Investor confidence.
That’s it. That’s the whole ball of wax.
The average Initial Coin Offering raises about $11.5 million, according to our analysis of over 750 ICOs.[1] But where does that value come from? This is a question that fascinates and perplexes me. How do founding teams, often with no company and no product, make $11.5 million out of thin air?
It all boils down to investor confidence.
How Investors Should Value ICOs:
- Founding team: They should look for strong entrepreneurial teams with a proven track record of success.
- Market need: They should look for a clear problem that the ICO solves with a unique, workable solution.
- Growth opportunity: They should look for markets with large, profitable growth prospects.
- Token mechanics: The token should be an integral part of the solution, not a “bolt-on blockchain.”
- User adoption strategy: The blockchain is ultimately about people. Is it realistic that people will actually use this solution?
How Investors Actually Value ICOs:
- Brand names: If founding team members come from Uber, Google, or Apple, investors assume it’s an A-team.
- Important-sounding titles: Founding team members who come from a finance or banking background are assumed to be capable.
- Quality of website and photos: Investors place enormous importance on the ICO website, the founding team’s profile photos, a well-produced demo video.
- PR: Investors are impressed when the ICO is mentioned in other publications, especially “mainstream” publications like Forbes.
- Buzz: Investors look to other investors to see their opinion of your ICO; there is a “herd mentality.”
We Trust the Familiar
When we see that an ICO founder is from Harvard Business School, or that one of the advisors was on the original Ethereum team, we rate the chances of success more highly. Because we have confidence in those brand names, that confidence rubs off on the ICO itself.
The Nobel Prize-winning author Daniel Kahneman, in his groundbreaking book Thinking, Fast and Slow, shows that our brains attribute a “halo effect” to things that we already view in a positive light. If we like Apple products, we assume that anyone who worked at the company is smart and successful.
This is how we are hardwired as humans. When we were still living in jungles, if we saw a rustle in the bushes, we instinctively mistrusted it until we determined whether it was just a harmless squirrel, or a fierce creature ready to attack.
The Invisible Hand vs. The Invisible Fuel
The great economist Adam Smith described the “Invisible Hand” that seems to guide the market. For example, he proposed that the rich accumulate enormous wealth in order to satisfy their “vain and insatiable desires.”[2]
But to satisfy those desires, they have to employ the poor by the thousands: to run their factories, to take care of their yachts, to massage their flabby bodies.
In so doing, he argued, the rich actually distribute their wealth in a way that they never intended: to benefit everyone else. It’s as if they are guided by an “invisible hand” that distributes their wealth for the greater good.
I will build on Smith’s idea by proposing that investor confidence is a kind of “invisible fuel.” I believe it is most clearly seen in ICOs, which are run entirely on this fuel. Investor confidence is the invisible fuel that lets Filecoin raise $200 million, and lack of investor confidence is what causes so many ICOs to fail.
An ICOs value, in other words, starts in our minds. The amount that’s raised is literally a dollar value measuring our overall measure of confidence.
That’s kind of cool.
Investor Takeaways
Given that there is a gap between how investors should analyze ICOs and how they actually analyze ICOs, here are some points to keep in mind.
- Don’t be fooled by the “familiar.” True, the ICO founder from Stanford is probably more capable than the high school dropout, but that doesn’t mean the Stanford founder will succeed. Look past the brand names.
- Look for people to challenge your beliefs. When you have a “good feeling” about an ICO, ask other believable people what they think (believable = consistent track record of investing success). Try to get them to talk you out of your “good feeling.”
- Invest in long term confidence. If you’re confident about an ICO, then invest for the long haul. Don’t try to get in and get out quickly. Timing the market is not the way to build long-term wealth.
- Ignore the sheeple. You have to maintain your confidence through the inevitable ups and downs. By definition, in order to beat the market, you have to bet against the market. Most importantly, remain confident in your own ideas and abilities.
Investor confidence. It’s the invisible fuel that drives ICOs. Knowing how it works has just made you a better investor. And you can become an even better investor by subscribing to Bitcoin Market Journal.
[1] Source: Bitcoin Market Journal, “Completed ICOs.” https://www.bitcoinmarketjournal.com/completed-coin-offerings/. Counts only reported ICOs.
[2] Adam Smith, “The Theory of Moral Sentiments,” vol. 1, p. 184.
