#004: Invest Like Venture Capitalists (Part 4/4): How to select individual (Crypto) investments?

Photo by Alexander Mils on Unsplash

In today’s issue, I am going to show you how to identify Crypto investments that might have a 1000X growth potential.

If you can learn how to implement this technique, you’ll immediately see a few benefits:

  • Clear and effective strategy regardless of bull or bear markets
  • Five simple steps to create short-list of opportunities to invest in
  • Certainty to invest along venture capitalists (a.k.a. “VCs”)
  • Applicable framework as a beginner or experienced investor.

By following these guidelines you are more likely to ensure a fast learning curve that leads to a sound investment strategy.

Unfortunately, many Crypto investors don’t have a predefined system or strategy at all.

This post is part of a series of 4 articles. In case you missed the first three, you can find them here:

  • Part 1: A financial home run is part of a strategy and not luck
  • Part 2: Why Crypto should be part of your portfolio — Even if you are not a fan of it
  • Part 3: Quantifying worst, modest, and best case scenarios

You can download the full content of this article as a PDF-presentation at the bottom of this post.

Before explaining the 5 steps, we have to understand some fundamentals of Crypto economics.

What are Tokenomics?

Tokenomics refers to the token economics which are basically defined by the following information:

Price:

The price of a unit of a token (e.g. 1 Bitcoin) in fiat currency (e.g. USD).

Market capitalization:

This value describes how much the total currency is worth today. It is calculated as circulating supply (i.e. the number of tokens in circulation) multiplied by the price per token.

Maximum supply of a currency or token:

Often tokens have a maximum supply defined but only a fraction thereof is in circulation.

Over time more tokens might be issued (depending on its protocol) and released into circulation.

Fully diluted market capitalization:

This value describes how high the market capitalization would be if the maximum supply was in circulation, i.e., the maximum supply multiplied by the price per token.

Trading volume:

This value is usually measured over 24 hours.

It describes how liquid a currency is.

A high trading volume implies that you can easily buy or sell a token.

On the contrary, a low trading volume might indicate that you cannot immediately sell a token as you might have to wait for an interested buyer.

Equity vs. liquid token funds

Usually, VCs invest in startups by purchasing equity. Therefore, after an investment the VC firm owns part of the company. In the Crypto-era VCs might invest

  • traditionally, i.e. in a startup by buying a stake;
  • by backing a project through pumping money into a related foundation that has oversight over projects related to a token;
  • by directly buying a cryptocurrency.

For the latter purpose, some VC firms have established what is usually referred to as a liquid token fund.

Out of such a fund VCs invest directly in cryptocurrencies instead of buying equity in a startup. These investments are a direct bet on the value of a specific currency to go up in the future.

However, if a VC firm invests through buying a stake in a blockchain-based startup that issues a token, me as a retail investor can still be very interested to buy the issued token:

Because, if the value of the startup increases, the value of the related cryptocurrency might directly be affected and could go up as well.

5 steps to create a short-list of possible investments

Step 1: Identify VC-backed Crypto or blockchain projects

Go to CoinMarketCap (link here) and filter Cryptocurrencies by VC as follows.

In the search field on the site you can type the name of a VC-firm (e.g. “a16z” in the screenshot-example below) and the autocomplete function will suggest if there is a relevant tag in the database for it.

If you don’t know any VC firms you can type “Portfolio“ in the search field and through the autocomplete function look at the investment firms that appear.

However, be aware that being listed under a Portfolio-tag is by no means a guarantee that such an investor is a top-tier investment firm.

I highly recommend to investigate an investment firm’s past investment portfolio to understand if they have invested in big winners at an early stage.

Step 2: Identify tokens with low market capitalization

Now, filter the list of tokens by market capitalization with lowest capitalization at the top of the list.

Compare the market capitalization with the overall top-10 cryptocurrency.

For this purpose, you need to go to back to the main site coinmarketcap.com where you directly see the largest currencies listed in descending order by market capitalization.

