How many people would love to get their hands on a time machine, travel back in time, and invest in internet #stocks right after the aftermath of the dotcom bubble? I am sure everyone.
With the benefit of hindsight, things look obvious, but at that time, almost no one would have touched internet #stocks even with a 10ft pole. Fast forward to today, the internet is so embedded in our daily life to the point that many people start feeling discomfort if their phone briefly loses access to it (or even to high-speed wifi).
The same will happen for the #blockchain and applications running on it in a few years’ time, like it or not. Let me be clear, I am not one of those who invested in $BTC when it was below $1 or had any special “legendary” 1000X return investment to talk about (yet). On the contrary, I was a big skeptic until 2020. Then, I started to fight my ignorance, to understand the technology, and to realize that, like in the early 2000s, there are a lot of potential 💎 hidden in plain sight.
These are the principles I personally use to unearth those 💎:
REVENUE SUSTAINABILITY AND SCALABILITY
Does the project generate revenues? If yes, does it provide a service in demand? If yes again, then the next step is to look at scalability. Here, I like to talk about the “highway principle”.
Think about the #blockchain as a highway, where Layer 1 essentially represents the road from point A to point B. The highway operator builds it and gets an exclusive right from the state to run it for many decades. How does a highway make money? Every car that passes through the toll barrier pays a fee. However, the number of cars that can drive through the highway at the same time isn’t unlimited. In order to grow revenues, the operator has two options once the highway is close to becoming congested: expand it by building new lanes and/or increasing the fees. The highway represents our Layer 1 #blockchain.
Building new lanes requires time, right? It’s quicker to build secondary roads or highways where the traffic can distribute more efficiently between point A and B. These secondary roads or highways represent the Layer 2 #blockchain.
Now, along the highways, many “services” can be built, all of them paying a “concession fee” to the highway operator. Gas stations, restaurants, truck checkpoints, and so on. These are the #crypto #blockchain projects.
If a project increases its revenues with the increase of “traffic,” then the scalability requirement is met. The best projects are those that can increase their revenues exponentially because their cost structure grows at a far slower rate.
HEALTHY TOKENOMICS
To keep it simple, think about “tokenomics” as the capital structure of a company. If a project is capable of buying back and burning their tokens regularly, then the economic interest represented by every remaining token in circulation will be higher, by definition. This isn’t very different from how corporate stock buybacks work in traditional finance when, even without growing profits, the Earnings Per Share (EPS) will increase as the number of shares outstanding in the market decreases. 💎 are those projects that post increasing profits alongside a decreasing number of circulating supply of tokens.
TRANSPARENCY
The beauty of the #blockchain is the possibility to access and verify every piece of information running on it. If a project presents itself as a #blockchain one instead runs a significant amount of its activity “off-chain,” particularly the revenues generating part, that tends to be a pretty reliable transparency.
Furthermore, from direct experience, strong and successful projects have all the interest to make their activity, especially revenues and growth, “visible”.
COMPLIANCE
The fact that there are no rules regulating the #blockchain is a myth. Generic laws and regulations already exist in the world, and the fact that they don’t explicitly contain the word “blockchain” (yet) or that, if there are some that already do, are not consistently enforced isn’t an excuse not to be compliant with them. After all, behind every #crypto #blockchain project, in 99% of the cases there is a registered legal entity. Call it a company for example, you cannot legally pay consultants or AWS monthly fees without a legal entity or sort somewhere and if you choose to do so I consider it a 🚩.
Furthermore many services cannot be delivered to companies without meeting their Knowledge Your Customer (KYC) requirements. My favorite item to understand whether a #blockchain project is broadly in compliance with the rules of the services provided is the access to a Bank Account with a reputable financial institution. Of course, there are exceptions, like the Bitcoin blockchain that is fully decentralized, but think about a Bitcoin miner that still maintains access and regular interaction with the traditional financial system (some of them are even listed!).
DEFINED PRODUCT/SERVICE VISION AND CONSTANT INNOVATION
Talking again from direct experience here, the most successful projects have always been the ones that never changed their product and vision significantly since the very beginning. If a project needs to “reinvent itself,” I take that as a 🚩, meaning that whatever they invested capital to build till then is pretty much worthless.
Another 🚩 is a project that needs to change its name. In the same way, Amazon didn’t need to change its name even if selling books is now an almost insignificant part of their business, a project doesn’t have the need to change its identity unless it wants people to “forget” what they were before. Brand value and reputation are key for the #blockchain nevertheless. This goes hand in hand with innovation. If a project continues developing its product and expanding its suite of services along the same spectrum, it is always a strong sign of success and healthy demand. On the contrary, a project that at some point “branches out” into something different from their core vision and products it often signals they see limited potential demand for them.
CONCLUSION
True that many projects lost more than 90% of their value since inception, but wasn’t exactly the same for the likes of Amazon in the early 2000s?
During an euphoric bubble, it is very hard to pick up real 💎, but now it’s a bit “easier” since those that kept meeting the above principles without throwing the towel when their token price hit rock bottom have a significant chance of seeing their valuation increase going forward.
I have my personal list of projects that meet the above requirements, but I won’t disclose it since I truly believe everyone should #DYOR first without bias and then take grounded decisions before any investment. I will leave the comments open to anyone willing to share his thoughts or to suggest additional rules worth to follow.
I wish everyone a Merry Christmas🎅🏻 with all your beloved ones and if you don’t celebrate it I still wish my readers all the best!