We discussed in a previous article that the Spray-and-Pray strategy may have some promise. The conclusion of that article was that, whilst there is some evidence to indicate that even a blind Spray-and-Pray approach has the potential to offer a promising return on your investment, it is nonetheless much better to adopt a more judicious approach.
Aside from the fact that conducting research into a potential ICO investment eliminates some measure of risk from the investment that you do ultimately decide to make, there is a second and much more important reason to conduct that research – to identify functional value.
In our view, it is this aspect of the investment which helps to identify ICOs with long-term promise.
What is Functional Value Precisely?
Functional value relates to a token’s utility within the business model which has produced it. It is perhaps best to demonstrate the idea with two examples:
Whilst Ether (the token of the Ethereum platform) is commonly referred to as a cryptocurrency, it is perhaps more correct to refer to it as a crypto token. The Ether token grants it owner the ability to access a given amount of processing power on the Ethereum network to execute Smart Contract scripts, and subsequently to have the results (“state changes”) of those Smart Contracts stored on the Blockchain.
The functional value of Ether is something that takes it beyond a simple asset like Bitcoin, a dollar bill or gold lingot. It carries intrinsic properties which allows processes within a network to be actioned, and those processes are related to a real world utility which is defined by the business model.
Another example of a token with inherent functional value is EMT, the EasyMINE token. EasyMINE is a recent ICO that sought funding for the development of local-install software with a front-end dashboard which simplifies small to medium-sized cryptocurrency mining operations.
Whilst the software is free, running the software itself requires use of the EMT token. Thus the EMT token is embedded within an ecosystem which is dependent upon it for its operations. The token clearly has inherent functional value.
Think Bitcoin for Digital Cogs
Conceptually, then, a functional token is generally any token that acts as a kind of fuel for powering some given system. ICOs which conceive of a token embedded in some system which also renders the token indispensable to the running of that same system thus become, in our view, much better long-term prospects. We generally pass now on ICOs which conceive of a traditional store-of-value cryptocurrency – there are plenty on the market already.
Now it is true that, in pretty much every scenario where you find a token with inherent functional value, the system most likely could have been rigged in such a way that Bitcoin – or indeed any other traditional cryptocurrency – could have been employed instead to somehow run the system.
The advantage, however, of creating a proprietary token is that it allows the project team to sell some of these newly-created tokens on the back of their potential future value in return for something with established present value – such as Bitcoin or, more commonly, Ether which has become a de-facto currency as well as a functional token – in order to fund and develop the product itself.
Fuel or Fraud
Where all of this becomes a problem is that we are now finding a large number of ICOs leading the charge with opportunistic token issues where it is plainly evident that the token itself serves no real purpose. Some people are getting carried away – one ICO we looked at recently proposed a token for “Blockchain-based Aviation Safety”. Naturally, we passed on that one.
With a large number of less than discerning investors out there, often without the technical expertise to understand the precise mechanics behind an ICO, we are now seeing a burgeoning number of sham ICO projects which are looking to cash in on vulnerable and technically-illiterate investors.
A second problem with ICOs is that very few seem to have any kind of built-in incentive to carry on with the project once they have successfully raised X million dollars on the back of the crowd-fund. Be wary of any ICO which does not voluntary engage in a smart contract-based, slow release mechanism of funds to the project team itself.
The most trust-worthy ICO projects are those where the project team promise to pay themselves in increments from the funds they have received in exchange for delivering milestones in the project roadmap. When there is an absence of these kinds of self-imposed conditions, it is time to be wary – particularly in the context where no explicit provisions have been made for a large marketing budget.
As ever, we will point out that ICOs are a very unorthodox investment instrument and, without a satisfactory regulatory framework in place at this point in time, you should only be prepared to invest what you are prepared to lose, and only then do some on the back of some diligent research. So, once you believe you have found an ICO that is proposing a business model which lends the token inherent functional value, you may then want to read through our guidelines on identifying fraudulent ICOs.