My reflections on participating in the ICO boom back in the day — and some thoughts to consider during the current DeFi phenomenon.
“Hey, did you hear of this crypto called XRP?”
That was the question that started my deep dive into the crypto rabbit-hole.
The XRP logo. Source.
It was during July 2017, at my friend’s birthday party. We were sitting around the table, enjoying some nice seafood when he started to talk about crypto.
Well, I certainly knew about Bitcoin, at least. I followed it loosely since 2013 and knew it as the “currency” that the dark web marketplace known as “Silk Road” accepted. Back then, I associated it with the drug market that it fueled, and watched with a combination of amusement and amazement as it skyrocketed from nearly $0 to $100, then to $1,000.
I also read about the takedown of “Dread Pirate Roberts,” the infamous mastermind behind Silk Road, and then stopped following the development of Bitcoin closely. I had the mistaken assumption that it would no longer be worth much since its biggest market was forcibly closed.
Of course, I knew my friend was into crypto. In 2015, when I was preparing to do my Master’s, he told me all about this marvelous currency that allowed him to buy coffee from a café downstairs. Back then, still coloured by the impression I had from the initial boom and Silk Road, I dismissed it and did not consider it something that people would want to own.
Well, how times have changed.
So, my friend starts telling me about XRP (and its parent company, Ripple) and how it could potentially upend the financial system. Well, I was certainly more interested now. After all, I had just started with a local bank and was aware of the onslaught of financial technology (“fintech”) that was seeking to replace the incumbents. However, most fintechs back then were in the early stages of development, and retail investors like myself could not directly participate in its growth (short of being an employee in a fintech company). Thus, I looked at XRP and cryptocurrencies as a whole with renewed interest since this was an area with game-changing potential, and offered retail investors like myself a way to participate in its growth, via ownership of the underlying tokens.
After that party, I dusted off my research glasses and jumped into reading. I read every article I could get my hands on, from a variety of sources, such as Google and article compilers. There was no mass-market structured way to learn about crypto back then, so I had to do the groundwork myself. I asked my friend for website referrals and subscribed to the mailing lists of several of them. I also downloaded Telegram to read up more about the developments of Ethereum, and the fast-growing market of Initial Coin Offerings (ICOs).
Meanwhile, I also had to find a way to get my hands on some of these tokens. Binance (the main exchange I use today) didn’t exist back then. Thus, I had to hunt for other exchanges that accepted fiat to buy some crypto.
I had several reasons why I wanted to own some cryptocurrencies:
- It was one way to tap into the growth of the fintech space.
As I mentioned previously, the growth of the fintech space was one potentially game-changing event which I thought will overturn the way that we do banking. However, it was virtually impossible for me to get involved in that sector, other than joining a fintech firm.
Thus, I saw this opportunity as a way for me to participate in the growth of fintech as a whole since the tokens would appreciate if this sector grew. I knew that I would not be able to tap into this growth otherwise because many of the fintech firms were privately held, so I could not even invest in a company even if I had wanted to.
2. It was a hedge against the “black swan” event that banks get displaced by this new technology.
Even though I work in compliance, I knew that anything that threatened the banks’ business model will also threaten my role. If banks are no longer able to operate in the manner in which they do today, it is very likely that all bankers will feel headwinds in our careers.
Yes, compliance would still be necessary, but the scope would be greatly reduced.
Thus, buying some tokens now seemed like a good way for me to hedge against the potential black swan event that could derail my career since I was just starting to build it.
3. It was the boom of my generation.
Based on more popular research, my generation is classified as part of the millennial generation, albeit the “older” millennials, because we were born before the internet, but were young enough to witness its growth. So, from an investing standpoint, I missed the dotcom boom and the resultant crash.
Additionally, I was still in my undergraduate years during the subprime crisis. As someone who is also interested in the financial markets, while it was a blessing to be able to ride out that period in university, I also missed the run-up due to the QE driven recovery. I did not know enough about the situation than to take full advantage of Ben Bernanke’s policies.
