For quite a while now, blockchain technology and the applications anchored on it have been the hottest trends in business and finance. The increase in popularity of cryptocurrencies, especially after the COVID pandemic, has created new business models and investment opportunities.
Generally speaking, there are two broad categories for investors to put their money in: cryptocurrencies and projects implementing blockchain technology, such as decentralized finance (DeFi) protocols, crypto exchanges, GameFi, and metaverses.
The plethora of projects available in these categories may make it hard for potential crypto investors to decide where to stake their funds. However, a study on investment behavior by BDC Consulting identified several factors that influence investor interest in crypto projects.
In this short article, we will take a closer look at some of the factors affecting the distribution of investor interest in two of the most popular sectors of the crypto space: blockchains and crypto gaming.
The Quality of Blockchain Mechanics
One of the most important factors in determining the distribution of interest in crypto projects is the quality of the project’s underlying mechanics. Different blockchains have different capabilities, but some, like the Ethereum network, have had performance issues caused by limited block space. Early crypto games used the Bitcoin blockchain, but the platform’s lack of speed and high cost of transactions made it untenable for gaming.
Subsequently, GameFi projects moved to the Ethereum blockchain. But the Ethereum network’s vulnerabilities were exposed back in 2017, when a pioneering gaming project, CryptoKitties, became so popular that it clogged up the Ethereum platform. This clogging caused gas fees to skyrocket on the Ethereum platform, making it less attractive to game developers and investors alike.
A lot of gaming projects are also powered by complex smart contracts. Unfortunately, some of these smart contracts can be exploited by bad-faith actors and cause investors to lose money. The BDC study revealed that a growing number of investors are becoming savvy enough to consider the mechanics of powering a crypto project seriously. Projects with more secure and more scalable mechanics will often receive the lion’s share of an investor’s funds.
In the crypto space, decentralization refers to the transfer of control and decision-making from individuals, organizations, or groups, to a distributed network. The purpose of decentralization is to reduce the need for trust that parties in a transaction must have in each other. Decentralization also removes the need for intermediaries traditionally used to facilitate transactions.
Decentralization provides a trustless environment, improves data reconciliation, reduces points of weakness in a system, and optimizes resource distribution. Various projects, like DeFi protocols, decentralized applications (dApps), and decentralized autonomous organizations (DAOs), all adopt varying degrees of decentralization.
With such projects currently being some of the hottest properties in the crypto space, there is little doubt that investors will be more amenable towards putting their money into them.
In fact, a fair number of respondents in the BDC study expressed the belief that decentralization is the future of crypto gaming and blockchain technology. Many of them were positive about supporting projects that form decentralized economies.
The Team’s Integrity
A fair number of crypto projects have turned out to be scams. Fraud in the crypto space comes in various forms, including initial coin offering (ICO) scams, pump and dump schemes, market manipulation, rug pulls, unscrupulous promoters, and fraudulent dealers.
For a time, bad faith actors fabricated ICOs, created fake bios of nonexistent founders and developers, copied the white papers of reputable projects, and used this to prey on unsophisticated crypto investors.
In other instances, owners of crypto projects schemed to drive up token prices and then sell them off when they reached an artificial peak. Others used spoofing, churning, and front-running to manipulate crypto markets for their personal benefit.
All these incidents of fraud have made it paramount for crypto investors to perform due diligence before deploying funds to a project. The team’s integrity behind a project is now a key factor to be considered when making investment decisions. Projects that have been audited and gone through a “know your customer” (KYC) process tend to be more positively considered by investors and will often receive the bulk of their funds.
The Relevance of the Project
Another factor identified as important in the distribution of interest in blockchain projects is relevance. Projects with a high degree of readiness to interact with traditional finance have the potential to become industry leaders quickly.
However, some projects have no relevance in the real world and only come to prominence through serendipity or dumb luck. For example, a crypto project named Omicron (OMIC) was launched in November 2021, a couple of weeks before South African researchers reported the discovery of a virulent new strain of COVID-19, which was also named Omicron.
The Omicron project held no significance other than sharing a name with a coronavirus variant, but it rode that wave of infamy to the point that its price spiked by 900% to hit an all-time high of $711. But since the coin had no relevance whatsoever, it had lost most of its value by early December and was selling for less than $100.
The value of a crypto project is usually arbitrary and near-impossible to predict. But most blockchain and GameFi projects often have solid foundations and actual use cases, making them safer bets for investors.
Last but not least, another important factor that influences the distribution of investment in blockchain and gaming projects is an investor’s tolerance for risk. Risk preference is the crypto investor’s tendency to choose between risky and less risky projects to invest in.
There are three categories of risk preference in the crypto space: risk-seeking preference, risk-averse preference, and risk-neutral preference.
Investors are often willing to shoulder increased risks to achieve higher returns in risk-seeking. In the risk-averse preference, investors shy away from the slightest risk. Risk-averse crypto investors are content to put their funds into safer projects for lower returns. For them, however small, the guarantee of returns holds more weight than the prospect of larger profits with the probability of failure.
Finally, the risk-neutral crypto investor is the one who does not care about the risks that come with an investment choice. This type of investor often chooses projects with the highest possible returns while paying no heed to possible outcomes.
The volatile nature of crypto means that there are very few opportunities for risk-averse investors. However, the crypto space is a veritable smorgasbord of choices for those made of sterner stuff.
Putting money into a crypto project, be it a blockchain, a DeFi protocol, a crypto game, or an exchange, will often involve considering at least one, if not all, of the factors, stated above. Each factor’s weight and importance largely depend on the temperament, knowledge, and desire of individual crypto investors.
Each factor also has varying significance for different projects. For instance, relevance might not be an important factor to consider when mulling over investing in a meme coin, but it might be the difference-maker when choosing between two DeFi projects.
Ultimately, it is up to the investor to know which factors they will consider when contemplating the distribution of funds among different crypto projects. The full version of the study is available on the BDC Consulting website.