I have a lot of friends asking me lately if I think it's a good idea to invest in 'X' cryptocurrency, or 'Y' Blockchain application, or 'Z' token sale...
There is so much speculation going on lately with the launch of so many new crypto-tokens and other blockchain-based platforms, plus the massive price-gains in Ethereum and Bitcoin over the last year or so...
I am always hesitant to answer my friends and acquaintances when this topic comes up. The reason I'm afraid to endorse anything publicly --
even if I have made my own mind up about it -- is because I don't get the sense that most new "crypto-investors" truly understand the risks, or the unregulated nature of the markets that they are jumping into.
So with that in mind, I've put together this list of filter questions for you to use. Ask yourself these questions. If you can't answer them, or if you don't understand the questions themselves or the jargon I use, take the time to do some research.
It's great to feel excited about investing in something that you feel is going to appreciate in value -- but it's even better to have the confidence in your convictions, to know and be able to articulate why you are investing in something before you pull the trigger. My hope is that this list will help you to be able to assess potential risks and rewards in this brave new world of crypto-investing.
Six questions to ask yourself before investing in any cryptocurrency, digital token, or Initial Coin Offering (ICO):
- Do I know who the developers are behind this cryptocurrency or token sale (ICO)? Do I know how to contact them? (Are they real people?)
- Do I know where the code repositories are located? Can I review the code, or have an expert review it for me? (Open-source, public codebase?)
- Can I provide a simple, high-level explanation of the security model behind the token or cryptocurrency? Could I explain it to a friend who is less knowledgeable than I am? (E.g., Proof-of-work, Proof-of-stake, or other algorithm?)
- Do I feel comfortable with the distribution model, the inflation rate, and/or the supply cap of this cryptocurrency? (Limited or unlimited supply?)
- Is there at least one reason I can identify for why this application or token should be built on a public blockchain and governed in a decentralized fashion? (True Innovation or Over-Engineered Solution?)
- Have I developed a plan for how to receive, spend, use, and/or keep secure these tokens or cryptocurrencies? Will I have the option to use at least one of the following to maintain full control over my investment: two-factor authentication, mnemonic seed backup passphrase, sole-ownership of private keys, and/or hardware wallet -- as in Trezor, KeepKey, or Ledger? (Am I ready to be my own bank?)
If you have questions about any of the these topics, please feel free to reach out to me via email: [email protected]; or on Twitter: @kernelmastery.
NOTE: This article is not intended as investment advise. Do your own research and make sure you understand -- and are comfortable with the associated risks of -- whatever you are planning to invest in. Never invest more than you can afford to lose.