So, now, I saw this as the opportunity of a generation. Here we are, on the cusp of a second-generation blockchain (the first being Bitcoin, particularly during the days of 2008 to 2013), as we were still early enough to snap up the tokens on the cheap. Yes, there is always the risk that this whole system would collapse, but being able to buy in earlier would give us significantly more potential upside than someone buying in later. I was also more stable financially, compared to the QE days, where I had just started work. It was a prime opportunity to allocate some “moonshot” funds into a high risk, but potentially high return strategy.
4. I could not afford to be wrong about crypto.
During this time, there were many other famous voices calling Bitcoin a bubble and/or a fraud — Warren Buffet and Jamie Dimon, to name a notable pair. However, they were in completely different life stages than I was in. They could afford to be wrong. If crypto actually did take off and replace mainstream banking, they could just retire.
However, I did not have such a luxury. Unlike them, I was neither rich enough nor established enough in my career to retire. Instead, I would be in a position to potentially build a career in crypto, should it have taken off.
On the other hand, if they were proven right and crypto amounted to nothing, the only loss I would take was the amount of capital I decided to invest in crypto. That amount would not set me back much, and I would be able to build my career in the traditional financial markets.
And thus started my hunt for a ‘fiat on-ramp’ exchange — an exchange that would allow me to convert some fiat into crypto. After asking around and doing some research, I settled on a smaller exchange (Bitstamp), mainly because it was one of the exchanges that allowed me to buy XRP directly with fiat.
When I started out, I decided to go into XRP and ETH instead of BTC, mainly because XRP was my “bank hedge,” and I felt that the Ethereum ecosystem was wider than Bitcoin’s (since the Ethereum blockchain allowed more smart contract functionality compared to the vanilla blockchain of BTC at the time).
I also started laying the foundations for being able to independently move crypto around. In addition to creating BTC, ETH, and XRP wallets, I purchased a hardware wallet called the Nano Ledger to ensure that I have a failsafe “cold storage” option (since the other wallets were either created based on apps or files that I had backed up into the cloud).
My Ledger wallet. Ironically, I eventually used an exchange to store the crypto, but hey… It was preparation!
After all, if I was going to prepare for the new era, I was going to prepare properly.
Amidst my preparations, the crypto world started to wake up.
The first Bitcoin fork was the first of many events that stoked the flames of the crypto market.
Back then, the miners were debating the merits of allowing more transactions on the blockchain. The original block size was around 4MB, and due to the growing popularity of Bitcoin, transactions were taking longer to get added to the blockchain due to the increased volume. This resulted in people having to pay higher fees to the miners to prioritise their transactions.
The resulting split created Bitcoin Cash, which had an 8MB block size, amongst other changes.
Unfortunately, this happened before I could put any fiat in the market. Had I understood the implications at the time, I may have given BTC more consideration, because this fork resulted in the owners of BTC at the fork date owning both BTC and BCH, i.e. both Bitcoin (core) and Bitcoin Cash. In a sense, it was creating tokens from thin air (the Federal Reserve’s dream — creating money out of nothing!).
However, this fork drew more attention to Bitcoin and cryptos in general, and as they say, a rising tide lifts all boats. You just had to get on, which I did.
When I first entered, I did not immediately throw all my fiat into XRP. I kept some aside and started to try to trade the XRP/USD pair on weekends. However, XRP was not as volatile as BTC back then but had occasional pumps and dumps, so trading it was very risky, and I was not able to fully capture the price action. Thus, I decided to average in by keeping some liquidity on the side to buy on dips and spotted some technical resistance levels to take profit on.
As it turns out, having the spare liquidity helped… When China took action.
The next big market-moving event was the China ban.
I recall this vividly because I happened to be eating dinner solo, due to an event that my wife had to attend. So, I watched with a mixture of horror and excitement as the crypto markets took a huge hit in the wake of that announcement.
Why both horror and excitement? Horror, for the severity of the ban that would have alienated a huge portion of demand for the crypto market, and excitement, as I was waiting for such an opportunity to buy.
This was the traders’ proverbial nightmare — catching a falling knife. Every time the XRP market dropped, I added more to my position. This kept happening, until… I ran out of cash.
AND THE MARKET KEPT DROPPING.
You can’t catch a falling knife without shedding some blood. The tighter you try to grip the knife, the more blood you will shed.
