Investors’ Beware:
In Cryptos This is Where Investment Profitability Comes From
When investing in Crypto two factors drive profitability: ‘source of variation’ and ‘adjusted return’.
Source of Variation essentially means what percentage of the returns depend on forces that the new company or token does not control. Ideally investors want 100% of the returns dependent on things they themselves or the entrepreneurs can control. On the opposite side, the most extreme case is investing in the market, where tokens are going up and down in value without the investors’ control.
Returns: investors want to earn more than what they would earn in other projects. But this figure must be adjusted for the cost of capital of the investor. In cryptocurrencies, returns are mostly linked to the value of the business model and the number of tokens that are outstanding during the time of the investment.
Evaluating an investment is about understanding the business model – not the idea of the business model that entrepreneurs are “selling” to you.
Adjusting the power of the business model to how much of its potential depends on the entrepreneurs and how much on external forces, and knowing the number of tokens that will be outstanding during the time of the investment is the key to profitability.
Credit to: Juan Pablo Vazquez UTEMIS Co-Founder.
