Crypto Scams, Crypto Shams. #1

Each new day in the land of blockchain brings another project graciously offering to trade your useless fiat money for their invaluable tokens. You're well aware you should tread carefully and do your due diligence.

Regardless, cryptocurrencies can be overwhelming. Brand new technology, little guidance... It's not easy for everyone to have an informed opinion.

Plus, due diligence is boring.

 

On the left, coolness. On the right... snore.

 

So let's ditch the vague guidelines. Instead, this series will give you actionable tips to separate the wheat from the chaff.

 

Look for the money

Specifically, these green dollar bills we all know and love.

Say SuperNewCryptoProject, henceby referred to as SNCP, asks for contributions. The first question is: how much? Is the amount they're asking for justified?

Put numbers into scale, and investments become easier to quantify. The average software developer in San Francisco is paid $100,000 per year.

 

If you ask me, that's grossly overpaying.

 

Throw in taxes and operating costs such as office space, laptops and starbucks coffees. Add a little extra, because SNCP developers are the best in the field (nevermind that "the field" didn't exist 10 years ago, and no formal review of competency exists). Multiply that previous price by 2.5 to get a rough idea of what it's going to take for each member of this bleeding edge team to work for a year: 250,000 US dollars.

Now let's say there is 8 core members in the SNPC team. They run an ICO, and because the crypto community is really excited about the value proposition of a decentralized toasting machine, they raise 100 million dollars in ether.

100 / 8 = 12.5 millions.

Woops. Looks like we made those guys multi-millionaires before anyone can even smell burnt toast.

 

Left: them. Right: you.

 

It's a simple calculation. Divide the money raised by the number of team members. If they end up millionaires, you're probably overpaying, considering the average programmer in one of the most expensive cities of the world is paid ten times less.

Now, some of you might be thinking:

"What if I really believe in SNPC?"

"Their decentralized toaster will change the world, I want to be part of this!"

"Besides, if they get more money, they'll have more funds to make the project a success!"

 

More is not better.

 

Money is a tool, but also an ongoing incentive to excel.

With the right amount of money, there's enough to kickstart a project and demand quality work from the developers. Fund one, two, three years of development, after which the company has to deliver.

But if our developers get so much money they could sit on their ass for one hundred years without producing anything, what is their incentive to deliver ? What's to stop them from doing the absolute minimum, and shrugging their shoulders if it doesn't work out ?

 

Oh well, we tried our best, guys. Pinky promise.

 

Some teams will believe in their project, and make a genuine effort. But as a rule, investors take on greater risk by overinvesting in a company. Not only the company is more likely to fail, but it vampirises resources from other would-be contenders. For the free market to work, there has to be healthy competition.

 

Beyond a few million dollars, developer shares are better incentives. If the team believes their project is a multi-billion idea before there is any product to see, then a 10% or 20% share of this future jackpot ought to be motivation enough.

Byteball has taken this model to the extreme: without any ICO, 98% of the tokens are gradually distributed to Bitcoin holders. 1% remain for transaction costs, and the developer keeps just 1% for himself. While it doesn't tell us in itself if the project will be successful or not, it's a strong sign of a developer with faith in their work.

 

Parting figures

In 2014, Ethereum itself raised about US$18,000,000 through their crowdsale.

 

And this day, a new religion was born.

 

At the time, many cryptocurrency enthusiasts thought this was unreasonable.

They were not wrong. Despite the revolutionary value proposition of Ethereum, throwing so much money in an unproven project was closer to gambling than investing. Some people took the plunge, became rich, then rationalised their luck as rational. This process is known as survivorship bias.

Being blind to exceptional circumstances can prove fatal if we fall prey to another common mistake, the assumption past history will always determine future results.

 

To recap: Ethereum offered smart contracts, a possible foray into moving programming to the blockchain, potentially improving security, efficiency and reducing overhead in a number of industries. It raised $18 millions.

A quick look at newer projects (from Wikipedia):

• Aragon: "a management platform for decentralized organizations. Aragon implements organizational features such as governance, fundraising, payroll and accounting." In other words, stuff you could implement in Ethereum. They raised $25 millions in 15 minutes.
• Polybius: crowdfunded bank. $28 millions.
• Basic Attention Token: browser ads. $35 millions.
• MobileGo: gaming marketplace. $53 millions.
• aeternity: Bitcoin + Ethereum, part 2 electric boogaloo. $63 millions.
• TenX: debit card. $80 millions.
• Status: messaging app. $100 millions.
• Bancor: a token to trade tokens. $150 millions.

"Useless token: $320 millions." Just watch.

 

Are these projects as revolutionary as Ethereum? You decide.

There's a lot of money flowing into cryptocurrency right now, and overvaluation isn't a death knell in itself. However, caution is required when developers become multi-millionaires off a website and a PDF file.