I can say, that was the scariest moment of my crypto journey thus far. Even though I wanted the market to drop so that I could get a good entry price, I did not want the market to be totally annihilated like that.
Well, that event turned out to be a blessing in disguise, as it allowed me to lower my average price, and eventually make some profit as I sold some XRP into ETH to prepare for the next big thing — the ICOs.
While hindsight is 6/6, I would say that participating in an ICO, particularly at the start, was a unique and novel experience.
Through the Telegram grapevine and discussions with my friend, the first ICO I participated in using ETH was WABI. This involved many steps:
- You need some ETH. This is the most straightforward part. I managed to snag some ETH using the capital / minor profits from the XRP trade.
- You need to have an ETH wallet. For this, I used an online service to create an ETH wallet that I could keep offline, on my computer.
- You need to fulfill the KYC with the ICO operator. For this, they needed us to take a selfie with the identity documents we submitted to register our interest. Of course, I had concerns about such pictures floating around the internet, but I consoled myself because both my passport and ID were due for renewal soon anyway. So, the copies I used have since expired. While not ideal, there was no other choice if you wanted to participate.
- Signing up for the actual ICO itself, by transferring ETH into the smart contract.
Now, signing up for the ICO was in itself tricky. You had to send the exact amount of ETH to the smart contract allocated, together with enough GAS, for them to process it.
For those who are unsure of how Ethereum works, here’s a brief summary:
The logo for Ethereum. Source.
Like most blockchains, you need to pay a processing fee for the miners to process your transaction. Unlike Bitcoin, where the processing fee is paid in BTC, the Ethereum blockchain uses a concept called GAS to pay the miners.
ETH is convertible to GAS, but GAS is not a tradable token. Instead, it is used to pay the miners to process the computations you want. It is slightly more complex than just paying a set amount of ETH because GAS prices also fluctuate depending on the demand on the blockchain at that time. GAS prices are quoted in GWEI, so the higher the amount of GWEI, the more ETH you need to pay. You also needed to set the upper limit of the number of units of GAS you are willing to pay before the transaction terminates.
So, this means you need to select the price of the GAS and how many units of GAS you want to allocate to the transaction. The final result will then be how much ETH you need to allocate for the transaction. For e.g., if you want to allocate 10 GWEI and 10 units of GAS, then the final result would be 100 (10 x 10), and that 100 GWEI will be converted into the amount of ETH you need to pay.
However, for something like an ICO, you will need to budget for both a higher price for GAS and more units of GAS, because it demands more processing power than just shifting ETH from one wallet address to another.
So, for my initial ICO transaction, I followed their instructions on how much to allocate. However, to my horror, my first transaction failed.
Cue some panic.
“Did I do something wrongly?” I thought.
While it was a minor setback and caused me a fair bit of panic, the cost was not too exorbitant. The failure just meant that the fees that I paid were all wasted (0.0025 ETH to be precise), but I got back the initial amount of ETH I wanted to send.
So, all I had to do was try again, and… maybe increase both the price and number of units of GAS to allocate, just in case.
Thankfully, the second transaction went through, and I was eventually credited with the amount of WABI that I subscribed to. Surprisingly, the total cost for the successful transaction was 0.00188875 ETH, which was lower than the 0.0025 ETH I initially allocated. This could have been due to the demand and supply of transactions during that period. Oh well, c’est la vie.
Since it was an ERC20 token, they sent the WABI back to the same wallet address that I used to send the ETH to the ICO team.
Now, I needed to wait for the listing. This was when I first heard of Binance, because that was the exchange that WABI was going to be listed on.
While going through the process of getting the tokens for the ICO, XRP’s price finally started to take off, trailing all the other cryptos (e.g. BTC and ETH).
During the crypto bull run in late 2017, XRP remained stubbornly low. It did have occasional spikes, but the price always returned to around the same support levels. While this made for some good trading, seeing BTC price “mooning” while XRP’s was stagnating was frustrating.
Eventually, XRP’s price started to wake up — doubling, tripling, doubling again. At its peak, the market value of XRP (as calculated by CoinMarketCap, a website that tracks crypto market value), eclipsed ETH and because it’s the second-largest crypto by market value, with BTC still reigning on top.
This was an exciting period.
