Introduction

An ICO is also known as an Initial Coin Offering dedicated to new technology start-ups in the blockchain space. There are over a 1000 new ICO’s available and more entering the market every day. When we have a look into the ICO economy we find that many of them seem to offer excellent solutions to world challenges and look exciting to be apart of. While many can turn out to be great investments there are others that will not be. Most of us have also heard of the scams and fraud committed using investors money.

How do we reduce our risk exposure and determine an investment worthy ICO?

There is no magic formula or secret method to identifying a great ICO opportunity. We need to take an economic view of each possible investment worthy ICO and dissect it according to a specific framework. This framework is used when evaluating the possible investment return of traditional businesses. It is called the Economic MOAT methodology and has been used very successfully for a wide array of investors the world over.

MOAT was coined by Warren Buffett. He used it to great effect and still does. It has helped him become one of the richest men in the world!

Graph – Economic MOAT

5 Aspects of using the MOAT Scorecard

For many crowd based investors taking part in an ICO pre-launch sale, there is normally a connection of the ICO and an area of interest for the investor. Areas of popular interest at the moment are disrupters in Social Media, AI and IOT – The Internet of Things. While this does work for many it still advisable to learn a more methodical approach in order reduce your risk exposure as much as possible.

I find that the current areas of focus used for traditional business models still applies to that of an ICO. It is important to mention that an IPO and ICO are inherently the same just using a different currency and form of capital acquisition. Lets take a closer look:

Intangible Asset

An Intangible asset is not a physical property. It is more IP – Intellectual Property – based and normally this term is used in the corporate space whereby certain ‘Intangible Assets’ like trademarks and copyrights are legally deemed as non-physical property. This is similar to an ICO – Initial Coin Offering – in that we need to identify the following:

  • What is the propriety blockchain technology being used?
  • Are there trademarks in place regarding protecting any aspect of the ICO technology offering?
  • Does this ICO have a strong level of brand recognition?
  • Who is the board and who are the Advisors helping make good decisions?

*Image: Forensis Group

There should be at least 3 ‘ticks’ for this out of the 4. Some ICO’s dont run any trademarks yet due to fundraising. However the ICO in question should answer you frankly if you ask about this. Trademarks are expensive therefore they are deemed a good indicator of potential reliability and investor backing which means that the particular ICO is serious in its plans to succeed.

Switching Costs

As the title implies, switching costs are part of a MOAT evaluation. Used in traditional business terminology the switching costs of a business imply the difficulty with which a client, customer or user will experience if they opt to choose a competitor in the future. Cryptocurrency businesses such as an ICO work a little differently. While there is not much to be concerned with from switching costs at the moment we will see this happen in the later global adoption of cryptocurreny companies. There will always be competition and in time there will be new ICO offerings promising faster and better results. Therefore this aspect of MOAT for now at least is not important.

Due to the blockchain technology being a free resource the switching cost will effectively come down to speed of service and / or unique value offering. In terms of actual monetary cost there will not be but in terms of other non-tangible cost factors there will be. Non-tangible switching cost factors:

  1. Speed of transactions on the blockchain
  2. Service from ICO
  3. Transaction fees
  4. Entrenchment – Ability to change or not to change

Network Effect

The network effect in MOAT refers to the scenario when the price of a business service increases according to how many people purchase or participate in it as well as and including complementary services or products that get added which increases the value of that product. Using this we can see the network effect of the Blockchain when more users come on board.

As part of how cryptocurrency market caps work including how the evaluation of an ICO’s currency coin is determined we need to look into the network effect. Therefore if there are more users and adopters then the value increases and the ROI of each investor / user increases proportionately. Using MOAT we find the network effect present itself as a unique competitor variable. We use the following as a guideline in reference to the network effect change and the reason why many will not move onto a newer platform unless it offers an strong intrinsic benefit.

  1. Loss of potential ROI
  2. Loss of potential referral authority
  3. Start-up phase for late joiners

If you want to learn more about Technology Adoption in the Cryptocurrency CLICK HERE

Cost Advantage

Cost Advantage is important and when viewed in the traditional sense of a business. In the normal sense of the term a cost advantage is when, due to size, a company can out price another in terms of service offerings or product pricing. This isn’t necessarily the case with an ICO.

Cost advantage in this case on an ICO would fall into the investment behind it. If we look at the current force and rapid rise in ICO start-ups we find a common thread. They are normally backed by strong investors and a strong marketing team. First to market is a major milestone at the moment and generating large media hype. Cost advantage in the case of an ICO would be but not limited to the following:

  1. Social Media penetration
  2. Investment backing allowing for network leverage
  3. Procurement of assets

Importantly the evaluation of the currency / coin generated. As we know all ICO’s offer a coin in the hopes of its value increasing. This is a major draw-card as crowd sales often see thousands of investors transfering their own cryptocurrencies in exchange for the ICO coin. During the initial pre-launch phase the ICO offers a value for their respective token / coin. This is a very important component for drawing in participants. Here we can assign this to the cost advantage of MOAT.

Scale

Scale is generally the more complex area of MOAT to learn. The ability for a business to scale whether traditional or crypto based is important. Remember that MOAT is used to define viability and part of this is having a strong competitive advantage. If a business can scale according to an increase in product or service demand then they have a greater chance for success. In the case of an ICO – Initial Coin Offering – the scalability of their service / product is determined by the following:

  1. Blockchain protocol
  2. Algorithm used to maintain the blockchain
  3. Smart contracts

An example of scaling can be found with the Bitcoin Blockchain. We find that the transaction speed and amount of transaction per second is relatively poor compared to its rivals such as Visa. This presents a scaling problem and therefore a growth challenge. However in this case there are solutions in place such as The Lightning Network for example that will help it scale quite considerably.

Closing

MOAT offers a good guideline in the ICO space. It is a method to help sharpen your ability to make ‘investor’ like decisions as if you were an investment banker for example. While MOAT does offer good guidance there are aspects that it may not cover, these are called Soft MOATS. Examples of a soft MOAT could be excellent company culture or outstanding leadership.

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