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Crypto Adventures - or how not to invest

Disclaimer: I am not a financial adviser. While I do have some formal training in the subject, most of my experience is personal and all of the information below is personal opinion and not suitable to be acted on. I will not be held liable if you do anything that makes you lose money after reading my posts. Do your own diligence and do not rely on advice from anonymous online pundits. In the interest of full disclosure, the author is holding bitcoins.

A few months ago I found myself in possession of a few hundred mBTC with no place to put them - I didn’t want to cash out yet since I didn’t know where the market would lead, and I didn’t want to keep it in my wallet since I was taught that money needs to work for you, not the other way around. Unfortunately, they should also have taught me that little money tends to go towards the big money, not the other way around.

As such, I decided to look around the interwebs and see where that money could be put to good use. Bitcointalk threads about investing in gambling (no, really, they actually had a business plan and everything) notwithstanding, I did find some places that aim to be a transactions platform for exactly this kind of deal. Let’s see how I did!

First, I found Cryptostocks.com. Let it just be said, I have no gripes with the site in itself, except perhaps with its polish. So far, the website has been responsive, the transactions worked without a hitch, though there have been times when the site’s wallets have been offline - technical difficulties that were solved after a while. The site is a meeting place for people with projects and business plans and investors that can choose to invest in said plans. There are no formalities if you’re a simple investor, and the project owners are put through a verification process, but it’s layered, and the lowest and cheapest layer means that having a valid domain, a website and an email address is all you need to pitch your plan to the masses.

Getting in

I took it upon myself to do some due diligence and read up on the various projects there. One thing that struck me was that many paid dividends on a semi-regular basis right up until they didn’t anymore, and there was no explanation. They just dried up all of a sudden. Scams? Misfortune? Investing is serious and risky business - maybe they and their investors got unlucky? Maybe there was some alternate channel for discussion where they settled and forgot to leave an update on the cryptostocks site? I had to dig deeper.

Then I figured that from all the active projects, some would be a lot more profitable than others. How they did that I didn’t know, but I gathered up a subset of project that looked promising. Their owners were responsive, their dividends were good, and their business plan seemed to work even though details were scarce and most of them were really mining businesses that have their own sets of risks. However, need I repeat it, the dividends were really good. I figured, let’s get behind some of these projects while the party lasts, and try to cash out at some point. I chose a few, some were verified (had a name, IP address and regular address on file) others were not - but for a few dollars, I thought I’d chance it and see where it led.

Choosing my poison

Then the fun begun. I chose about six different projects, trying to diversify and not put all my assets into the same basket, as it were. However, five of those projects were mining projects and they all shared the risk of increasing difficulty and diminishing returns. The sixth project - and the most successful so far - was based on a different business plan as they were trying to develop a multi currency wallet software.

I tried to use common sense when weeding out the misfits, by choosing only projects with responsive managers, whose websites didn’t look too much like a scam and that were paying dividends. I tried to get medium to high returns on my shares in form of dividends, calculating them to be between 5 and 10% per month (which is, I now am aware, too much to be real but seemed OK in the crypto world where I had made 10000% returns on my “investments” before). That was the second mistake - greed. The first one was, if you’ve been following along, tying all my coin into mining projects which are affected at the same time in the same way by the same market forces like bitcoin price and difficulty increases.

IPO

The third mistake came to light shortly after buying, but fault lies half way between me and the site. There’s this IPO setting that project managers can employ, that makes investors able only to buy shares - and that is supposed to only be used when starting a project, for the Initial Public Offering of shares. However, project owners can start a new IPO at any time; some do so after asking for votes from the shareholders (which is a neat feature), others set the IPO flag whenever they decide they need more cash. I had supposed the IPO flag would be settable only at the beginning of a project, and not whenever the owners felt like it.

