THOUGHT LEADERSHIP

How to assess crypto asset risk

There are some valid crypto tokens in the market and many more coming to market over the years ahead that can and should find a home in your portfolio. But how can you tell them apart from the many others that are hyped to the rafters, but are more likely to be froth than solid investments?

Investment rules shouldn’t change

For reasons that are unfathomable, the classic investment rules have been thrown away when it comes to investing in crypto assets.  Analogous to the dotcom years, the emergence of a new dynamic in investment has caused investors to throw money at crypto assets rather than examining whether the businesses behind them are capable of delivering valuable, functioning solutions.

Asking the right questions

How do the following questions relate to your experience of crypto asset investing?

Purpose

In trying to discern a clarity of purpose in what is being offered, investors will find many crypto offerings hard to pin down. One recent start-up has had huge success in attracting investment based entirely on the proposition, “We are going to revolutionise blockchain.” Our research revealed a dearth of detail as to how this might happen, but the firm in question raised billions of USD.  

In any other business context, a prudent investor would quickly look for a different opportunity in which to invest.   The mystery is why investors treat crypto assets differently; but they do.

Demand

Next assess whether there is a genuine commercial demand for what is being proposed.  Fintech is often seen as being about innovation.  Investors are caught up by the glamour of the sector; the attractiveness of disruption and the elegance of the ideas, forgetting the fundamental questions.

Value

Where is the value in the proposal – is it scalable?  Is there a compelling cost-saving that can incentivise a move from existing business practices to the proposed one? If the solution proposed fails to offer significant value to drive adoption, it won’t work.

People

The common question when investors discuss new offerings is, “Who is on the team; who is the CTO?”

The better the names (even if just “advisors”) the more credibility is attached to the value, and with good reason. There are experienced designers, developers and business people even in this emerging sector, and they are key to driving success.  There are also many who are undoubtedly clever, but have no experience at all, and these represent the investment risk.

The asset classes

Most crypto tokens are a form of payment, not a token for utility.

Understand your asset because a payment for services to be rendered at some point in the future contains a risk of non-delivery. If you are paying for a service you call upon at some point in the future, ask the key question, “If all the income is paid up front at a claimed discount to value, will the company providing the service actually exist when all those services are called upon by people who have invested at an alleged discount?”

Am I afraid of missing out?

Finally, do not let an irrational dose of FOMO – Fear of Missing Out on a bull run in pricing, part you from your money in a crypto asset that fails your sensible analysis.

There are other opportunities including many that will pass your rational analysis of their investment potential and we wish you every success with them!

 

Greg Chew, former banker and barrister, is the founder of QPQ, a digital trade settlement platform for goods, services and payments with integrated trade finance and an open corporate finance portal built on distributed ledger technology to ensure fairer, cheaper and more inclusive trade finance and administration.