Lindsey Maule is the CEO and Managing Partner of Luna Capital , a crypto asset hedge fund located in the SF Bay Area. She was formerly Head of Cryptocurrency Research at Precursor Ventures, a pre-seed/seed VC firm, and the founding partner Charles Hudson is now an advisor to Luna. She started trading and investing in cryptocurrencies in 2013 and has previous experience in financial markets, business development, and statistics. Lindsey focuses on pre-ICO and ICO investments. You can follow her on Twitter at @lindzjm, where she covers all things crypto (and occasionally gives out free Bitcoin).
WHAT IS CRYPTOCURRENCY?
“Cryptocurrency” might be the buzzword of the year. More than that, however, it is an entirely new way to think about currency.
When most of us think of currencies -- like the dollar, the euro, or the yen -- we think of money that we all exchange for goods and services. What a lot of people don’t know, however, is that currencies don’t have any inherent value. They have value because banks and governments have decided they have value. As a result, we all agree to believe these currencies have value, and that value is set by the supply and demand for money. (Crazy, right?)
“Cryptocurrencies” aren’t that foreign from what people use in their daily life. The underlying blockchain tech is an improvement upon the traditional system we have today. Cryptocurrency is a digital asset that allows for faster, cheaper peer-to-peer transactions, and much more. Even though there are around 1,380 other cryptocurrencies as of this writing, Bitcoin remains the most recognizable name and the most popular “coin” because it was the very first cryptocurrency built, which was in 2009.
I have been trading and investing in cryptocurrencies since 2013. At the time, Bitcoin had the reputation of being a medium of exchange for drugs on Silk Road, which was an illegal drug-related website on the dark web. Many students in college were talking about it in class. It sounded sketchy so I ignored it. Shortly after, a friend introduced me to the investing side of digital currencies, and that definitely sparked my interest. I have always loved investing since my parents taught me lessons about money at an early age. I also studied statistics and economics, so I enjoy numbers and seeing them grow.
Earlier this year, I promised myself six months of unemployment. I was figuring out my life while trading cryptocurrencies to pay off my San Francisco rent. When the six months was up, it was hard to find a job that I thought I would care about, so I started building Luna Capital, a crypto asset hedge fund.
Shortly after, Charles Hudson, the Founder and Managing Partner at Precursor Ventures, an early stage VC firm, reached out to me after a conversation we had about crypto, investing, life, etc. from a warm intro mid-summer. He encouraged me to continue to build Luna while joining Precursor Ventures as their Head of Cryptocurrency Research. My job was to get Precursor up to speed on crypto and help them strategize and decide if crypto/blockchain investments should be a part of their firm.
WHY IS CRYPTOCURRENCY RELEVANT TO STARTUPS AND VENTURE CAPITALISTS?
Cryptocurrencies are used for a new funding method, called Initial Coin Offering, that are disruptive to the traditional equity investment model. Instead of waiting five to ten years for a liquidation event to see a return of 2X to 5X, you can invest in an ICO and easily 2x in three to six months -- 10X+ is even likely. Venture deals are tedious, slow and involve a lot of paperwork, whereas ICO investing does now. Also, anyone in the world can invest in an ICO, which is the really cool part.
Cryptocurrencies are particularly important to startups because they allow founders to raise funds without giving away equity, which also gives away power. Now founders have more control than ever, raising money that will last them years.
HOW ARE CRYPTOCURRENCIES USED?
Many cryptocurrencies have similar use cases, like payment systems. Bitcoin was created to disrupt the financial system, and in the early days more people were using Bitcoin to make illegal transactions because you can create a Bitcoin address that doesn’t trace back to you. However, Bitcoin has acted more like a store of wealth in the last few years.
Some companies already have a cryptocurrency-like system within their platform, like reward systems where you receive more benefits when you buy more.
Blockchain is also immutable and cannot be manipulated, so it can be extremely useful when accuracy of data is important.
People buy/invest in cryptocurrencies to trade because they believe the value will rise or they buy it to use on a company’s platform.
The number of ICOs being launched daily is difficult to digest. There is a plethora of information to learn about ICOs, but I’ll briefly go over the basics and the most important things I believe a curious investor (and founder) should know.
Here’s a quick rundown of what my firm, Precursor Ventures, looks for in an ICO. Should you decide to create a coin or token for your startup, this is a simple guide that can help you stay on track and avoid many of the common pitfalls I’ve seen from otherwise really solid early-stage companies.
