By Cale Moodie, Neptune Dash
There is a prevailing belief that you need to grasp all the intricacies of cryptocurrency mining or blockchain technology before investing in a cryptocompany.
But I’d encourage you to ask yourself whether everyone who invested in Google has a background in computer programming. The answer, of course, is definitely not.
Having background knowledge is certainly helpful in making sound investment decisions, but other factors are much more important.
After all, a cryptoinvestment is like any other: Venture capitalists need to focus on the same things that make a good investment in any other space, including financial viability, growth plans and market size.
Getting a grasp on crypto
We know by now that as the world becomes increasingly invested in digital, cryptocurrency and blockchain have the potential to be foundational parts of the financial systems of the future.
That’s an exciting prospect; it’s why crypto generated so much buzz at this year’s SXSW and why banks are paying attention.
Sure, it doesn’t hurt to know the basics of cryptocurrency mining. But more important than knowing how coins are mined is understanding what that means for society overall and what new types of mining could mean for your investments.
This is a constantly evolving space, and as we continue to learn more about the environmental effects of cryptocurrency mining, innovative players are stepping in to develop new, greener approaches.
For instance, proof-of-stake mining relies more on users and less on sheer computing power. That’s the type of innovation that should catch a venture capitalist’s eye, regardless of industry.
That said, mining is just one area to evaluate, and a seemingly endless number of startups are trying to tokenize everything we do. Here is what you should focus on to separate the valuable opportunities from the hype.
1. Ask for more financials and fewer buzzwords
Before you invest in a cryptocompany, dig deeper than the pitch and ask yourself the hard questions about the business model. Is there a real-world application for the coin or technology? Do the revenue and growth model seem viable? Is the company being practical about managing risk? Critical questions like these will help you assess whether a business can actually disrupt the industry profitably or whether it’s just riding the popularity wave.
2. Invest only in teams with whom you are comfortable
Every company a VC evaluates is made up of two parts: the product and the people. Do your research on both fronts. Any great idea can be destroyed by a team that lacks the expertise or the drive to make sustainable business choices. Thoroughly researching, interviewing and interacting with the leadership team will help you understand its capabilities and its potential to keep a cryptocompany growing.
3. Think like an entrepreneur, not a programmer
Most cryptoopportunities have far less to do with perfecting code than with seizing market opportunities.
First, identify the technologies you believe have the most potential, even if you’re not an expert yet. A number of opportunities are emerging in this space, for example, investing directly in blockchain infrastructure.
Second, imagine how average people will interact with these companies. Will labor markets for miners develop? How will cryptotechnologies disrupt or interact with Amazon Web Services, Google Search, and other existing spaces?
As with any startup, thinking critically about potential consequences for consumers, companies, and employees will help you identify which companies are most scalable.
Cryptocurrency proponents expect bitcoin to be worth $1 trillion in less than a decade, and billions of dollars will likely be poured into cryptocurrencies over the next five years.
VCs will have an important role to play in the growth of this market. Investors should work to bring good businesses, solid financial plans, and cryptoexpertise together.
This time-tested strategy should lead to successful investment opportunities in one of the world’s most exciting emerging markets.
Photo of gold bitcoin coins and dollar bills courtesy of bodnarchuk/iStock/Getty Images