This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
A Retirement Sends DeFi Reeling
“Andre and I have decided that we are closing the chapter of contibuting [sic] to the defi/crypto space,” crypto developer Anton Nell unceremoniously tweeted on Sunday. “There are around ~25 apps and services that we are terminating on 03 April 2022.”
Crypto markets were blindsided. Tokens like Solidly (SOLID-USD) instantly dropped 70%, erasing $200 million in market capitalization. And many would rightly wonder, “how on earth can two programmers juggle 25 projects at once?” (My other half and I can barely manage a single dog).
Yet the moral of the story remains the same:
Reputation matters, especially in blockchain.
Much like fine wines and collectible coins, the value of crypto tokens and NFTs are often driven by what investors think of their creators.
Consider what three Ethereum “royalty” have done:
- Vitalik Buterin. Turned Shiba Inu (SHIB-USD) into a $12 billion coin after donating a portion of his stake to charity
- Charles Hoskinson. Founded Cardano (ADA-USD), a $26 billion cryptocurrency.
- Gavin Wood. Founded Polkadot (DOT-USD), a $16 billion cryptocurrency
In each case, their individual ability to raise money and promote a coin turned promising technologies to billion-dollar wins.
As Bitcoin (BTC-USD) lumbers out of its fourth bear market in a decade, star power will matter more than ever in determining which projects get funded, and which get forgotten.
2 Diamond-in-the-Rough Cryptos Destined to Shine
Regular Moonshot readers will know this newsletter generally favors higher-quality picks like Ethereum (ETH-USD) and Terra Luna (LUNA-USD) that have real-world uses. Meme coins from Dogecoin (DOGE-USD) to Shiba Inu are only considered when they gain enough momentum.
The name of the game is prestige. These are cryptocurrencies that people want to buy because they like the feeling that ownership conveys. Focusing on these coins will save investors from the thousands of duds and scams launched every day.
Today, we’re going to review two top picks winning at the star-power game.
Top Dark Horse Pick: ImmutableX (IMX)
On Monday, Sydney-based Immutable announced it had added several more prestigious “feathers” to its cap. After securing $200 million in Series C financing the firm’s growing list of stakeholders now includes Singaporean sovereign wealth fund Temasek, Axie Infinity’s (AXS-USD) Animoca Brands and Chinese gaming firm Tencent (OTCMKTS:TCEHY) among others.
This isn’t the first time big-name investors have favored Immutable X (IMX-USD). In February, Gamestop (NYSE:GME) chose the crypto over meme favorite Loopring (LRC-USD) to run its NFT business. And Nike’s (NYSE:NKE) RTFKT Studios was also an early adopter.
But the addition of Animoca Brands and Tencent makes for an even bigger step forward — both firms are heavyweight crypto investors. The former counts Atari and Bloktopia as partners, while the latter owns a 48.4% stake in Epic Games.
Their rationale for IMX is straightforward. Immutable runs one of the best NFT scaling solutions on the Ethereum network. Unlike sidechains like Polygon (MATIC-USD) or state channels like Efinity (EFI-USD) that sacrifice security for scale, Immutable X’s “ZK-rollup” recognizes computational ability is a secondary concern and downgrades that instead. The result is a highly scalable rollup that offers instant transaction confirmation with zero compromises to user security.
IMX prices now hover in the $1.50 range. Investors looking to buy a top-tier diamond in the rough should consider jumping in.
Top New Entrant: FTX (FTX)
In November, I called Crypto.com (CRO-USD) the “35-cent crypto [that] could sink Robinhood.” A masterful ad campaign on social media — combined with its headline-grabbing rename of the LA Staples Center — would send the cryptocurrency up 200% within a month.
Today, a new entrant looks like it could unseat the old king: FTX (FTX-USD).
Founded by 30-year-old billionaire crypto trader Sam Bankman-Fried, this crypto exchange has become the anti-CRO. Its platform is instead built with traders in mind.
“FTX has the cleanest user experience of all the major crypto exchanges,” notes UK-based blockchain analyst Chris Williams, “and it doesn’t rinse you on fees like Coinbase does.”
Mr. Bankman-Fried has also pursued a softer touch. Its TV ads starring Larry David are humorously self-deprecating. And so far, FTX has steered clear of Binance’s (BNB-USD) tactic to “launch first, ask for regulatory forgiveness later.”
The strategy has paid off. On Monday, FTX gained regulatory approval for the EU. As more and more investors migrate to FTX’s platform, its token stands to gain handsomely.
Breaking the SPELL
Meanwhile, Solidly and its 24 DeFi relatives aren’t the only project group suffering a reversal of fortunes.
In January, Wonderland’s (TIME-USD) token fell by one-third after creator Dani Sesta revealed the project was partially run by Michael Patryn, a serial crypto scammer.
The fallout quickly spread to other tokens created by Mr. Sesta, despite having no relation to Wonderland. The most prominent of these — the Abracadabra.Money project — would see its Spell Token (SPELL-USD) lose two-thirds of its value within weeks. Apparently, associating yourself with Ponzi masterminds is bad for business.
Abracadabra’s undoing highlights crypto’s broad dependence on reputation. Smaller projects are often run with zero oversight, and developers for projects like Safemoon (SAFEMOON-USD) often claim to be “community-driven” while keeping the keys to the kingdom.
Reputations can occasionally be mended. Binance’s “Tai Chi” document scandal to “intentionally deceive regulators and surreptitiously profit from crypto investors in the United States” was eventually forgotten.
But when you’re looking for small Moonshots to ride, I wouldn’t give many of these picks a second chance.
When Prestige Isn’t Enough
High-potential cryptocurrencies can also fail. Andreessen Horowitz-backed Internet Computer (ICP-USD) now trades at $16, down 97% from its peak. And the 80% decline in Gavin Wood’s Kusama (KSM-USD) means it’s now back down to its 2021 prices.
The world of equities is full of similar stories. Eddie Lampert, once considered the “Warren Buffett of Canada,” destroyed his reputation after driving retailer Sears (OTCMKTS:SHLDQ) into the ground. A similar fate would ensnare Apple store designer Ron Johnson when he took over the top job at J.C. Penney’s in 2011.
Cryptocurrencies, however, are particularly sensitive to star power. Their lack of fundamental value and regulatory oversight means that a simple “trust me” is often the only thing cryptocurrency founders can tell their investors.
These truths have created superstars in the blockchain world. Ventura capital firms are reportedly valuing Bored Ape Yacht Club creators Yuga Labs at $5 billion. And it seems celebrity endorsements are now a requirement for any up-and-coming token.
But once a token or NFT’s star power fades, investors should quickly head for greener pastures. In Moonshot crypto investing, there’s no time for second chances.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.