ICO

BLOCKCHAIN: $1 Trillion lost in Crypto since all-time-highs, but $700 million in November still flowed in

Ugh. Here's the monthly update on the crypto fundraising figures. Let's start with some good examples -- we are fans of Trustology raising $8MM in equity from Two Sigma and ConsenSys, and ErisX raising $28MM from Fidelity and Nasdaq. Those sound a lot like the institutional chassis needed for traditional players. However, from a retail perspective, the crypto markets are not holding their value in an overall downturn, and have been fairly correlated with traditional equities as everything nosedives together. This is in meaningful part, we think, driven by the availability of instruments to take short positions in the market. 

We took the ever excellent OnchainFX data from Messari, and looked at the total loss of market capitalization (i.e., "hopium") across their tracked coins from all-time-highs. The answer is that there has been nearly a trillion of burned down value in the last year. Millennials are going to be salty for a long time! But look, it's not all doom and gloom. November saw another $700 million or so in blockchain-first funding, again roughly split 50% between token sales and venture investment.  The sustained flow of venture is encouraging to the promise of this sector in the future.

Some conclusions from looking at the tokens in detail: (1) an Arizona offering stood out as an interesting jurisdiction, (2) a few EOS projects are going forward, (3) some projects are using the STO monicker to try and position more positively, and (4) there are still quite a few questionable business models in the mix. Looking at crypto funds, we continue to see new entrants in the space, even as 2018 funds face -80% performance profiles and shed employees. Crypto projects are also starting to downsize, and we projected for Bloomberg a contraction of 25-50% in the number of funded seats at the blockchain table for existing companies today. That doesn't mean there can't be new companies with new opportunities ahead -- it just means their journey will be more rational, and potentially more fruitful.

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Source: Messari (liquid coin data), Autonomous NEXT (crypto fund data set, ICO tracker leverages and cleans CoinSchedule, ICO Rating, ICO Bench, ICO drops and various others), Bloomberg (layoffs)

CRYPTO: $600 Million of both ICO and traditional venture funding in October for $1.2 Billion total

Some positive news for the crypto world, in the form of fundraising figures. The financialization of crypto assets, melding securitization with tokenization, continues to move forward. Based on our latest data, this year saw over 140 crypto investment funds enter the space. While that is below the 270 from last year, a couple of developments are notable. First, we continue to see new entities formed month over month, even though the narrative is that most crypto funds are 50%+ down this year. Second, there has been a healthy development of ecosystem funds, attached either to exchanges or at the protocol level. These entities are well aligned with funding projects that are adopted by consumers, which then would use the exchange or protocol to engage with the token. Circular logic, or lifting yourself up by the bootstraps -- you decide!

We also know that much of the focus in crypto fundraising has now shifted to STOs, with both enterprise blockchain success stories like BNP Paribas building out syndicates of financiers to provide large loans (e.g., Red Electrica), as well as public STO asset examples like the Aspen resort token from Templum. Similarly, many of the crypto funds are doing equity investing first, and getting tokens for free. With that in mind, we are encouraged by the October numbers in our ICO/token database.

ICO funding data listed on public trackers, and cleaned/confirmed by us to the extent possible, shows about $600 million in flows, which is higher than $450 a month ago. There were not any major unusual chunky raises like the Petro or RubyX. But there was a roughly equivalent amount ($600 million) of traditional venture capital activity in the space. Looking at the chart below, it is becoming a trend that VC funding constitutes 50% of the overall money flowing into the space. From an economics perspective, it is good to see institutional investors find the risks attractive again. From a decentralization perspective, it seems less likely that global crowdfunding will democratize the ownership of a future Internet. 

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Source: Autonomous NEXT (analysis of various trackers for $1mm+ ICOs), Pitchbook Data

WEALTH MANAGEMENT: Fidelity launches Crypto custody, has won this game before

Everyone knows: Fidelity has made its move into crypto custody. The firm has been toying with an offering into the space since starting to mine Bitcoin since 2015. The product itself is exactly what institutional investors, i.e., fund manufacturers, have been complaining about over the last year: (1) a custody platform, akin to Coinbase / Xapo / Bitgo / Kingdom Trust, and (2) an order routing system that creates best execution across exchanges, independent versions of which also exist (e.g., XTRD). But to package it and make it accessible for the traditional financial services industry is a massive leap for the asset class.

Here's what many people don't know. Fidelity is one of the top 4 investment advisor custodians in the United States -- including BNY Mellon Pershing, Schwab, and TD Ameritrade. Together, these firms control about $2 trillion in advisor assets, with another $1 trillion in independent RIA assets sitting on smaller players or self-clearing firms like LPL. These custodians know (1) how to service a long tail of small independent money managers, (2) throw annual conferences attended by thousands of people to look at investment products, (3) enable hundreds of wealth tech companies to sit on top of their core services, and (4) deliver performance reporting and other tools helping regular people access their assets. That is not something any of the crypto players come close to doing or understanding.