Together with the fledgling WABI, the increases in my portfolio value were unlike anything I’d seen before. Critics called it another dotcom boom, and in hindsight, that was correct. However, the trick of getting ahead in such a boom is to sell. Here, my game plan for WABI and XRP differed materially, with predictably divergent results.
For WABI, I had an exit price — USD$5. Even though I had no idea how this number was derived, it was flagged in multiple Telegram chats that this is the price that WABI would hit. This represented a 20x multiple from the ICO price of USD$0.25 per token.
For XRP, I had no exit plan. Remember, this was supposed to be my long term hedge against the black swan event of crypto replacing the banking system we knew today.
During this exciting period, I was on a cruise (of all possible places to be), with no stable internet connection. Ironically, this was the cruise before the second blockchain cruise, and it was during this period that WABI finally hit the targeted USD$5.
So, true to my exit plan, I was selling chunks of WABI into ETH (the WABI/ETH pair, just like a currency e.g. USDSGD pair) every time I could get a connection. Eventually, I managed to sell half my WABI holdings into ETH, giving me a return of 10x of my initial purchase (although, that was in USD terms. In ETH terms, because ETH also increased in price during that period, the multiplier was lower). I decided to keep the other half as a moonshot, just in case, WABI managed to develop its business plan and execute its use case.
However, for XRP, I didn’t sell any during the period when it spiked. There were rumours at this point that XRP was going to be listed on Coinbase (the biggest US exchange at the time), so we were hoping for a second price spike when it gets listed.
At this point, XRP was also trading at multiples of 10x to 20x of my entry price. At a portfolio level, I was up by 1,000%(or 10x, as they say).
One quote I do remember is from my friend — “Will selling now impact your life in any way?”. I did consider it. After all, I did not throw in my life savings into crypto, it was the only money I could afford to lose. And yes, while cashing out into fiat would have made me a pretty penny, it would not ultimately impact my life. It was not as if I liquidated every other asset I had to buy in. The calculations would have been different if you had sold all other assets and YOLO-ed into crypto (e.g. if you become a crypto millionaire, it would be nice to cash out enough fiat to say, put a down payment on a house). Thus, I just followed what the Telegram chats were screaming about — HODL-ing.
Now comes the second part of the story — how the gains evaporated.
The losses came in two stages. The first was XRP.
At that time, XRP was the biggest allocation in my crypto portfolio. Since I didn’t sell nor have an exit plan, I just held the tokens through the boom and bust of the price spike — HODL-ing, as they say.
Well, the Coinbase listing didn’t materialise. This is when the old adage of “buy the rumour, sell the news” comes in — and I didn’t sell the news. So, XRP’s price reversed and it came back down to near its original price.
Unrealised paper gains don’t last long in this market.
The second stage was, well, part diversification and part greed.
Flush with the profits from WABI, I started to buy smaller tokens at a rapid pace. The only major token I diversified into was NEO, and mainly because there were NEO ICOs that I wanted to buy into as well. NEO was also considered to be the “Chinese Ethereum” because it functioned similarly to Ethereum but was built mainly for the Chinese developers.
The three main groups of tokens that I spent the profits on were:
- Buying smaller tokens off the market at the prevailing prices (since I missed the ICOs for those tokens);
- Participating in more ICOs (at least this time I didn’t get a failed transaction!); and
- Buying some tokens at pre-ICO through intermediaries (for these, I got the tokens for one, but I didn’t manage to get back the initial ETH nor the tokens from another).
Well, all those tokens tanked along with the broader crypto market in 2018. I also wrote off the ETH that I passed on to the intermediary that couldn’t send me the tokens, attributing it to either a scam or a failed company.
One reason for this lack of an exit plan was that I was too focused on achieving similar rates of returns for the ICOs as WABI — even though they had an initial pop on listing, I didn’t sell since I wanted a 5x or 10x return.
Additionally, not all tokens listed on exchanges that I was already registered with. One token listed on some small exchange where I couldn’t get access to, and thus, I was not able to trade in that token at all.
Given that these losses were from the profits of selling my WABI and re-allocating some XRP, I didn’t feel the pinch as much compared to if I had bought more using fiat. However, it seems likely that many of these projects are stagnating and will not succeed, which is not that surprising since upwards of 90% of small business start-ups fail. In my view, it was just a calculated gamble with realised ETH profits from the sale of WABI.
