Geography of Token Sales

From Observations on the Geography of Token Sales at Smith + Crown:

  • In terms of both sales activity and raise amounts, Switzerland and Singapore are unsurprisingly leaders.
  • The number of sales occurring and the amounts raised in the United States isurprising, given a widely held view of US regulatory risk.
  • In addition, the list of countries filling in the secondary tiers of ICO activities contains a number of somewhat surprising entrants. Whether this represents a relatively small number of globally-dispersed outliers or the beginnings of a new trend of projects moving away from traditional financial centers–crypto or traditional–is yet unknown.

Along with the writeup, they created 3 nice-looking charts/infographics to analyze various ICO data by country. There’s less discrepancy overall than I would have expected. Now, if only we could see from which countries ICO money originated.


Paradigm Shift for Calculating Value?

From David Einhorn’s latest letter to investors, via Josh Brown:

we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?

Brown recently wrote a post with similar sentiment. It’s interesting to think about how business models and values are changing in light of the recent token sale boom. And beyond token sales, there will be successful projects that will operate completely decentralized and based upon the exchange of tokens. There still won’t be any public financials and traditional valuation methods will likely be just as challenging as they are now.

Stop Worrying About Warren Buffet Thinks about Bitcoin

Each time Warren Buffett makes a comment about Bitcoin, it makes headlines. To be fair, any time Buffett chimes in anything financial-related, it’s considered newsworthy. In 2014, he called Bitcoin a mirage, which as a much more popular opinion at the time. Recently, he commented “You can’t value bitcoin because it’s not a value-producing asset.”

Of course, this is written about mockingly by Bitcoin-proponents, as if Buffett should be expected to suddenly change everything he’s done throughout his career. Perhaps it’s merely others seeking validation, but nobody should be surprised. This is entirely consistent with how Buffett has always operated. Buffett invests heavily in what he knows, concentrates his bets, and looks at the underlying value of an asset with only some regard to price. It hasn’t exactly been a poor formula for success.

His comment may sound harsh, but he’s not even wrong. Though many have attempted to derive valuations methods for cryptoassets, most tend to agree that Bitcoin and Ethereum are more similar to a currency or gold, rather than a security. From that light, he’s entirely right to say it’s not a “value-producing asset.” Businesses produce value. Currencies are a means of exchange; no value is produced.

True believers in Bitcoin are actually quite similar to Buffett in many ways. Rather that getting caught up in the extreme volatility, they believe Bitcoin will be valuable in the long-run and act with that timeframe instead of trading. And while Buffett knows nothing about Bitcoin, those have followed the developments know it quite well and can’t imagine not being involved.

Buffett’s methodology can be extended well-beyond the stock market, but it needs to be adapted to individual situations. In the biography, “The Making of American Capitalist” Roger Lowenstein does an excellent job describing Buffett’s thinking and development.Some of the key takeaways are

  • think long term
  • don’t pay attention to what others have done

Baseball synonyms are big with Buffett, and he was a big fan of Ted Williams (the greatest hitter who ever lived according to this Red Sox fan). Williams would often let hittable pitches go by early in the count, while he waited for something better in his zone. Likewise, Buffett has no need to swing at every opportunity. He can wait to find things that are obvious opportunities to him. And unlike Williams, there’s no third strike possibility.

Buffet has avoided tech stocks mostly, rarely uses a computer. It would be shocking if he suddenly decided to get into BitCoin. Of course, it shouldn’t matter to anyone involved with Bitcoin.

Bitcoin Hard Forks as Dividends

At Bloomberg, Justina Lee compared the recent Bitcoin Gold hard fork to a stock dividend:

On top of stupendous capital gains, investors in bitcoin are also getting a dividend — if they’re lucky.

A split in the blockchain created a new offshoot in the form of bitcoin gold on Tuesday, with bitcoin holders receiving one unit for every bitcoin they own, according to the offshoot’s developers. The cryptocurrency fell from a record high after the so-called hard fork, just as stocks typically drop after going ex-dividend.

Of course, not all token holders received the dividend. For example. anyone holding BTC through Coinbase missed out. Then there’s the problem of whether a 5% of less dividend means anything when prices can fluctuate 30% in a week anyway.

The Bitcoin Boom: Asset, Currency, Commodity or Collectible?

