“An investment in knowledge pays the best interest.” – Benjamin Franklin
On November, 2017, my fund and I made an unilateral decision to invest in a mining farm ICO. We had invested in the EOS ICO before and small amounts here and there in other ICO projects. However, this was the first one we put down a substantial amount of money (enough to make us one of the 5% top holders of the coin).
The profitability was attractive and we had wanted to do some mining on our own before, but this seemed like a perfect opportunity to get involved, without having all the headache of setting up the farm.
In theory, 1 token of this ICO would equal 1 Mh/s. Once the farm was at full capacity, the revenue would be divided 50/50 between investors and the company. All the operational costs would be the company’s responsibility. They had a buyback program which they would use 10% of monthly revenue to buy any tokens at a fixed price. They promised to set up a farm at full capacity until the February 1st and start buybacks in March.
Now that was November, fast forward to the day I am writing this article: February 7th, 2018. The farm is currently at 30% capacity, meaning payouts are very lousy, and there isn’t a clear date for when it is supposed to be at 100% capacity. They say they are close to getting to full capacity, but who knows. There is no reliability in payouts sometimes going for 4 days without seeing any updates in payout dashboard. The buyback program still remains shady, with multiple team members spreading different information.
Now, let this be a lesson for anyone wanting to invest in an ICO. Specialized tokenized assets. The truth is: Cryptomarkets move too fast and real businesses take time to develop.
I am convinced this farm, in the medium to long-run will be a good business, and it will cover our investment until summer 2018, however, it was far from our best acquisition. Below I detailed what was wrong with our decision-making strategy.
We relied on information provided by the company and investors in its Telegram chat. Big no-no. Investors are almost always too overoptimistic. We should’ve done outside due diligence, such as, calculating the Mh/s profits on NiceHash and talking to people who actually own a farm to see what they thought about this ICO.
In all honesty, we were attracted because of the fact the CEO had already built a $300,000.00 mining farm, so we figured he had the know-how to pull a project like this. Obviously we were wrong. And this is the biggest problems with ICOs, a lot of them are trying to do some revolutionary which will almost always take more time than they say it will. I suspect most don’t do this from a bad place, they genuinely (and naively) believe they can pull such a project off. As a business owner, I can tell you, there always hurdles which you didn’t anticipate. Luckily for them, ICOs are not part of any jurisdiction and by setting up companies in places with very lax crypto laws, investors are left hanging with nothing to do but wait.
Lack of liquidity
Most ICOs will have a hard time exposing themselves. You don’t see many ICOs on Binance or Bittrex. It costs a lot of money now to get listed in those exchanges. That means most ICOs will trade in either Cryptopia or EtherDelta. While this problem may get solved in the future with decentralized exchanges, as it stands, most ICOs have a very little pool of liquidity, meaning investors who want to jump ship, either can’t or are forced to sell at ridiculous amount.
Opportunity cost and shiny object syndrome
In investing, you are always trying to invest in something, before it gets popular. We saw this opportunity, and clouded our mind to what we could with that money. We invested with ETH, if we had just kept the ETH, we would have 3x our money now even with the crash (6x if we had sold at the top). Meanwhile, since we have such large amounts and there is little to no liquidity, we can’t sell our holdings. We didn’t examine our opportunity cost properly because if we had, we wouldn’t have invested so much money into one ICO.
Lessons for the investing in the next ICOs
- Have a proper time frame. Are they saying it is going to take 3 months? Make it at least 4.
- Never buy during the ICO phase. Pretty much every ICO I have seen drops in price in this desert-like wait after the ICO is over. This was the case even with EOS, an amazing project, which went to $0.60 and today trades at over $8.00
- Consider the opportunity cost. Is there a coin where you can get similar or better returns? (Hint: There almost always is). If that is the case, maybe you should lower your investment.