I still do hold many of these small tokens, mainly on exchanges (and some in my wallets since they didn’t list on the exchanges I am registered with), and I also still do hold some of the bigger names like ETH, XRP, and NEO. For now, I view it as a waiting game. Even though I have written off all the smaller names, the potential hedge would still come from the bigger tokens that I hold, and the potential “moonshot” from one of these small tokens succeeding.
Given my experience in the second wave of crypto (ICOs), I didn’t manage to keep myself too updated on this third wave of Decentralised Finance (or DeFi). Conceptually, DeFi tokens and projects are also ICOs by nature, just that their protocols are more focused on a specific part of finance (e.g. P2P collateralised loans) versus the whole gamut of services that the ICOs wanted to bring to the world.
While there are many more articles out there that can educate you better than me on what the DeFi tokens bring, the mindset that comes with buying such tokens remains similar in many ways. Some concluding thoughts I have, while reflecting on my experiences, are:
- If investing or speculating, only do so with money you can afford to lose.
This is the key factor in being able to ride out the storm or face liquidation. There were jokes flying around during 2017 of imitating the guy who mortgaged his house to buy Bitcoin — but at $19,000 instead of $1,000.
I would say, no matter how well-researched you are, unless you are part of the team building the DeFi app, only throw in money that you can afford to lose. If you go in on leverage and get margin called or cannot recover your principal… Be prepared to get wrecked.
2. Do your own due diligence.
Yes, you can read reviews but you should drill down. There is no substitute for your own reading and analysis. Of course, you will never be able to get in as deep as the technologists, but the process of doing the research will educate you on how these things work.
At the very least, you would have paid for the education by getting your hands dirty, and not just attending a lecture or seminar. There is really no substitute for trying to create your own wallet and learning how to calculate GAS for ETH transactions.
I figure that the amount of money you would pay for a seminar and a certificate can be used to accumulate some tokens and wallet addresses instead. After all, a certificate is just that. But those who know will know.
3. Beware the carry trade
For those who are unaware of the actual carry trade, this involves shorting (or borrowing) a lower-yielding asset to buy a higher-yielding asset.
Based on my brief understanding of many DeFi projects (please correct me if I am mistaken), the basis of their project is a carry trade. After all, I have heard people saying why DeFi will outlast the previous ICO boom precisely because of all the ETH-equivalents (or ETH) locked into their protocols. This is because you would have to buy their token first, and/or be paid interest in their token.
However, the carry trade comes with one big risk — the decimation of your initial capital. Yes, the yields you earn would be eye-popping in this environment, but the risk is that the underlying token’s loss in value far outweighs the yield earned by holding that token, instead of ETH or BTC.
Many people have described the carry trade as picking up dollar coins on train tracks. You have to be able to get out of the way when the train comes, or risk getting flattened.
Thus, if you think you see some light at the end of the tunnel… Better hope that it isn’t a train (à la the recent SushiSwap dump, where the founder dumped his/her tokens on the market and caused a 99% loss in value in the $SUSHI token. No amount of yield is going to be able to compensate you for that.).
4. Have an exit plan
The difference between my WABI and XRP outcomes also boils down to one simple reason — an exit plan. I had the discipline to sell some WABI when it hit my exit target, which enabled me to lock in gains in ETH that I could then redeploy into other ICOs.
But, the subsequent losses of all the gains just show you how devastating going in without an exit plan can be. If you don’t have one, be mentally prepared for the possibility that you may lose all your money, which is why the first point is to only put in money that you can afford to lose.
Well, even after going through the ICO boom and bust phase, I am still hopeful that cryptocurrencies and blockchain technology will eventually change the way we do things. With the new rage also being stablecoins and CBDCs (even though I still question the fundamental concept of trust versus blockchain in a CBDC, which I elaborated on in an earlier article), the next evolution of crypto will be exciting to see.
Hence, even though I am not in as deep with DeFi as I was with the ICOs, I am still keeping an eye on the developments. As they say, the current internet companies were built from the suds of the dotcom bubble. Here’s to hoping that similar developments will come out of the suds of the crypto bubble!