Despite scepticism in some circles, there is still big interest in crypto-focused opportunities. But investors need to think carefully about several key issues, says Apollo Capital’s chief investment officer Henrik Andersson

A whopping 537 ICOs closed in the first five months of 2018, raising $US13.7 billion ($18.5 billion), Stockhead recently reported.

ICOs — or initial coin offerings — are like initial public offerings. But instead of offering shares in a company, an issuer offers digital tokens that can be traded on cryptocurrency platforms or swapped for services.

ICOs usually occur at the earliest stages of a project — when the risks are greatest — and investors must carefully review several factors.

“The risk is much higher, and it’s very hard for retail investors to invest in the ICO space,” Mr Andersson tells Stockhead. 

A typical investor would need to build a diversified portfolio of token investments in order to hedge against those risks.

However, blockchain and crypto focused projects are still in their infancy. There are more and more ways to get exposure, whether it’s through buying an ASX-listed company that has a crypto stake or holding a token for a project in development.

When it comes to these projects, it’s important to do the research on the use cases, and ask whether opportunities have a strong “network effect”, Mr Andersson says.

Money-ness

One of the key “value creation” elements in the crypto space is “money-ness” – whether that means a specific use case or a decided-upon value stored in a token or currency.

When something has a strong “network effect”, people believe in the story and its uses. That’s a good thing because such projects attract good developers, Mr Andersson said.

“Money is the ultimate network effect in some senses. Money is a story we tell ourselves, that’s why it has a certain dollar value. And like with Bitcoin, it ultimately has value because people believe it does. And the more people believe in that story, the more value there is in the bitcoin sector.”

No matter the project, though, Mr Andersson says an investor should always ask the company why they need to use blockchain or cryptocurrency to achieve their goals and understand this reasoning before buying in.

ASX-listed crypto plays

As an alternative to investing directly in an ICO, a number of ASX stocks offers exposure to the cryptocurrency sector.

These include the likes of Fatfish Internet Group (ASX:FFG), with a share price up 200 per cent over the past 12 months to 2.7c. It was the first ASX-listed company to get involved in the mining of cryptocurrencies, taking a stake in APAC Mining as well as UK crypto-investment hedge fund Altairian.

IT retailer Byte Power Group (ASX:BPG) is setting up a cryptocurrency exchange, last updating investors in April that it was working with AUSTRAC on relevant licensing.

Under a deal with a Bitcoin mining equipment provider, IOT Group (ASX:IOT) is trying to build a “blockchain applications complex” in the Hunter Valley, NSW. Its share price is sitting at 0.3c, compared with 1.3c a year ago.

Then there’s DigitalX (ASX:DCC) which has held a range of cryptoassets and announced in April it was opening a funds under management division so investors could also have access to cryptocurrency portfolios.

It’s well down from its 44c one-year high, but still up 140 per cent for the year, sitting at 9.6c.