This was a problem, as it is ripe for abuse - owners can set it at will and disturb the market. Case in point, asset #6 sold (when I bought it) for 0.049 BTC / share, then a second round of shares were sold by the owners at 0.04, diluting other shares and pissing off everyone who bought the more expensive shares. Then the IPO flag was lifted, allowing people to trade the shares again, only for it to be re-set later at 0.035 where it currently stands. They are either shooting themselves in the foot - as right now I have absolutely zero incentives to buy any shares, since the price might drop later - or are setting up for a grab and run. Either way, my money is stuck as I can not sell any shares and I am not pleased.

This would not be the worst part though. There are projects that have been in IPO for three months and the shares are still blocked. There is only so much trust people place in crypto currency schemes and once the IPO flag will be off, people will sell en masse because they don't want to be left holding the bag, and the share price will plummet. This speaks volumes about both investors (who think “investing” means playing hot potato) and entrepreneurs who seem to believe this site is just about promising large dividends.

Update: as this article is being written, the Cryptostocks.com site is modifying their modus operandi 1) such as the IPO flag will only be settable once, at the project start. They have recognized the potential for abuse and are taking steps to curb that, which is a good sign.

Penny stocks are bad, mmkay

The final problem that I could see with investing in crypto stocks on this particular site or on any other is actually made up of two parts. First, the market is very thin. These are penny stocks, which have been known to be dangerous 2) and largely unprofitable for a long time. Couple that with the fact that the market is very much not liquid, which means that any minor player can upset it and start a downtrend or an unfounded rush to buy just by playing a bigger hand and it spells trouble. Indeed, a few bitcoins can deplete the market of available stocks, making the price soar; conversely, a medium player can sell all his stock and crash the market easily and both these scenarios have happened.

The second problem is coupled to the first and speaks a lot about the psychological state of the investors in crypto stocks. Usually, investors are in for the medium term or even long haul. They expect their money to work for them via the project owners' business plan, and expect to get the money back in years. Sometimes, bad streaks happen and they are just growing pains – smart investors trust themselves to know they have chosen well, and try to weather out the storms.

However, most “investors” in crypto stocks are just the opposite. They seem to want huge profit on very short time scales, and any and all disturbances in the market seem to send them on a selling frenzy. This is not investment, this is speculation and gambling; it is especially baffling when considering the majority of listed projects are actually mining projects. These projects have outputs that follow mathematical formulas, they are verifiable and one can always do simulations based on probable difficulty increases so one always has an idea about current and potential output for the next few years!

There should be a logical conclusion that a share in a mining operation should be worth exactly the revenue from that mining process. Say that one share equals 1 khs in a scrypt mining operation. One can go find out exactly how much BTC (or LTC) will be mined over the next year (or until the 1khs share becomes useless as network difficulty makes it unprofitable). That should be the price of that share, and it should drop accordingly on each difficulty increase.

The second part is true - share prices do drop with time, as their potential revenue drops. However, most of them are severely overrated and there seems to be an ongoing “hot potato” game going on - buy, hold for a bit and try to sell before the next hefty price drop which is more indicative of speculation than investment. Case in point: on Scrypt.cc one kilohash goes for 0.00014 BTC right now. IF you take into account a mean 4.5% increase of difficulty for LTC mining, this kilohash share should cost 0.00004 BTC (that's 3.5 times less) for it to be profitable by the end of the year. Of course, this simple analysis does not account for rises in LTC/BTC or BTC/USD, but those have been scarce lately.

What it comes down to

All of the above mean that the market is still very much immature, with people seeming not to understand that 10% return on investment per month is too good to be true - especially if this only goes on for two or three months and then the project owners disappear. Also, the decline in share price is bigger than the dividends gained for most projects, and while owners blame it on the difficulty increases which are always taking them by surprise, this is more of a statement on their knowledge and market appreciation skills than anything else. In layman terms, they are the ones that screwed up when they didn't account for massive increases in difficulty - especially when it's been going on forever.

Bottom line is that so far, the best investment is in BTC itself and various altcoins. Keep some money in BTC form, as you never know what can happen. Otherwise, be prepared to put some cash in and then struggle to get it back. I will be updating this article in a year's time, just to put down how many of the six projects I've invested in have at least got me my money back, let alone profits; we'll see then if my pessimistic approach was warranted or not.