From Aswath Damodaran’s post The Bitcoin Boom: Asset, Currency, Commodity or Collectible? at Musings on Markets:

I find myself disagreeing with both its most virulent critics and its strongest proponents.  Unlike Jamie Dimon, I don’t believe that bitcoin is a fraud and that people who are “stupid enough to buy it” will pay a price for that stupidity. Unlike its biggest cheerleaders, I don’t believe that crypto currencies are now or ever will be an asset class or that these currencies can change fundamental truths about risk, investing and management.

He goes on to describe his process for determining how to classify bitcoin, beginning by describing has his asset class classifications as:

  • Cash Generating Asset
  • Commodity
  • Currency
  • Collectible

After concluding that Bitcoin is a currency, though a weak one currently given how much it is used as a means of exchange currently (which would make it closer to a collectible), he layout out three possible long term scenarios:

  • The Global Digital Currency
  • Gold for Millennials
  • The 21st Century Tulip Bulb

A very practical look at Bitcoin from a more traditional financial perspective.

3 Keys to Optimal Token Sales

Albert Wegner with thoughts on Optimal Token Sales:

Though he goes into much more detail, the basics are:

  1. Keep initial sale small.
  2. Hold one or more subsequent sales of increasing size
  3. When the protocol is ready, hold a final sale and/or distribution that gets all but a small fraction of the initially available tokens out for use.

Some of his ideas are quite similar to what Vitalik described previously (which he also cites). Before getting to the right way to hold a token sale, he lays out the two extremes in token sales with the right way somewhere in the middle:

The most potential for trouble are token sales which are one-time, large (possibly even uncapped) and take place when minimal specification / technical work has been done. In these the risk of outright abuse is highest (eg team starts paying themselves above market salaries, lavish perks), as well as the risk of nothing of use ever shipping is highest also

Conversely, the least problematic and the best incentives for the operation of a protocol would come from a highly distributed “helicopter drop” of a token that can immediately be used in a fully functioning protocol. The team makes no money here so there is zero potential for abuse, there is no technical risk (by assumption) and the recipients have a windfall so they will have no issue selling or using the token.

“99%+ of the ICOs out there are scams”

From Pierre Entremont early this month, ICOs: You’re scammy and you know it:

99%+ of the ICOs out there are scams. It has the very unfortunate side effect to make good teams/projects look dubious by association, so it has to stop.

I spent a lot of time thinking about what defines legitimate players. I feel the framework is now robust enough to be shared.

First three parts are definitions of what are Decentralized Networks (I), Tokens (II) and ICOs (III). Once these concepts clearly defined, identifying legitimate players is pretty straightforward.

He’s not the only one that things many ICOs are scams, though the 99% figure seems high. While most projects may not succeed, it seems ridiculous that 99% of projects are out to purposefully deceive investors/token holders. Entremont lays out his questions to ask for determining if a particular ICO is legitimate:

  • Is this organization really building a Network, or is it just a traditional company looking for easy and unregulated money?
  • Is there value to Decentralize this Network ? Some things work very well in a centralized way, plus decentralization is still an early and very costly/underperforming technology, it’s not a good idea to decentralize everything
  • Is the value of the Infrastructure the Organization says it will build correlated to the amount and Tokens % they are asking ? (example: Asking €x00m and x0% of the Tokens to “build a new currency for Africa” by cloning Bitcoin is questionable)

Most certainly don’t pass those questions and are using token sales primarily as a fundraising method .That doesn’t necessarily make it a scam, in my opinion, but they aren’t capturing the full technological potential presented by tokens and blockchains.

Thursday Links

  1. Guide to launching an initial coin offering – by Chris McCann. Given the relative newness of ICOs, he acknowledges it’s an evolving process:

    Given the blockchain industry is relatively new, there isn’t a whole lot of information on the topic (from a project’s perspective), and with each new ICO, teams are learning best practices on what to do and what not to do. Below is a guide of all of the information we collected about the ICO process, with input from people who experienced the process first hand…We will update this post with changes as we collect them.

  2. Brett Winton on How to Value a Cryptoasset. This is a precursor to Chris Burninske’s post, which we mentioned last week. Definitely still worth a read.

    At the simplest level, the network’s value is determined by the value of tokens that get held aside in user wallets to facilitate the network’s transaction flow.

  3. Lawrence Lundy on Convergence and the larger scale implications of blockchain:

    This means we constantly underestimate the pace of change and as software eats more industries, improvements compound as traditionally human-centric industries like healthcare, logistics and agriculture digitise. As these industries come online and capture, process and automate data; ownership of this data will define the state, market and nation over the next half a century. Blockchains are therefore one of the most significant technological innovations since The Internet and fundamental to Web 3.0.