HOW WE CONDUCT DUE DILIGENCE ON ICOS
- Are there blockchain experts/engineers on staff?
- Is there a strong background in entrepreneurship, and does the team have a competent background that shows they can execute?
- Do their advisors make sense for the product/market?
- Is the raise going to be attractive to investors?
- Is this a market that's hot enough to raise at whatever level they're going for?
- Are they raising X amount because it makes sense for their project or because “X company raised this much and so can I.”
- Are they throwing out discounts left and right that allows investors to game the system?
NOTE: If the top funds have invested, take into consideration that those funds probably got such great deals that they can't lose.
- What problem are they solving and do they really care about it?
- Would they build this out without funding?
SIDE NOTE: I hear too many times from founders in this space that if they don’t raise, they won’t build. This demonstrates a lack of passion that should be a red flag to any investor.
- Are they solving a problem in their space that is needed and/or are they building something that makes sense to integrate blockchain?
SIDE NOTE: Cryptocurrencies and blockchain technology are as inseparable as keys and locks. A startup that is focused not just on their coin, but also on the technology to secure the privacy of their investors will stand apart from the crowd.
- Is it absolutely a utility token?
SIDE NOTE: If it a coin on the line of being a security, that may make it difficult for liquidity. Exchanges like Bittrex and Binance don’t want to cross that line or else they will have to become a broker dealer, and AML/KYC is a BIG pain for them.
ADDITIONAL SIDE NOTE: I actually do not believe every token needs to be a utility token, but in the market today it makes it easier to filter out which ones will be currently successful. I would love to see exchanges launch tokens that are purely for fundraising, which allows more companies the opportunity to run an ICO. This is a whole other article though!
A note about bad signaling: When there are advisors who don’t really bring value to the project or if there is an advisor that has their face on many projects, this kills the value a little bit depending on the situation. Other bad signals to look out for include when the project is highly technical and there is no experienced blockchain developer and when the founders, in-person, say they need money to code something or else it's not worth their time to build. (Founders have actually said that to me before.)
The bottom line: Founders want to know that they are about to get a lot of money. As an investor, I need to trust that they won't lose grit or discipline because that's what can happen when a lot of easy money comes into the bank. So, an investor has to trust the founding team completely. (Precursor Ventures’ managing partner, Chris Hudson, wrote an excellent article about key success indicators in early-stage startups if you’d like to get a rundown of how one Silicon Valley VC evaluates companies for investment.)
HOW TO BUY YOUR FIRST CRYPTO:
Set up a Coinbase account with this link for easy, free Bitcoin.
Verify your identity (it’s easier to do with the Coinbase app) and add your bank account.
Set up your security in the account section by downloading Authy, which gives you a random six digit code every time you login.
Once everything is verified, which takes less than a day, you can buy Bitcoin, Litecoin, and Ethereum on the platform.
TIP: Log into GDAX.com with your Coinbase account if you want to start trading. Fees are also cheaper on GDAX (0% - 0.15%) because Coinbase (1.39% - 3%) fees are significantly larger.
Cryptocurrencies, like Bitcoin, are facing a lot of scrutiny, and are up against a ton of uncertainty, but the underlying tech is what really makes it truly valuable. It is absolutely one of the most revolutionary times and that will disrupt and improve our entire global ecosystem.
Cryptocurrency. an asset class; a digital, encrypted medium of exchange; there are over 1,380 cryptocurrencies, and Bitcoin is just one of them. Cryptocurrency can be created using the open source code of Bitcoin or Litecoin (which you can easily find on GitHub). Building a cryptocurrency requires a reasonably good coder to create a coin.
Other terms used: token, digital asset, crypto asset, coin.
Fiat. a government-backed currency (e.g. USD, YEN, EURO).
Other terms used: dollar, paper money.
Blockchain. a cryptographically secure, decentralized database that stores a ledger of assets and transactions on a peer-to-peer network. The cryptocurrency is the layer on top of blockchain that allows transactions.
ICOs (Initial Coin Offerings). a new form of fundraising for companies that allows anyone in the world the ability to invest. Companies create a new cryptocurrency and typically take crypto investments (typically Bitcoin and Ethereum) in exchange for their cryptocurrency when it launches on exchange(s).
Other terms used: token sales, token raises, token generation event, crowdsale, public sale, pre-sale.
HODL. it literally means hold. “Don’t sell Bitcoin; HODL it.”
Moon. a term used to describe a cryptocurrency rising in value very fast. “The value of Stellar Lumens doubled in one day -- it mooned!” or “Stellar to the moon!”