Take the one on the 10th place (Dogecoin in this example) and divide its market capitalization ($7,803,282,242) by the one of the VC-firm’s portfolio investment (e.g. $24,110,959 for Handshake according to the screenshots).

In this example you would get $7,803,282,242 / $24,110,959 = 324.

Personally, I only consider currencies where this ratio is at least 100 (so 324 is good).

As I assume that the top-10 currencies might still grow 10x in the future I thus make sure to have at least a 1000x overall potential for all coins in my short list.

Step 3: Understand the industry

Understand what industry or vertical the potential currency has an impact in. This is important for 2 reasons:

First, tokens can be issued as “currencies“ in the traditional sense (e.g. Bitcoin) without inherent value (i.e. “just“ because everyone agrees to trade this coin in exchange for fiat currency).

However, many tokens are related to a specific use case (e.g. see Handshake as it is the example taken in the screenshot, which aims at creating a “decentralized internet“.

The second reason is diversification: understanding the industry also helps you to diversify your Crypto portfolio in terms of verticals. For example, you probably don’t want to have a majority of your investments be related to the gaming-industry.

To understand the industry it is good practice to have a look at the official website of the project. You can also find this URL on coinmarketcap.com .

Step 4: Fact-check your information

As you probably know, the Crypto and blockchain industry does not necessarily have the finest reputation.

Currently, it (still) is a crowded, unregulated space with lots of actors, some good and some bad.

Users, developers, and teams can hide behind nontransparent websites and codes without necessarily having to disclose their identity.

This makes the whole industry a sunny place for shady people.

However, many (or even probably most) startups and project teams act in good faith, are mission-driven, and super hard working with no bad intentions.

But you have to make sure that you are considering investments that are serious (google “rug pull“ to learn about 1 option on how you might potentially get tricked).

A few very simple yet effective measures to fact-check how serious a project is are:

Official website of the project:

  • Is it up to date (e.g. the copyright information)?
  • Does it look professional?
  • Is the team behind the project listed with real names?

Listed investors:

  • If a project gets backed by top-tier investors, this information is often indicated on the projects website.
  • Double-check if you also find the project listed in the portfolio shown on the official website of the VC firm.

Twitter activity:

  • Most Crypto projects have twitter accounts. Are they still active?

Step 5: Identify where to potentially buy a currency

Again, on coinmarketcap.com (the site is brilliant and I am not affiliated to them in any way) for each currency listed you can click on the tab “Markets“.

Then, a list of possible exchanges appears indicating where you can buy the currency.

If you want to buy a currency, now all you have to do is to register on such an exchange and buy it.

If you haven’t invested yet in Crypto: the easiest way to start is to start.

Follow this guide, get your hands dirty by browsing coinmarketcap.com, decide on an investment and most importantly:

Invest your first Crypto-money assuming you will lose everything.

However, the return on investment on the learning you will get out of this first experience might be: unlimited upside.

Key takeaways

  1. Consider VC-backed tokens with low market capitalization to ensure at least 1000X growth potential
  2. Coinmarketcap.com is where your journey starts.
  3. Do your research, get your hands dirty, be aware of scams. Assume you might lose all your investment.

In the next post, I will present an easy and quick method to exactly determine your net worth. Recall: don’t invest without understanding how to quantify risk and opportunity relative to your net worth.

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PDF / Slides

Download the entire content (parts 1 to 4) as a PDF-presentation here (feel free to share it).

If you’d like to learn more, there are 3 ways I can help you:

  • Subscribe to my newsletter here or follow me on Medium and get actionable tips each Saturday on personal and financial growth.
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Disclaimer

The views expressed here are those of the author. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, the author has not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest. Any investments or companies mentioned, referred to, or described should not be considered as investment recommendation, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

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Daniel Schmitter

Daniel Schmitter

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Daniel is an entrepreneur in the financial industry and is passionate about personal and financial growth.