Disclaimer: The author is not a financial advisor or an expert in blockchain technology. This article does not provide any investment advice and should not be seen as such. The author is an advisor to Trust Wallet.
“What do you think about Bitcoin?” my father asked me on the phone a couple of weeks ago. It was a stunning question to hear from a person who struggles to keep his email in order or change basic preferences on his iPhone (sorry, dad!). Apparently, my father heard about Bitcoin at one of the New Year’s Eve parties and felt that it might be an opportunity to make a solid investment.
“It is not an easy question,” I responded. “The [blockchain] technology has tremendous potential but today Bitcoin is an extremely risky investment.”
The idea of investing in cryptocurrency has penetrated into many parts of our society. It is mind-blowing to think that people would be willing to invest their hard-earned money in something they can barely understand, but that’s exactly what seems to be happening in the crypto world.
One of the perks of living in Silicon Valley is hearing about new things and technologies in a casual conversation earlier than anyone else in the world. Whether it’s a vending machine or a robotic coffee bar, you will find out about it if you hang out around coffee shops, bars, and streets of San Francisco.
I can’t recall the first time I heard the term Initial Coin Offering (ICO). My guess is it was Summer or Fall of 2016. As the hype about the crypto market was growing, my curiosity won over. I started actively reading and researching the blockchain technology and its applications.
My understanding of ICOs didn’t feel complete without participating in the process. Soon, I opened a Coinbase account and invested a few thousand dollars to see how the “system” works. I subscribed to crypto newsletters and ICO alerts. In the next few months, I participated, sometimes successfully and sometimes not so much, in a few ICOs.
ICO is a process of issuing a public coin or token. It is similar to companies entering an initial public offering (IPO) by listing their stock (or shares) on a public stock exchange, such as the NYSE or NASDAQ. Coins or tokens are issued on blockchain, which means they are unregulated. They can be easily traded, but this is where it gets tricky.
Unlike stocks, which reflect ownership rights to the company, tokens represent the utility or assets that are valuable within a particular network created by the company issuing it (read more about the difference between coins and tokens). In other words, tokens do not represent ownership, they constitute value created by the network itself. The success of the company or project increases the utility of the token, causing its value to rise (WTF is an ICO?).
Before we continue, let me recommend a few resources to learn the basics:
- Bitcoin whitepaper
- Ethereum whitepaper
- Beyond The Bitcoin Bubble by New York Times
- The Phil Ferguson Show: Part 1 and Part 2
- Master Crypto
- List of article compiled by A16Z
1. Getting Started: You almost have to start with Coinbase
Before you can invest in an ICO, you have to buy Ethereum. There aren’t many places to buy ETH with dollars (or fiat, in crypto-speak). So the default and easiest route is to use Coinbase. The company enjoys its position as an early entrant. As the hype about Bitcoin in particular and cryptocurrencies in general skyrocketed, Coinbase reaped disproportional rewards by being one of the earliest players. (Last year Coinbase generated over $1B in revenue).
There are other options, such as Gemini, owned by two brothers from the Facebook saga. While Gemini’s fees are lower, it can take a couple of days to complete the purchase of the coin, which is an eternity in the crypto market, where prices change in a matter of minutes.
Frankly, Coinbase isn’t much better when it comes to transaction speeds. Sometimes, delays are due to a slow network that’s confirming the transaction. Sometimes it’s because of maintenance on the Coinbase side. Concerns are growing in the community that Coinbase can to manipulate prices since they hold a large market share among companies that bridge dollars to crypto (read more).
Here are a few options for buying Bitcoin or Ethereum with dollars:
- Coinbase: Market leader, easy to use, has mobile app
- Gemini: A good option but more limiting
- BitPanda: Never used myself
- CoinMama: Never used myself
2. Setting up MyEtherWallet
Since most of the ICO are based on Ethereum smart contracts, your crypto wallet has to support receiving tokens. During an ICO, you send Ethereum to the company issuing a new token and receive the amount of tokens based on the announced exchange rate.
