Investing in cryptoassets (or digital “tokens”) is high risk. However with the high-risk comes great returns for those investors who are able to hold their nerve.

The crypto boom of 2017 was quickly followed by the “trough of disillusionment” where values tumbled almost overnight, but for those that maintained their skin in the game, they saw their portfolios bounce back (and more) where the price of the mainstream tokens are today at record highs (and in fact more than double the value of the so-called boom of 2017). In this article we explore those tokens that have performed well and identify some hints and trends for those new to this market.

Trust

Whilst the last 5 years in the crypto sector has been a rollercoaster, the constant factor that has remained is the trust element of any token. Those tokens that have gained the trust of the market have flourished, whereas those less trustworthy, more speculative tokens, have more or less disappeared.

Trust can take many forms, but primarily investors want to see:

• Security: the token is safely secured in an impenetrable digital safe (because tokens are like cash, if your digital wallet becomes compromised, the tokens can be stolen by hackers).

• Legitimacy: the token is being used for legitimate purposes. If investors view the token as being used to facilitate criminal activities they will look less favourably upon it.

• Stability: the more a token can smooth out the fluctuations in its value, the more attractive it becomes for an investor’s portfolio.

Knowledge is power

The technology underpinning all tokens is highly complex. I am not suggesting investors become coders and understand the different computer languages, but rather there needs to be a basic understanding of the technology and use of the token you’re considering as an investment. Prior to any investment in any token, I’d suggest doing your research, read blogs, attend virtual events, talk to lawyers (I’m always happy to have a chat) to ensure you’re investing in a token that makes sense to you.

Beware of ICOs

Initial Coin Offerings (ICOs) were popular in 2017/2018 at the height of the last crypto boom. ICOs are essentially where a company issues its own token in exchange for mainstream tokens (such as Bitcoin or Ethereum). At that time, this practice was unregulated and many investors made significant losses as the tokens issued by these companies were essentially worthless. Thankfully the regulators (particularly in the US, but now also the FCA) have cracked down on these practices and companies seeking to now undertake an ICO (which, not surprisingly, are far less these days) have a much higher duty of disclosure and regulatory compliance.

Commodity v Currency

The genesis of the first token (Bitcoin) was in response to the global financial crisis in 2008, to create a global currency that did not rely on a single central repository. Whilst tokens may in the future become legal tender and replace nations’ currencies, in my view I’d suggest we are still some way off this becoming a reality. The more accurate view therefore is to classify tokens as a commodity. Certainly investors are not buying tokens to use in their trade, but rather investing for capital gains.

Regulation

One of the reasons tokens have steadily increased in value over the past 12 months is because regulators have finally started to take this sector seriously. For instance, businesses that are “crypto businesses” must now be registered by the FCA, otherwise they must shut down and return all tokens to their stakeholders. By becoming a regulated sector, this should stamp out the illegitimate players in the market and create that trust (as mentioned above) that is needed for a thriving investment community.

Concluding remarks

Tokens are becoming more and more mainstream in the UK, particularly with the FCA now regulating the crypto sector. However there are still unsavoury players in the space, so you should always do your homework before making any investment. Check for its legitimacy and how others in the market view the token and the technology. For me, I’m sticking with the mainstream tokens for now.