It is possible to make money on Cryptocurrencies, in an interesting but short window post ITO (Initial Token Offering). Trust me there’s more here than a clickbait title, but first we need to introduce our subject.
When people think of Cryptocurrencies, if they know what they are, they think of Bitcoin first, and maybe the altcoins, of which there are many, such as Litecoin and Ethereum, to name just two.
When people think of how to make money in cryptocurrency, they might think of speculation first - buy and hold, or buy and trade, or more complex stuff, like shorting.
If they’ve heard of blockchain, and know even the basics, they’ll be aware of mining, and how that “can” earn you rewards for contributing computing power to the network, essentially to validate and encode transactions into an immutable chain of blocks - think of blocks as ledgers for the transactions - hence the name “blockchain”.
Both work in theory and can make you money.
In practice you are competing against a pretty efficient market when trading cryptocurrencies, and the fees for doing so can be significant on centralised exchanges.
And, as as we say in the regulated world of financial services, but are not obligated to mention here, as this is not regulated by the FCA “investments can go down as well as up and you are not guaranteed to get back the money you invested”.
We don’t need to say, but that doesn’t make it not true.
Mining isn’t a great bet either, even though in principle you are exposed to less risk, as you earn a set number of coins, and you’ve not had to pay for them.
Depending on the currency you want to mine, you’ll need to invest in hardware which either brings a lot of CPU power to the table, or a lot of fast memory. The kit is an investment for certain.
Then you need to factor in running costs. “Rigs” or miners as they get called, consume a lot of electricity, required both to perform the calculations, and also to keep the hardware cool enough. If someone has better hardware than you, they can compute faster, solving the puzzles first, and reap the rewards for mining the blocks. And if someone can operate at lower cost, consuming less electricity, they can be more profitable than you, allowing them to reinvest in better hardware again.
The mechanics aren’t unfamiliar in the normal business world. It’s a race: to be the most effective and; the most efficient.
As a side note, I’m mainly speaking of the “Proof of Work” model and many currencies are mined on this basis. It’s not really relevant to this discussion, but someone will call me out on it ;)
So what about ITOs?
An ITO, or Initial Token Offering represents the sale of cryptotokens to the public. Think of an ITO as similar to an ICO (Initial Coin Offering), and as similar to an IPO (Initial Public Offering) which is the offer of company shares to the public.
In practice ICO and ITO get used interchangeably, though they are not quite the same. In one you get coins - new cryptocurrency - in the other you get tokens, something which is a product of what is known as a smart-contract.
We’ll park that for now though.
In an ITO you give fiat currency (real) or cryptocurrency in return for tokens, and you want these tokens for the purpose of obtaining future, greater value based on what the company is going to do with the currency invested.
The smart-contract defines what value should be attached to a token and in many cases when the value gets crystalized and shared per token - talk about bad parking!
A token is like a share in so many regards - but it’s not a share, mainly for the purpose of staying under the radar as best as possible and avoiding regulation, as far as I can see.
Another side note: I’m not familiar with the current state of legisation on ITOs. They were very big news last year, and arguably contributed significantly to the bubble in cryptocurrencies, and the subsequent crash. But regulation evolves to match the animal that evolves. Well, in most cases it does.
Going back to risk. Many previous ITOs at best, turned out to have no legs and little actual substance beyond very impressive marketing, and in the worst case, they were vehicles for outright fraud.
I suspect that hasn’t changed much today.
Final side note: Most of my experience relates to 2018 and early 2019 when I took a deep dive into all this crypto and blockchain stuff.
So how does this work then? If ITOs are no good to us - why mention them?
That’s the thing you see, we do need an ITO, but hopefully not long enough to be burned though lack of project viabilty or being defrauded.
I’m going to get into the nitty gritty tomorrow in Part 2 which will be the penultimate part.
I’m not going to be stringing it out - I’ve got a job or lucrative contract to find, so can’t be writing on here, all day.
You want a teaser? “Liquidity” is a big part of it, or rather the lack of it.
You’re welcome to feed back or ask questions in the comments below, if you want to.