For example, a company’s exchange rate is ETH = 1,000 X coins. The ICO market is like the wild west — there isn’t a single set of rules or policies. Often the company that issues the ICO limits the amount of coins a person can buy.
Setting up a MyEtherWallet seems strange when you do it for the first time because you don’t create usernames. You create a passport and download the Keystone file, often referred to as a private key. MyEtherWallet generates a public address for your wallet and your private key is the only way to access it. Your public address is anonymous but everyone in the network can see it. In other words, everyone can see transactions that happen in your wallet but no one knows it’s yours.
Example: Bob wants to send money (Ethereum) to John. First,Bob needs to know John’s bank account number (public or wallet address). John’s account number is 1325. Bob sends $1 (1 Ethereum) to John’s account. Everyone in the network can see that account 1325 received $1 (1 Ethereum). Now, John needs to use his private key to access his bank account (wallet) to withdraw or send money (Ethereum). If John loses his private key he will never be able to access his bank account (wallet) and his money will be lost forever.
That’s why you MUST secure your private key. Unlike your bank account login, which you can reset by proving your identity in person or with state issued identification, a lost or compromised private key in crypto is equal to a death sentence. You will never be able to recover it. The horror stories of losing private keys are cautionary tales for all of us (‘I FORGOT MY PIN’: AN EPIC TALE OF LOSING $30,000 IN BITCOIN.)
Tip: There are a few ways to secure your private key. You can use a hardware wallet, an encrypted device that stores private keys for all the coins you own. You can store an encrypted private key on a flash drive and keep it in a secure box at the bank as a backup. You can also use encryption software, such as 1password, to store your private keys. If you trade regularly, you will need access to your key often, so encryption software is a safe option.
3. Finding and Researching ICOs
It was shocking to find out how many ICOs were happening almost simultaneously. How do you pick which token to buy? Even if you can analyze a white paper that goes with each ICO, how do you decide what white papers to read? You can’t possibly read all of them.
Is an ICO investing or gambling?
Let me take a step back and explain my philosophy on investing in ICOs. Actually, investing might be the wrong word. ICOs today, seem more like pure gambling — a game of chance. I don’t believe any so-called experts that find a rational explanation to irrational beliefs (Yes, James Altucher, I’m talking to you).
We, including so-called crypto experts, are prone to what Nassim Taleb in his book Black Swan called a narrative fallacy — a tendency to construct stories connecting and linking facts that are unrelated. A narrative fallacy prevents us from looking at the facts without weaving an explanation into them. For example, this token will be successful because Vitalik Buterin is on the board of advisors.
Of course many so-called crypto experts want to capitalize on emerging markets. Selling shovels in the gold rush is usually a much safer and more profitable business strategy. What’s more alarming is that many ICOs are issued without a product or even a prototype. How many VC or angel investors would invest in a company that has no traction and no product in sight? Sounds crazy, but the ICO market is full of companies raising millions of dollars that are missing both.
My primary goal in investing in ICOs was to research and understand how this new market is working now. It is overhyped and it looks like a bubble. Nonetheless, the blockchain technology and decentralized ecosystems are likely to change how our societies operate (this article provides a few examples).
Still, I didn’t want to throw money around randomly. My first step was to narrow down my list of potential investments to a manageable number of five to 10. To compile a short list, I looked at three aspects: 1) basic concept; 2) team; 3) interest or hype. Below is a list of questions that will help you:
- Can you understand the value of the token at least in theory?
- Is it easy to explain and understand?
- Who is the behind the company?
- Does the team consist of real people?
- What are their backgrounds?
- Where are they located?
Interest or Hype
- What is their hype rating on ICO Drops?
- How many people do they have in their Telegram channel and other social media channels?
Then, I would try to scan their white paper for more information about the solution. Honestly, I rarely found them insightful. Often, it’s due to my lack of knowledge. Sometimes companies don’t invest much time and effort in explaining what they want to build. A few even plagiarize and copy their papers (Tron is a good example).