Update: 09/10/2014

Exactly one month later, here is the situation in the field, so to speak.

Cryptostocks

Cryptostocks is still going strong. They seem to be taking a more involved approach to running the stock market, and it is funny if not ironic to see them and all the other players in this field reiterate the steps the original markets went through – wild west period, followed by more and more regulation and standardization.

Out of eight stocks I “invested” in, only two remain. I liquidated two, as they had become unprofitable. One of them had almost gone out of business after severe electrical damage to their miners, or so they claimed; however, they announced they would keep sending out dividends (starting at 70 satoshi) as a gesture of faith while they would rebuild.

This was heartening as people tend to just up and quit after such catastrophic damage – and most of the time the sob story is just a cover anyway. BSVM, which is their handle on Cryptostocks, wanted to prove the community wrong and show that not all projects are run by scammers, which was a breath of fresh air. Stock price rose accordingly, as people saw they were keeping their word, and I chose to hang on to the shares. After a month or so, though, dividends stopped coming in altogether (though they had increased to 100 satoshi by the end). This is usually a swansong right there, and I chose to limit my losses, which isn’t saying much – I lost 90% of my investment. One week later, they are still not paying dividends.

Two stocks have been put on a trade stop by Cryptostocks. I still own the shares, but the project owners have not responded to emails for more than a month, and for all intents and purposes the money I have in those stocks is gone. I received 12% of the initial investment back as dividends over time, which puts my loss at 88%. This is how all the stocks there seem to be able to give huge dividends: they pay something like 10% ROI per month for the first month, and then just disappear. There’s no catching them, and they scram with 80-90 percent of the people’s money.

The other two projects I still own shares in are going. One of them is still going strong, the other is still paying out dividends, but they are tapering off, and stock price is going down. Right now I have received 30% of my initial investment back as dividends, but the share price is down 80% - which means that if I sold now, I would only get half the money I “invested” back. I’m still holding on to this one, as selling now is not necessary and every dividend received cuts my losses.

The other one, the star of my portfolio is MSP which has already paid back 100% of initial investment in dividends, and while still in IPO (which, if you’ve been following means you can’t yet sell the shares), it is still going strong so it doesn’t matter. Selling the shares now would be just icing on the cake, as I have already made my money back, and every satoshi from now on is pure profit. How is this possible? As far as I know, there are not many stocks that can boast 100% ROI in just three months, in dividends, let alone the price. There is another project that has seen share price increase after the IPO period (which is saying something!) and it is owned by the same company.

You might wonder what sets these two projects apart from the others. The answer is they are not mining ventures. They are actually providing value to the community, as one is a trading fund that actually seems to know what they are doing and are actively investing in new altcoins or coins 2.0 while the other (MSP) is actually a multiple coin wallet that is just beginning to see acceptance. Their first big customer is Coinsortium 3) and my feeling is that once the IPO is over (if it ever is), the share price will go up as well.

The good

So far it seems that investing into the crypto world can be a good idea, if enough due diligence is done. Check the companies and only invest in ones you have faith in – and don’t have faith in mining ventures because the days of “I have $1000, let’s mine” are long gone. Projects that seem to actually add value to the crypto community have a real chance to make it out of the pool and into something great – miners not so much.

The bad

A lot of projects go under quickly or are scams outright because they can. Running away with either most of the money or what’s left after a catastrophe is not really unheard of. It’s easy to do, and people will rarely seek legal remedy, since they most likely haven’t been paying taxes on those dividends anyway, and besides, these are penny stocks.

The ugly

These were expensive lessons. Two out of six stocks successful is dismal – I’ve lost a lot more money than I’ve gained in this venture, and I am pulling out almost completely from the penny stocks game. I’m still long on MSP, as I already made ROI and am curious where they will go, but other than that I’m not putting another cent in penny stocks, crypto or regular.


Investing | Cryptocurrency


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