    The development of blockchains is a good example, as exceptionally talented developers push the boundaries of cryptography with zero-knowledge proofs and smart contracts but fail to see the implications on broader governance structures and political philosophies.

  4. CB Insights’ published Blockchain Investment Trends In Review with lots of analysis and data on the amount being raised both via VC and token sales.

    The steady decline of early-stage equity deals may indicate that blockchain, like other emerging technologies, is undergoing the evolution from creation, to crowding, to consolidation.

    However, according to CB Insights data, blockchain’s consolidation may be tight, with blockchain companies failing at a higher rate than tech startups in other areas. Of 103 blockchain companies that received initial seed or angel funding in 2013 – 2014, only 28% managed to raise additional funding, and just one company made it to Series D: Japan-based cryptocurrency exchange, bitFlyer, with a small $1.8M round.

    In comparison, of 1,098 tech companies we tracked that raised seed rounds in the US in 2008 – 2010, 46% raised a second round of funding. An additional 14% went on to raise a fourth round of funding, versus blockchain’s 2%.

“Mainstream [blockchain] adoption is still pretty far ahead”

Alexander Lange published a piece titled Mapping the decentralized world of tomorrow, which includes an infographic showing the landscape of many of the tokens launched so far. He lays it out in a graph, beginning with platforms and protocols and followed by middleware, financing methods, and decentralized applications. A few interesting points:

On token value:

Value is created on token level rather than on equity level, therefore opposing everything we experienced in conventional software businesses. Tokens represent an atomic unit of a company’s business model. Some are sold to finance the project but their main purpose is to monetize products and services in the long run. Tokens don’t make sense for any business model and need to fit into the company’s landscape of services to be useful….. A more objective approach of valuing a token would be to define its “utility value” by analyzing real life KPIs.

On fundraising:

The fundamentally different value creation allows for new kinds of venture financing in form of ICOs attracting developers, technologists, early adopters and mainstream investors in that order.

On possible new business models:

We might see a paradigm shift from the “data economy” towards an “attention economy”. As soon as the infrastructure for self sovereign data ownership is in place and users get back the control over their data…think of being payed by the network for writing high quality stuff on reddit, medium or facebook… think of google with a transparent ranking algorithm fighting fake news and corruption.

Lange believe it will take time, since users don’t care about the backend technology, rather they care about the functionality. Still he believes the potential for major adoption is there:

Mainstream adoption is still pretty far ahead, maybe 5 years or more. People don’t care whether or not software is built on blockchain technologies, what counts is utility and price.

Some similar points to what Balaji S. Srinivasan wrote about recently, specifically in regards to looking at the bigger picture of the technology and temperament of timeframes.


For stable token values, sinks are highly beneficial

Vitalik published a post on the valuation of medium of exchange tokens, which have dominated the ICO landscape. This type of token implies that it can be exchanges for goods and services on a platform built by the development team. It’s similar to a Kickstarter-style funding, except that tokens must have ongoing value. It’s not sufficient to deliver a product once.

…the cycle is not complete, and in fact it never will be; there needs to be an ongoing stream of buyers and sellers for the token to continue having its value.

He goes on to the many factors that go into determining the value of a token, concluding:

One immediate conclusion from this particular insight is that appcoins are very much a multi-equilibrium game….Another, and perhaps even more important, conclusion is that the market cap of an appcoin depends crucially on the holding time H. If someone creates a very efficient exchange, which allows users to purchase an appcoin in real time and then immediately use it in the application, then allowing sellers to immediately cash out, then the market cap would drop precipitously….hyper-efficient exchanges are around the corner

Due to this, he says values cannot be sustained solely on their usage as a medium of exchange; there are too many outside factors. He cites Etherdelta as an example of an alternative model, where fees are collected in the interface. Another option it to set a side a specific amount to buy back tokens and burn them, thus reducing deflation/costs of holding over time.

The important thing is that for the token to have a stable value, it is highly beneficial for the token supply to have sinks – places where tokens actually disappear and so the total token quantity decreases over time.

There’s been a lot of discussion lately about the value of tokens and the right way to do a token sale/ICO. The standards around tokens/ICOs need to be raised and hopefully this helps push more projects in the right directly. Of course, it won’t do much to help the dozens of poorly structured projects that have already raised millions.