These are my top two favorite resources to learn about ICOs:
- ICO Drops (ICO Drops)
ICO Drops is hands down my favorite place to research ICOs. The layout is simple and clean, so it’s easy to find active and upcoming ICOs. They rate ICOs based on hype and interest, which saves time. They even tell you if the ICO is available in all. countries.
- ICO Alert (ICO Alert)
ICO Alert is my second favorite alternative to ICO Drops.
Tip: Sign up for a whitelist of the ICOs that you are interested in. Often you have to be on the whitelist to pass your customer (KYC) process. More on this later.
4. Signing Up and the Know Your Customer (KYC) Process
The first ICO is kind of like losing your virginity — you are terrified and excited at the same time. I lost mine with a small coin called ALIS.
It was difficult to figure out what to do and how. ALIS provided an address on their website with the exchange rate. You had to use your wallet and send Ethereum. Coinbase does not accept Ethereum-based tokens so I had to transfer ETH to MyEtherWallet. In a couple of days, I received a few hundred dollars worth of ALIS coins in my Wallet.
ALIS didn’t have a know your customer (KYC) process. KYC is the way a company verifies the identity of the customer (or in case of the ICO, the investor). With so much hype about anonymity in the crypto world, I was surprised that the KYC process often includes sending a copy of your passport and a picture of you holding your identification document.
As ICO becomes more and more popular, regulators are forcing the KYC process on companies to prevent money laundering or tax evasion. We should expect more regulations in the crypto world.
5. Switching to Trust Wallet
ALIS ICO was relatively quiet. The process wasn’t rushed and ICO wasn’t completed in minutes. That’s why I picked it — I wanted to have plenty of time to learn the process. By the way, my $300 in ALIS coins turned out to be worth about $1,200 when I sold them a couple of month later. At least, I didn’t lose anything.
Over the next few months, I successfully participated in Bread ICO and Bloom. Bread ICO ended in about an hour. You could use their own app to send ETH and receive BREAD coin. I invested a few thousand dollars in Bread at about $0.80 per token. I sold 50% a week later at about $3 per coin, recovering all of my initial investment. I sold another 25% of my original stake a month later at about $1.8 per coin and decided to keep the rest for the long term.
My ICO experience includes:
- ALIS — invested, and returned my money +
- BREAD — invested, and returned my money +
- BLOOM — successful, and holding them
- Bluzelle — was late to ICO
- DADI — failed transaction during ICO
Tip: if you are a novice in ICO (like me), read about the importance of setting the right amount of gas for your transaction. Gas price tells the network how much you are willing to pay for a unit of work and the gas limit gives the maximum amount of work you are willing to pay for to complete a transaction. In order to complete a transaction, miners on the network have to process it and you need to have enough ETH to compensate them for their work (read more).
Setting your gas price and limit is very important when participating in a very popular ICO, where many people are trying to buy the token. This can cause the network to overload. Usually, the ICO will let you know ahead of time what to set gas price and gas limit to. If you set more or less than the recommendation your transaction either will not go through or be heavily penalized.
When you are planning to participate in a popular ICO, timing is everything. Depending on your location and the location of the company, the ICO process can start anytime — early morning, late night, or middle of the day.
The primary challenge with MyEtherWallet is that it’s web-based. You have to carry your laptop around. Also, I wanted something more secure. After a while I settled on Trust Wallet, a secure and easy Ethereum wallet for mobile device that supports Ethereum-based tokens. Trust Wallet has a nice UI that’s easy to use. Aside from that, it’s a more secure version of a soft wallet.
Security and Safety
When I participated in ICO, I used to transfer ETH from Coinbase to MyEtherWallet, and I kept a portion of my portfolio on Coinbase. But after some research, I realized that Coinbase is not a decentralized wallet, and if by any chance it gets hacked your money might be gone forever. This is what happened with Coincheck when they got hacked. Coinbase keeps your private key on their servers.
Trust Wallet, on the other hand, does not store your private key. It is stored locally on your device. Unfortunately, even with the most sophisticated security algorithms, the weakest part of your crypto fund protection is you. Phishing attacks are the Achilles heel of web-based wallets like MyEtherWallet. Nothing prevents scammers from imitating a web application to get access to secret information.
