Part 2- How to Become a Venture Capitalist with Cryptocurrencies
First, we covered the “blue chip” technique of investing in cryptocurrency. An investor’s preferences, time restrictions, available resources, and level of expertise should all be taken into account when deciding which approach to take.
The first technique is the least complicated and takes the least amount of time, but it comes with a number of limitations. That there isn’t much room for growth is one of the major downsides. Ten-to-twenty-fold returns are highly unlikely.
For this reason, I choose Strategy #2: Acting as a Venture Capitalist, when it comes to cryptocurrency investments. Today I plan to delve into that topic.
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Methods of Profit for venture Capital Firms
Investors who specialize in venture capital tend to have a lot of money. Perhaps you’ve heard of Ben Horowitz from Andreessen Horowitz, Peter Thiel from Founders Fund, and Fred Wilson from Union Square Ventures.
When startups are still young and scruffy, before they have public appeal as an investment, venture capitalists will invest in them. They’re betting on the team, the vision they’ve laid forth, and the possibility of a successful outcome.
In many cases, the company will already be showing evidence of product market fit and early traction. Sometimes the team has everything but the VCs are counting on their experience, track record, agility, and ability to execute.
That the team is competent enough to iterate on their product and overcome the many problems they may encounter is a key factor for venture capitalists to consider when deciding whether or not to invest.
Private equity firms profit when a company they’ve invested in is sold or goes public. The term “home run” applies to this. They anticipate 10–20-times returns. But they are also realistic enough to recognize that not every swing will result in a home run. They’ll have some successes, like singles and doubles, but they’ll also have some failures, like strikeouts, and ultimately their money will be wasted.
But that’s fine; if you play the game correctly, it shouldn’t matter anyhow. Suppose you follow the rules for appropriate investment sizing and make 10 annual investments of equal amount. That way, if everything else you invest in fails, all you need is one home run to make back your initial investment and then some.
Adopting Crypto’s “Venture Capital Playbook”
When dealing with crypto, we can use a similar strategy. We are on the lookout for cheap but valuable hidden jewels. The term for these is “tiny caps.” In general, we try to invest in coins with a market cap of less than $10 million that have the potential to develop rapidly before anybody else does.
Applying the strategies used by venture capitalists in the world of crypto has many benefits. As opposed to venture capital, cryptocurrency investing allows for far smaller initial investments of $100 to $500, allowing risk-takers to really go for it.
Cryptocurrencies are semi-publicly traded, which is another plus. To get in on a deal, you don’t have to be a well-known venture capitalist. To acquire some of this coin, all you have to do is visit the market where it is being traded, make a purchase, and add the coins to your wallet. Absolutely no need for legal representation or negotiating.
Last but not least, the liquidity of the investment is what I find most intriguing in using the VC playbook for crypto investing. Typically, venture capitalists must wait anywhere from five to ten years for an investment to bear fruit in the form of an acquisition or an initial public offering.
If your cryptocurrency investment multiplies by ten overnight, you can cash out and pocket the profit without waiting.
Victory selection
The time commitment and complexity of Strategy 2 (Playing VC) are significantly higher than those of Strategy 1 (Investing in Blue Chips).
When using tactic 2, it requires a lot more work and resources to identify successful candidates. You must keep a close eye on the stock markets for any fresh listings. The next step is to check out each potential cryptocurrency.
Many of the criteria we use to analyze the major coins, such as NVT (network value to transactions), adoption, and ecology, are not yet present because the coin/project is usually new and has not been thoroughly tested.
You should consult the company’s founders and upper management and pose queries like:
- Is there proof of the team’s past accomplishments when it comes to blockchain applications?
- Is there a good balance between managers and experts in other fields like technology or company strategy or even marketing?
- Does the team have a good reputation that they need to maintain?
- Most crypto teams operate in the open and are easy to get in touch with. So it’s not completely out of the question to join their Telegram group and arrange a call with a high-ranking team member. After meeting with the team, it’s a good idea to hear from other large investors in the industry who share the team’s vision and to pick their brains about the decision to fund the project.
Finally, a near term catalyst is the single most crucial thing to keep an eye out for. Any incident that has the potential to rapidly increase the value of the coin is considered a near-term catalyst.
Potential catalysts include a forthcoming listing on a major exchange, the introduction of a new product or update to an existing one, the release of a new mainnet, the activation of previously locked features (such as staking), and the announcement of a big new collaboration.
Put simply, it is possible to have your cake and eat it, too.
As can be seen, plan B requires a lot more work and money than plan A. Nonetheless, the potential rewards from Option 2 are significantly higher and might completely transform your life.