So recently I’ve bought small nibbles of OmiseGo and Augur. Primarily because they were so easy to buy using ShapeShift within my Exodus wallet.
However, I’ve begun questioning whether that was a good idea and whether I’m losing my investing discipline by buying ICO tokens that are on the secondary market.
First off, what is an ICO?
An ICO is an Initial Coin Offering. This is not the same as an IPO or (Initial Public Offering).
In an IPO, you get shares in a company.
In an ICO, you are being asked to crowdfund an interesting project that in all likelihood hasn’t come to even an alpha release yet. Instead of shares, you get tokens.
Now investing in these tokens is not the same as investing in a coin (whether Bitcoin or an altcoin) and it’s important that we don’t lose our heads in the huge range of possible cryptocurrency investments.
Secondly, what is the secondary market in an ICO?
The primary market is where you participate in the first issue of ICO tokens. I.e. the project issues the tokens in return for money (usually Ether). This is the primary market.
If you then want to sell the tokens to me, then the tokens are said to be trading on the secondary market. The key difference is for the issuer (the project) of the token. In the first case (primary), the issuer gets capital. In the second case, the issuer does not get capital.
Let’s get back to basics.
A good coin investment has certain characteristics:
- It has limited supply
- It has respected code
- It has been around for a few years at least
- It has its own unique differentiating features like enhanced privacy
- It has a strong market cap
Our ultimate aim in this blog is to make money speculating in cryptocurrencies and make as much of it as possible.
So firstly, to make money, we have to our overall investments/speculations have to make positive returns. So we aim to lose as little money as possible.
And secondly, to make as much of it as possible, we aim to have the greatest upside we can have.
This could play out in a few ways:
Say we were investing £10,000.
- £10,000 into Bitcoin and zero elsewhere.
- £5,000 into BTC and £5,000 into Ethereum (ETH)
- £5,000 into BTC, £2,500 into ETH and £2,500 Monero (XMR)
- or £1,000 equally into BTC, ETH, XMR, Litecoin, Dash, OmiseGo, Augur, Aragon, Verge, Decred.
Which of the above do you think will make more money in the long run?
Which scenario do you think has more chance of losing money?
Which has more potential upside?
It’s not easy to answer those questions.
If you’re thinking that Bitcoin has had most of its multiples of growth, then you’re less likely to go with option 1, because, you might fancy that you’d find that growth in another instead.
If you think that most altcoins/tokens (like OmiseGo, Augur (REP), Aragon) are not going to be worth anything in the long term, then you’re not going to go with option 4, because you would lose £3,000 of your £10,000 investment (30%).
I think that there’s a strong chance that these tokens and other ICO tokens, whilst having some great projects that they’re funding, will not be tradable or worth anything in 5 to 10 years time. This is because they don’t stack up well against the characteristics that we highlighted above that good coin investments share such as limited supply.
Remember the last post on OmiseGo? They don’t think they’ll increase the supply. That really isn’t the same as not having guaranteed limited supply like Bitcoin does. Bitcoin will never go above 21 million coins because that’s what’s written in the code.
Remember the post on Augur (REP)? What do you get for your REP? You get some platform fees but that isn’t the same as having a fungible, privacy enabled cryptocurrency like Monero.
What will these ICO tokens be worth in a few years?
So should you never trade ICO tokens?
I’m not saying never. I just don’t think you should hold on for forever, because in the majority of cases, I don’t think they’re going to be worth a great deal, if anything at all.
Sure, you may pick a couple of winners, but how are you going to pick ICO token winners from the 1,000 that are already on coinmarketcap.com?
That being said, I don’t think that there may be good time to risk some money on the secondary ICO token market.
That’s when there’s been a good run-in to the ICO, where there’s heavyweight support for the project (like Augur, Golem etc) and there is real appetite to fund the project for the good of the future.
After the ICO, there may be a run-up to a price many multiples of the ICO price.
Look at the below chart of OmiseGo (OMG):
The ICO in late June has seen a huge run up in price, from around USD 1 to USD 12. That’s an astonishing 1200% return in a couple of months.
With ICO tokens on the secondary market ie post-ICO, I think there’s potential plays where:
- The project is supported and well-backed by respected figures in the community like Vitalik Buterin.
- You enter near to the ICO date and hopefully price.
- You exit this position (or at least some of it to crystallise gains) within a couple of months.
Look at the below chart of Augur (REP):
This play may have worked here:
Well supported project
Enter in late Nov 2015 and exit in Feb 2016 or Mar 2016
So the question is: what are the recent or upcoming ICOs that are well-supported projects where we can try out this strategy?
Let me know what you think in the comments below!