I've been recently consulting on blockchain decided to have some skin in the game with a basket of my own cryptocurrencies. There is a lot of information around on short term trading (which is fabulous and thank you for all those providing it as this is not my skill set and I find it useful). However there is often less information around long term portfolio planning. I spent a long time assessing my portfolio and having shared with them my early success with Ripple and Antshares my friends have encouraged me to share my approach.
I have been holding a basked of 10-15 currencies. The five criteria I used to ride the ripple wave and then the antshare wave early were:
- Prioritise for Platforms and network effects.
- Prioritise solutions that solves a real problem that exists in a big industry today where billions of dollars are at stake
- Identify a potential target market cap, a big gap from a potential company's current market cap and from its peers
- Check the detail (is the use case real - does blockchain add a genuine benefit? is the management team good - do they have a track record? Is the way the ICO has been structured attractive to investors? Is it a scam?)
- Diversify the portfolio but don't hold so many you can't manage them
More on each of these.
1. Platforms and network effects
The market cap is supposed to reflect the net present value of all the possible revenues a service or company can make in the future to infinity. By definition then it stands to reason that someone who conquers the electronic games market, however big or exciting, can never, ever, grow to the same market cap as a company seeking to (and being successful at) organising the world's information as Google tries to do. I wanted to pick the companies I thought would have the biggest long term market cap.
A network effect is when a company or its service becomes exponentially more valuable the more people that use it. Think about facebook. Today if you want to find anyone, you just look on facebook. Everyone you know is there (or on one of the other social networks for those of you who are younger!). These networks don't just increase in value exponentially with the number of users but they grow exponentially too. Most of the phone messaging services like watts app grew to 100m users in just 2-3 years. This isn't a coincidence. It is because I give the app my address book and it then invites all my friends. It does the same to their friends. Anything with a good proposition around network effects that could appeal to anyone in the entire population has the potential for an astronomic market cap. Steem is in this category. So will coinbase's proposed ethereum based messaging and payment service (the concept was announced at Consensus) designed to mirror the chinese service WeChat.
Long term payment mechanisms are a network effect. But there are much higher barriers to getting mass adoption of payment networks than of social media. For social media I just have to share my address book and get people to come. For payments there has to be a reason and shops have to have terminals that accept new payments. It will come.... but will take a long time. So I believe in (the long term) opportunity for Bitcoin, think the opportunity for dash and others is there but will be less, and am seeking those services that purport to be one thing but can side step into being a currency. For example Incent wants to being loyalty points to millions of consumers. They won't know they are using blockchain or a cryptocurrency. Once there are millions of wallets with incent tokens, they can side-step into being used in a shop. Similarly if steem became used by 100m people for the social media and blogging ability, there may come a time when shops start to accept steem the currency for merchandise or services.
In network effects, I chose Bitcoin as my main holding, followed by niche holdings of security oriented cash coins (monero, dash, zcash, zcoin). Most recently I've invested in Steem as well as it has an amazing business model to turbo charge its network effect.
A platform is the underlying enabling infrastructure that supports a whole ecosystem of different player and different business. I like investing in platforms because it only needs one massively successful application on the top of the platform to make the platform valuable. I don't have the time or resources to bet on every game company, every uber disrupter, every currency, ... But there are far fewer platforms in the cryptocurrency world. It is easier to bet on the platforms. And... in the long run the market cap of the most successful platforms will far outweigh the most successful applications (unless the application backs into becoming a platform as well in the way that say facebook has done and steemit has hinted it might like to)
My big bets in this category were initially ethereum (the microsoft of blockchain), then antshares (the chinese version massively undervalued compared with ethereal. If you think alibaba is 60% of amazon's market cap but Antshares was about 1% the other day of atheneum's market cap, it shows how undervalued antshares is even against ethereum). I have smaller bets on platform layers like List that can alleviate problems on bigger platforms by relegating computations to side chains. I don't say this is the definitive portfolio - I'm just trying to show you how I set about thinking through the criteria and applying it. You may reach different conclusions which is fine but it might help you to have a methodology that's all.
2. Priorize companies that solve a pressing and expensive problem that many large companies have today
I bought into ripple early on seeing how much cost could be taken out of liquidity and foreign exchange transactions for the big banks. It is a many billions of dollar problem. Ripple had got lots of trials with lots of banks. It seemed inconceivable that in the short term its value wouldn't be recognised in increasing market cap once trials started to go to launches
3. Determine ratio of current market cap to target market cap
For all the companies I've invested in, I looked for a proxy in the real world and allocated a potential long term market cap. Initially I thought ethereum was most like cisco underpinning the internet (market cap of $160bn) but then decided microsoft is better proxy ($560bn). Although you'd have to discount this for the fact many corporate blockchain applications may sit on private blockchains (another debate for another time ). But I didn't do this in a lot of detai - it doesn't really matter whether it is $100bn or $500bn, the point is it is much much bigger than something aiming to take a PayPal type market (Paypal market cap $60bn) or a drop box market cap ($5bn). I then looked at the ratio of the current market cap to the order of magnitude of the end goal market cap and gave points to those with the biggest market cap growth yet to come.
4. Analyse the specifics
It was for this reason I also got out of ripple. You have to believe with ripple not just that the banks will use ripple but that they will use the ripple currency XRP. I asked two banks at a conference I was at if they were going to and they said "we'll use ripple but not xrp" . A bit more digging and it became clear that shareholders in ripple benefited even if XRP was not used but also benefited if XRP was used because Ripple kept back a lot of XRP for the company. But investors in XRP would totally lose out if Ripple basic technology is used by banks but the xrp isn't . I therefore got out 80% just after the market top turned and on reading the first article I'd seen that echoed what I've just said above I decided to sell the other 20% as well on the grounds it would now be public domain insight for anyone to find. That doesn't mean Ripple won't find some banks to use XRP or that even if they never do people won't buy the hype and push the currency price up first. But for me this changed the risk reward ratio and I decided to take profit and run. This also illustrates the need to be an agile investor. The crypto market is moving so fast you can't analyse it to death before you make a move or the winners will rise 50-100 whiles you're waiting. You have to do some analysis, place your bets, do more analysis and refine your bets. On the other hand there will eventually be a shake-out and the many rubbish ponzi schemes and poorly though out propositions will crash and will not recover .So it is worth sticking with quality companies.
5. Diversify the portfolio
I diversified between areas (platform: for applications (ethereal, antshares/NEO, Lisk, and others like this) ; internet architecture (maid, sia, storjx, skycoin..); network effect (currency like bitcoin, social media like stem) and then across several companies in the area. I quickly decided that there were many categories I couldn't invest in as I would be spread too thin. For example in every wave of technology games and sex are always big revenue earners but there will be lots of competitors and I don't have the bandwidth to cover them all properly.
This is my first foray back on steemit after setting up an account a year ago and not really posting anything. Hope this helps and is interesting. Now - I'd love to hear from you whether you use any other investment categories and what you think might fit my criteria that I should consider investing in!!! This isn't meant to be a final recommendation so much as a straw man attempt at a structured approach which I'm sure the community here could improve on further. One thing I haven't covered is the short term decision about at what price to buy in. There are many posts and videos from traders who are far better qualified than me to advise on that.