As I mentioned in a previous article, around 2019 when testnets were getting started, our head researcher at the time, proposed that we get involved as deeply and as quickly as possible into this new venture. I did not agree, as I viewed long-term holding of cheaply obtained coins as the safest way of creating the highest possible ROI over several years. Safety of capital is paramount to me and I believed Testnets would provide low returns with a need to retrain and hire specialists.
At the same time, I viewed Angel Investing as the natural extension of my “Safety First” philosophy. Seed investment in a promising team/idea would surely net the highest returns, and our company is built around a deeply long-term vision. Briefly, as described in my books, it is my belief that if one can identify a protocol in its early stages that is likely to keep operating and updating over at least a 5-year horizon, profits will take care of themselves.
Managing money for a trusted pool of investors deeply committed to this philosophy has its benefits; I don’t need to worry about the day-to-day. But having kept our operation small, we do not have the “brand” that other more prolific Angel Investors may bring to the table. Operating from South America, we do not have the connections or “cachet”. It’s actually a hindrance.
Around 2020, we were knee-deep in a pre-launch token I had absolute faith in and was interested in making an Angel Investment. I contacted the team through Discord. Getting in touch with the team directly was not easy. Teams receive a lot of spam, and again, we are not a “brand name”. Our call with this team was brief. I offered them up to a $1M investment, no strings attached, for a SAFT at whatever price they were offering their other investors. Sounds like a good deal, right?
We were politely, but summarily shot down. And I was told why quite clearly. We brought nothing to the table other than money, and generally speaking, in crypto, for quality teams, money is cheap. This experience caused a paradigm shift in my mind, and I realized that the things that made us unappealing to quality projects were insurmountable unless I was willing to relocate and build a brand by investing in lower quality projects and networking from scratch. This would involve the tearing down and rebuilding of our operation and constituted to me a non-starter.
Again, this was around the same time that our head researcher got into testnets. I am ashamed to say she had to drag me kicking and screaming into our first operation, a protocol that even to this day we are heavily invested in. Our average buy price, due to the high testnet reward allocation, cheap entry price for additional buys, and staking rewards, is below the lowest public price this token has ever traded for. Testnets, I came to realize, along with intelligent and opportunistic asset allocation, are a poor man’s from of Angel Investing.
Changing the numbers a bit for obvious reasons, this coin sold to seed investors at around 3.5 cents. Our average entry price is much higher than that, around 20 cents, but the interesting part is that due to our large “free” allocation and staking rewards, this is lower than the about 35 cent lowest historical trading price. Is this the slam dunk that actual Angel Investors made? No, but it is a dunk nonetheless.
Now, of course, this was not a “free” allocation. To those unfamiliar with testnets, operators provide infrastructure in the form of servers and expertise to pre-release networks to facilitate testing and modeling with a large number of nodes. Basically, operators provide free infrastructure on which teams can test their code at scale. And the reward is an allocation of tokens, that can range from a small payment to several hundred thousand dollars, within an average 2.5 year period start to finish.
The risk is one is never sure which protocol will provide the ultra-high returns and which one will flop. Clearly, other than time, the node operators’ costs are server time, which can add up. But this rarely exceeds one or two thousand dollars over the lifetime of the testnet; and the rewards can be enormous.
After having participated in over two dozen testnets, I can say that losses can only be time and server cost. If you are a full-time crypto operator, this is your job, so the time factor is moot. And ALL testnets provide some form of at least marginal return. So the most you stand to lose is around one thousand dollars over a 2.5 year period, and the most you stand to gain is low to mid-six figures in the same time period, an asymmetric bet if there ever was one.
Is Angel Investing a better bet? It sure is! On the model example provided above, seed round investors can and have exited at an order of magnitude better rate than my operation has, even considering the fantastic economics of testnets. But unless I am willing to uproot and rebuild my business in the US or Europe from the bottom up, Testnets are a poor man’s Angel Investing whose returns are more than satisfactory. If you can, get into testnet operation; it’s a great way to more safely invest in crypto.