Exploring EOS.io ICO investment strategies

Hats off to the EOS.io team for a fascinating logic problem in the form of their ICO distribution approach! But how can we reduce uncertainty and maximize our investment?

The Setup

The EOS ICO, which launched today, will be distributed in 2 phases (or 341, depending on how you look at it). The first phase will run for 5 days, and distribute 200 million tokens. The next phase will take place over 335.4 days and will distribute 700 million tokens in 350 23-hour phases where 2 million tokens will go out per phase. 

Lets ignore the 23 hour thing for the moment and just round up to a day. Two million tokens a day until 700 million have been handed out. That's easier.

But here's where things get super funky. You aren't buying a specified amount of EOS tokens. You are paying into the pool, and whatever percentage your contribution represents of that pool, you will get that percentage of the available tokens.

Let's say you decide to throw $10,000 into this ring. If EOS raises $50 million, $10k is 0.02% of the whole, so you'll clear about 40,000 EOS tokens. However, if EOS raises Status.im kind of money, then you might wind up with less than 10,000 EOS tokens.

This is referred to as an auction, but I can't think of any example like this in the real world.  If you're buying antiques, you may have no idea how high the price will go, but at the end of the day, you know you're bidding for a chance to own the very axe head that Washington used to cut down that cherry tree (sorry, that reference is probably lost on anyone outside the US).  No auction house has ever offered a mystery lot, where people bid $1 million for something that is sure to be super amazing, just trust us.  

You know what? I minute ago I said I couldn't think of any real world analogues, but I think I have one now.  The game show Deal or No Deal.  You get offered some amount of money, and you're guessing whether what you have in your suitcase is higher or lower. Another example is any game show that's offered you a choice between some prize you know, and some prize hidden behind Door Number 2! Will it be A NEW CAR????!!! Or a toaster. That's the EOS ICO in a nutshell, paying money and not knowing what you'll receive in return.  Just putting that out there before we proceed.

The Goal

EOS has massive potential, but with this bizarre rollout, what strategies can we apply to find the right entry point? This article won't answer that definitivel, but will give you a framework for making the decision.

Assumptions

Heres how this analysis will NOT play out:

• I won't make any guesses about the future value of EOS.io or whether you should invest at all
• I won't be assessing the technology or considering the whitepaper 
• I will probably poke fun at the ICO distribution strategy but I won't spend much time critiquing, instead I'm looking to develop a strategy to work within what they've built.

I WILL employ the following analysis:

• Results of past ICOs
• Price trend analysis
• Good ol' logic

Let it begin!

Rate of Distribution

On an hourly basis, the initial 5-day distribution phase will offer 1.67 M tokens per hour on average (200M / 120 hrs). That's almost the rate of the entire day's distribution for the second phase.  By contrast, over the course of most of the next year, the rate of distribution will be ~87,000/hr.  That means the fire hose of the first phase is about 19x stronger.

Does that mean you should buy in during the first phase?

That depends.  Remember how you don't know how many EOS tokens you will actually be able to buy?  If the amount of money invested on a daily basis in the second phase is low enough, it might make sense to wait.

Entry Scenarios

Let's look at three scenarios that will help us pick a point of entry. All of these scenarios will use $10,000 as the investment or 35 ETH, and will consider an ETH price a bit more optimistic than this moment, $285/ETH.

1. Phase 1: $250 M raised, Phase 2: daily volume similar to steady top ETH pairs on Bittrex.
2. Phase 1: Remaining 4 days stay the same rate (~3800 ETH/hr as of this writing), Phase 2: See Scenario 1
3. Phase 1: Rate of investment in Phase 1 drops 25% per day, Phase 2: daily volume similar to popular NEW coins on Bittrex (e.g. Cofound.it), ETH trading pair.

Scenario 1:

In this scenario, Phase 1 raises $250 M and each day of Phase 2 raises an amount comparable to the volume of a steady  top ETH trading pair on Bittrex. I'm picking ETC/ETH for this since it has been around a long time and is currently #3. The last 24 hours have had 1945 ETH of ETC activity.

Phase 1: 10k/250M = 0.004% of 200M tokens, earning 8,000 EOS

Phase 2: 35ETH/1945ETH = 1.8% of 2M tokens, earning 36,000 EOS

Winner: Waiting till Phase 2.

Scenario 2: 

In this scenario, Phase 1 raises 3800 ETH per hour for 120 hours, or 456,000 ETH or $130 M at $285/ETH.  No change on Phase 2.

Phase 1: 10k/130M = 0.0077% of 200M tokens, earning 15,400 EOS

Phase 2: 35ETH/1945ETH = 1.8% of 2M tokens, earning 36,000 EOS

Winner: Waiting till Phase 2, unless ETH suddenly hits mid $500s

Scenario 3:

In this scenario, we assume Phase 1 investors got in early and the 3,800 ETH/hr rate drops by 25% each day. Phase 1 earnings are thus: Day 1: 91k ETH, Day 2: 68k ETH, Day 3: 51k ETH, Day 4: 38k ETH, Day 5: 29k ETH. Total 5-day haul = 277k ETH = $79 M

For Phase 2, I'll use a range of new coins on Bittrex. NMR is the new hotness right now scoring 6400 ETH in 24 hrs. Then there's the ever-popular Bancor, at 3000 ETH. Finally, let's look at CFI, still a good coin, also very new, with 340 ETH.

Phase 1: 10k/79M = 0.013% of 200M tokens, earning 25,300 EOS

Phase 2 (NMR): 35ETH/6400ETH = 0.5% of 2M tokens, earning 10,000 EOS

Phase 2 (BNT): 35ETH/3000ETH = 1.1% of 2M tokens, earning 22,000 EOS

Phase 2 (CFI): 35ETH/340ETH = 10% of 2M tokens, earning 200,000 EOS

Winner: If the Phase 1 loses a lot of steam but the days in Phase 2 see a LOT of activity, then you should buy in Phase 1. But if you think the daily investment is likely to slow, you should wait.

This is how I choose to proceed, YMMV

After this analysis, I see no compelling reason to rush into investing before the end of Phase 1.  As Phase 2 opens, we may have new strategies develop based on how soon coins can be traded on the open market. I will be looking at these factors:

1. What was the price per EOS token at the end of Phase 1?
2. If coins aren't being traded on the open market, what's the daily volume of investment in EOS? This will be expressed more simply in a price. I might trend this out to try to find an entry point.
3. If coins begin being traded, is it more valuable to invest, or buy? I am betting interesting fluctuations will happen here.

What will YOU do?

I am interested to hear your strategy as well as your rationale.

Feedback

This is my first stab at a Steemit article, so let me know what you think. Agree/disagree with anything? Want me to fix a typo or a dangling participle? I look forward to your thoughts.