11 Questions I ask before I ever invest in a Crypto Business. Antifragile investing 101.
When I invest in digital assets, I use a number of heuristics which helps lead me to projects that can be both profitable, and actively make the world a better place. These questions are not laws. They are not guaranteed to lead to a good business, however the more of these questions a project is able to answer yes to, the more likely the project is to be successful. For every time you answer yes add a point:
- Is this project solving a problem that exists? Every business needs to solve a problem that the customer either knows or doesn’t know they have. Ask yourself if the project solves any of these problems. Also ask yourself if you understand the problem being solved and if it affects you personally. The closer you are to the mind of a customer, the better you are able to assess whether this project is working well.
- Does this project require provable fairness or censorship resistance? What the internet was to connectivity, the Blockchain is to trust. A Blockchain is also very slow and expensive to use. Ask yourself if the problem that is being solved involves multiple parties that need to have trust established between them. This can be as wide ranging from Cryptokitties, which needs to ensure users that its Kitties will always be there, to online casinos that need to make sure winnings can’t be taken from players.
- Does the token deliver some sort of tangible return of investment to holders? Everybody loves collecting a dividend from a token. This is a very simple token: Dapp makes money, Dapp distributes money based on token ownership. Other Dapps require a token to be burned in order to use the application. If your token does not do this, chances are you require the token to be bought by somebody else, colloquially known as a “greater fool” for it to have value and it does not deliver a tangible return of investment.
- Does the team have the ability to deliver a product that can actually solve the problem? You need to understand whether the background of the team shows that they have the capability to execute on the project at hand. You can do this either by looking at the success of their past projects, or looking at the already written code that they are proposing as part of the product. Bestowed titles are unimportant, it’s what their actual track record is that counts. The less experience a team has, the more you need to see invested upfront by the team in terms of product development.
- Do the incentives of investors align with the incentives of users? As an investor, I would be very happy if the price of the token or fees to use the product skyrocketed. Would this be bad for prospective users? Am I hoping for something that might actually push users aways from the product?
- Does the project have a robust bug bounty program? All code has bugs in it. It’s a fact of life. The question is whether or not your project has a bug bounty program to handle them. A good bug bounty program should make prompt, sizable payments, and have a clear criteria for what bugs deserve what size payout. If a Dapp is hacked, the token can become worthless, so you need to make sure as an investor that security researchers are being paid for their work.
- Is the project being actively developed? This can be as simple as checking the Github to make sure the team has written any code within the past month. Code, left alone, naturally rots. The more actively people are checking and contributing to it, the more robust it is.
- Does the development team actively foster a community? Ask yourself if you can easily communicate with a member of the team. Part of being an investor means taking an active role in the community. For this community to exist you need to have the actual business helping answer both user and investor questions. This can be as wide ranging as a Discord room, to a Telegram chat, to an active Medium presence.
- Does the project have a working demonstration? Since many of these businesses use open-source code, you need to be able to interact with a version of the application either by running it locally or interacting with it in a browser. It doesn’t need to be perfect, but if a picture is worth a 1,000 words, a demo is worth 1,000,000 words. If you can’t use the product, ask yourself if the customers would be able to. The answer is probably not.
- Was this project discovered organically? It’s important to recognize how you came into contact with the project. Many projects use bloated advertising budgets to attract investors. This is money that should actually be going to the development team. The best way to discover a good project is by word-of-mouth from a user or online discussion about the product itself, not the business.
- Has this project existed for more than a year? The Lindy rule tells us that the longer something exists, the more likely it will keep existing. This is especially true of Blockchain. You want to be investing in projects that have a discernable track record of developer and user engagment.
If you follow these rules, you might not get the best deal on tokens, but in the long run you’ll avoid the projects whose value will go to zero. This is what I call antifragile investing. My hope is that if we all followed these rules, we as a community would select better projects to invest in, and we would have a better framework with which to assess the value of new Blockchain businesses.