up to 5 per cent of US investors have bought a cryptocurrency — and institutional is finding its way into Initial Coin Offerings (ICOs), says Henrik Andersson, chief investment officer of new crypto fund, Apollo Capital.
Do you think bitcoin’s volatility has scared investors away from investing in ICOs?
(An Initial Coin Offering is a form of crowd funding. It is like an initial public offering — but instead of offering shares in a company, an issuer offers digital tokens that can be traded on cryptocurrency platforms or for digital services.)
I think this is nothing new to the crypto market. Not long ago we saw the all-time high and bitcoin topped at 20,000 — and today we are at 11000. Volatility in the market is increasing.
We have seen this before, and each time the next high goes even further.
The last year was big for retail investors moving into the market and they have largely had the upper hand. Institutional money has not had a look in yet but that money is still coming and will boost the market once again.
Is there a typical crypto investor?
The typical crypto investor is male, and generally a younger person. But recent stats have showed close to 5 per cent of US citizens have invested — a number that even surprised me.
It’s the demographic you can expect with a new technology, but now it is moving to a more diverse market.
Personally, I first discovered bitcoin in 2013 and I liked it because it was the combination of finance and new technology. What struck a chord was the revolution of the possibilities of ownership of a digital assets.
We no longer have to trust third parties with information — today’s institutions that handle our data can be replaced by open or public blockchain.
(Blockchain is the technology all cryptocurrencies are built on. It provides a public ledger of transactions where each “block” is like a bank statement that connects to other blocks to form a chain.)
Blockchain is being spruiked for a growing number of application — even by the ASX. How far will the technology go?
Blockchain can be applied across so many verticals and cryptocurrencies is just the start.
For industries related to commodities, privacy or smart contracts, cloud storage or advertising there is a compelling business case for its use.
Some of these verticals have a market that is big enough for the use of blockchain to make sense but investing in ICOs is kind of like early seed investing – only a few will be very successful.
Investors have to realise that the risk is enormous and many projects don’t have a product yet — they are looking to build a product.
What should investors look out for when investing in ICOs?
The first question to ask is – is there a need for a trustless technology? Many of the projects we see today could use bitcoin or ethereum. They don’t really need their own cryptocurrency, but are trying to leverage the hype in the sector.
Ask yourself if there is a need to use a decentralised technology or whether it is just a way to raise money.
You also need to evaluate if the market opportunity is big enough. Weigh up the barriers to entry and if their valuation is reasonable. Ask whether the product exists yet or whether the investment is just in the white paper and what the community interest is around the project.
Ultimately though, it all boils down to the team — just like any other company. Look at what they have done in the past and how long they have been involved.
A lot of people who have been around in the space for a long time have already done their ICOs – there is probably a lack of talent left but there is a lot of supply.
The market is still so active. ICOs have raised $US5.5 billion ($6.8 billion) in the last year and that is showing no signs of slowing down.
It is still early days in 2018, but in the first two weeks of the year, interest has actually increased.
The real test this year will be to see [which] projects funded last year come to fruition and whether they actually deliver on their goals and promises.
Henrik Andersson is the chief investment officer for new crypto fund, Apollo Capital.
He has over 17 years experience in global financial markets, with almost a decade on Wall Street. Henrik has extensive experience across three continents as a quantitative analyst, senior research analyst and in institutional equity sales.
Apollo Capital is Australia’s premier crypto fund, allowing sophisticated wholesale investors to gain access to investment opportunities within the crypto asset market.
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.