As crypto markets mature, increased opportunities arise for investors and tech-savvy individuals to move funds into new areas of interest.
However, understanding exactly what you are getting into and how you can mitigate risk is a key component of any investment strategy. And the crypto markets are replete with terms and language such as “gas fees”, non-fungible tokens (NFTs), “hodl”, and many more.
To safely navigate the murky waters of the cryptocurrency world, and specifically, the plethora of new tokens and projects, is almost a full-time job.
One area of interest is the tech royalties market.
Royalties can be compared to the dividends you would earn in traditional stock market investing. But within the “cryptoverse”, things are not quite what they seem.
Let’s see how you can protect yourself and your money when diving into crypto-tech royalty investments.
What Are Cryptocurrency Royalties?
Royalties are defined as the reward you receive in exchange for investing in an asset.
You may recognize the term royalty from the music industry. Record industry executives have made millions from funding up-and-coming artists. They do this by signing contracts that give them a certain portion of the sales on each song or album sold.
And these royalties go on paying out cash for many years, depending on how popular they may be.
In the crypto world, royalty payments are distributed in the form of underlying tokens. You stake a certain amount of money by swapping Bitcoin, Ethereum, or any other cryptocurrency for a token that represents the crypto project which you hope will one day be worth something.
Now let’s look at the investment process in more detail. Certain terms need explanation so that you can understand the process more easily.
Proof of Stake as Opposed to Proof of Work
Proof-of-stake (PoS) and Proof-of-work (PoW) are consensus mechanisms that validate cryptocurrency transactions. These are essentially the processes that are performed on the blockchain to keep everyone honest.
The blockchain cannot be amended without these validating processes taking place.
With proof of work, miners will compete against each other to solve complex calculations. They are then compensated for their work. But the cost of running a mining operation is enormous and uses vast amounts of electrical energy. This is one of the downsides of using proof of work to validate blockchain transactions.
On the other hand, you have proof of stake. Here, validators earn an income based on the stake they have in the blockchain. To be chosen as a validator, you need to purchase large amounts of a token, which is seen as one of its downsides.
To earn royalties, investors buy whichever cryptocurrency coin allows them to stake and then they deposit it into a staking pool. They then collect royalties as compensation for making their investment in the token.
Staking is seen as a more efficient and less ecologically damaging way to validate blockchain transactions due to the much smaller amounts of electrical energy required to perform validations.
But What are You Actually Investing In?
As any investor knows, if you don’t understand the underlying business in which you are investing, then it is not possible to assess the riskiness of your investment.
Warren Buffet and Charlie Munger, arguably the most successful and prolific value investors of the past half-century, have, over the years, made billions of dollars by only investing in businesses that they understand.
It is maybe prudent to add, that neither of them considers Bitcoin or the cryptocurrency markets as anything other than a massive gamble.
The Blockchain is Not Only Cryptocurrency
But the blockchain is not only Bitcoin, Ethereum, or any of the other cryptocurrencies
you’ll find on the exchanges.
Blockchain technology is essentially a technology that can guarantee secure data storage. It offers the end-user the ability to encrypt any data so that it is impossible to change it without being caught.
The system is also not subject to any one authority, such as a government or financial institution.
The Blockchain Facilitates Safe Custody
The blockchain is used to certify documents, manage cryptocurrencies, control project management, and manage dispute resolution processes.
It facilitates the tokenization of assets such as NFTs and is being used to allocate and manage shares in physical assets such as houses and apartment blocks.
The list of uses is virtually limitless.
So, now that you have some idea of the blockchain’s utility, you can see that each project represented by a token, has the potential to be an industry-changing event or tool through the adoption of blockchain technology.
This is where the value of a blockchain project lies. If the project takes off and is adopted by a large enough client base, then the underlying token will increase in value, and the investor benefits through their share of not only
the original investment but also all the tokens they have received as royalty payments.
Naturally, they would have to keep their royalties and not cash out early to enjoy any long-term increase in value as well as a regular flow of royalties.
How to Invest to Receive Crypto Tech Royalties
The process of investing in royalty-earning crypto projects can be a little confusing, but it is not too difficult once you’ve been through the process.
Here’s an overview of the steps you must take to own a piece of the crypto royalty action.
1. Buy Cryptocurrency
The first step in investing in a project to receive crypto royalties is to purchase cryptocurrency.
To do this, you need a wallet in which you will receive the currency you purchased.
An electronic wallet is a program that you load onto your computer or external device. You can also use an online wallet, but these are less secure than holding cryptocurrencies on your own devices.
Once you have a wallet, you must open an account on a cryptocurrency exchange. The exchange is the place where you will purchase the cryptocurrency of your choice.
Once your account is open and you have been verified, you will be required to deposit funds into your exchange account.
When you purchase a cryptocurrency, you are effectively trading dollars or other real-world money for virtual money such as Bitcoin or Ethereum.
Popular and safe exchanges are Coinbase and Binance, and safe wallets can be obtained from Trezor, Ledger, and Metamask.
2. Identify a Project to Invest In
There are many different projects available that you can invest in, with new ones coming online every day.
To keep track of existing projects and become aware of new projects, websites like CoinGecko and CryptoSlate provide research platforms and commentary. You can also join groups on Twitter and Facebook as well as attend crypto conferences for the latest information.
Once you have found a project that interests you and you have conducted your due diligence, it’s time to make your investment.
3. Making Your Investment
To invest in a project, you need to purchase a token.
Each project has a wallet address into which you must transfer your cryptocurrency. When you purchase a token, it is referred to as a swap. This is because you are swapping out one token for another.
Each project will have several cryptocurrency tokens that they will accept in exchange for their project token.
There will be an exchange rate where you will see how many project tokens you’ll receive for the cryptocurrency tokens you wish to invest in.
Also, bear in mind that each platform has something called “gas fees”. This is the cost of exchanging one token for another on their network. These fees fluctuate during the course of the day and are related to the traffic on the network.
To minimize the amount you pay in fees, it’s worth keeping track of the times during the day when fees are lower. There are websites such as crypto.com and etherscan.io, where you can track the latest gas fees and look at historical data to time your purchases.
4. Keeping Track of Your Investment
It is important that you keep up to date with what’s going on with each project you’ve invested in.
Various websites provide commentary on what’s going on in the cryptocurrency markets, so finding new projects to invest in and keeping track of your portfolio is not hard.
You should also monitor your investments by checking the project website, following their social media accounts, or joining project discords.
The line between gambling and investing can sometimes blur, but through careful research and prudent money management strategies, your investment in crypto-tech royalty tokens can pay off handsomely.