With Trust Wallet’s dedicated mobile app, phishing attack risk becomes minimal. Mobile apps are more prone to viruses and keyloggers, a software that illegally records all the keystrokes on a keyboard. The only way someone can access your funds is if they get your device, somehow find the password for it AND figure out the password for the Trust app itself!
Trust Wallet is open source, and it provides transparency and the ability to contribute. A community of engineers regularly assesses app security.
Coinbase knows who you are and collects personal information about you. Why does that matter? Recently, Coinbase was ordered to give the IRS data on its users trading more than $20K (read more). On the other hand, MyEtherWallet and Trust Wallet do not ask or retain any of your personal information.
I imported MyEtherWallet to Trust Wallet, and transferred a portion of ETH that I wanted to keep long term from Coinbase. Today, I participate in ICO using the Trust Wallet mobile app. It’s much more convenient than MyEtherWallet.
6. Tokens on exchanges
After the ICO madness is over and you receive you tokens, everyone is waiting to know what exchanges will list the token. I have tried multiple exchanges but now I primarily use just two: Bittrex and Binance (Binance). Recently, Trust Wallet launched a decentralized apps browser that enables you to use decentralized exchanges like KyberNetwork and Bancor to trade tokens.
Tip: The best resources to check all the prices on many exchanges — Coin Market Cap
What have I learned while investing in cryptocurrency?
1. It’s a gamble most of the time
ICO and cryptocurrency remind us of the dot-com bubble, when anyone with a Powerpoint could raise millions of dollars without customers or even a product (how ICO market has grown). Change dot-com to ICO, substitute Powerpoint for whitepaper, and multiply the hype and you get an idea of the ICO market today.
2. Invest money you can afford to lose
If you could buy a $500 ticket that gives you a 5 percent chance of winning $10,000, would you buy it? It is helpful to think of ICO investment in terms of this problem. How much money would you be willing to lose with a small chance of reaping a large reward (Thinking Fast and Slow, a book by Daniel Kahneman, provides many examples of how we decide on gains and losses).
3. Do not borrow or use credit to buy crypto
Since ICO is a risky investment, borrowing money and using credit to invest in Bitcoin or ICO is crazy. Prices for all cryptocurrency are tied to the price of Bitcoin or ETH. Since there are only few places where you can exchange major coins into cash (Coinbase is the largest) the market is prone to a rapid sell off. During the sell off, networks are overloaded and transaction times increase. Coinbase becomes one of the biggest bottlenecks.
4. Avoid being scammed
Scammers are part of the ICO process. If you’ve participated in the ICO process, you know how crazy the Telegram channel becomes. Scammers try to appear as admins or company representatives and lure you into sending coins to the wrong address. Some create admin-like posts in public chat in hopes that someone will get confused and send their funds to the wrong address.
Learn the rules of the particular ICO and double and triple check everything, especially if the ICO is at night. The Telegram channel is the preferable way to communicate during the ICO. Most companies announce ICO rules and policies using pinned messages in the group.
5. Improve security
Your private key is the only way for you to ever recover your wallet (and your funds) — period. Minimize the use of centralized wallets such as Coinbase. Use a decentralized wallet, like Trust, that doesn’t store your private keys on their servers. Use encryption software, like 1password, to protect your private key.
6. Regardless of craziness, blockchain technology has a great potential.
The dot-com bubble didn’t kill the internet and internet startups. Yes, many companies died and many investors lost their money. It happened because founders, investors, and other players on the market forgot about the fundamentals — customers, product, and revenue. This is what happens now in ICO. People invest in companies that don’t have products, customers, or revenue. What even most important is that we invest in ideas we hardly understand. And we do that only for a small chance (or hope) of making a quick buck.
To learn more about ICO and cryptocurrencies, check out an amazing list of articles and resources gathered by the Andreessen Horowitz team.
I’m looking forward to more stable and mature ICO markets, where legitimate companies will build legitimate products by improving technology and applications behind blockchain.