To moderate our excitement, we highlight that serving a manufacturer (i.e, a crypto fund) is not the same as serving a distributor (i.e., a financial advisor). Still, we believe the software is transferable to some extent, and the entire world of digital wealth management awaits open APIs here. Second, we think best execution will be a real boon to the space, unbundling what an exchange should do from what a broker should do. If regulators like the NY Attorney General continue to find bundling and conflicts of interest offensive, some US firms will have to be broken up into component parts and spun off. Not Fidelity -- which will benefit from being impartial. And further, with enough volume and a good routing system, perhaps arbitrage bots and crypto market manipulation may start to fade out of the ecosystem. Fidelity's entry -- though long time in the making -- is a clear win for crypto.

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Source: BloombergCNBC, Fidelity (RIAsCrypto)

CRYPTO: Surprises from the Dallas Digital Assets Strategies Conference

We chaired a unique event in Dallas this week, and a few key takeaways are worth mentioning. First, something that really stuck out was the audience itself. We informally surveyed about 150 attendees, of whom 50% were financial advisors allocating assets for retail and HNW investors. Further, 70% of the audience owned Bitcoin, 50% owned ETH, and about 15% participated in an ICO directly. Two people, not including Lex, had the unfortunate pleasure of buying Crypto Kitties. The largest financial advisor in the United States, Ric Edelman, who runs $200 billion across 85,000 clients, stayed with us for the full agenda. Just a year ago, the overlap between the wealth management and crypto communities would be a null set. 

On the fund manager side, we had Tuur Demeester from Adamant, Sean Keegan of Digital Asset Strategies, Kyle Samani of Multicoin, Mat Hougan of Bitwise, and Bart Stephens of Blockchain Capital. We were impressed by the very variety of investment strategies on display. For example, Tuur primarily runs a Bitcoin investment strategy, using leverage on/off BTC to amplify alpha.  Similarly, the custodian Xapo only custodies BTC, backed by a reserve of coins -- $10 million worth bought in 2014. Others run index funds -- with Bitwise creating passive indexes and Digital Asset Strategies trying to deliver smart beta on the same baskets. And of course, Multicoin and Blockchain Capital both take fundamental venture-style bets on direct projects. We were reminded again of the BCAP token offering, a security token that Blockchain Capital launched as a unit in its fund. 

We can't do justice to all the conversations (i.e., custody, regulation, markets), but another one that stuck out for us was an asset allocator panel. Paul Pagnato of PagnatoKarp, a wealth advisor to large family offices, sees crypto living inside the venture capital allocation slice. James McDonald of Vishnu Wealth Management talked about building a 10-15 coin basket with the largest liquidity, while protecting for downside exposure. And we'll end on the perspective of Tyrone Ross Jr., who never wanted to put his clients into crypto assets. Instead, his clients just started disclosing to him their over-exposure to digital holdings -- so he had to design hedges and diversification strategies that would balance out the idiosyncratic risk. He also had to start reading white papers and websites to figure out what his clients were talking about. Advisors with such an appetite will retain their clients relationships, while those like Noriel Roubini will be drowned out by the winds of time.

Source: Tyrone's     Video    , DASS     Twitter    , Lou Kerner on     Nouriel Roubini    .

Source: Tyrone's Video, DASS Twitter, Lou Kerner on Nouriel Roubini.

CRYPTO: Did ICOs raise $300 million or $2 billion in September? Depends who you ask.

Last week we published some grim ICO figures, which made the rounds in the media, suggesting that token offerings are 90% down on a monthly basis relative to the peak. We were challenged on our figures based on two sources: Elementus and Coinschedule (ICO Rating is another great reference). While our number floated down to $300 million, some of the others saw September as $1B+. As an aside, we want to show the largest number possible to frame the best story for a delicate and growing space. This is why we began adding venture capital equity investment into crypto companies. When looking at that particular chart, our trend is at over $1 billion in August. So let's explore the delta.

First, there are some chunky and problematic figures which we chose to treat differently. For example, CoinSchedule lists Rubi-X as a $1.2B ICO entry for the month of September, which we have not been able to verify otherwise and chose to exclude. The Venezuelan Petro ($700MM+) we also ignore, as it is at best a government-backed monetary unit, and at worst an experiment in sovereign fraud. Second, there are various timing differences. Take the $134MM into tZero, which we had already accounted for at announcement in July. Lastly, taking a closer look, many of the ICOs we chose not to include are self-reporting a "completed" ICO, and then a data spider is taking their softcap as the amount raised. We generally exclude data where the confirmation of a meaningful raise ($10MM+) is hard to pin down.

Further, Elementus tracks monthly flows as they happen. This means if an ongoing ICO is 40% through its time period, they will have counted accrued fund flow. We track data at period end, meaning that only closed offerings are counted. Such an approach will not give credit for capital in flight, and perhaps there are good months ahead if indeed flows are strong. But this methodology difference should generally wash out, unless large chunky and unusual things are happening (e.g., Telegram and EOS). 

Our final point on this is to revisit our data sources. We focus on analysis, and leverage other primary sources for much of the underlying gathering, which we then scrub. In looking at the process, we counted over 30 ICO trackers used in our aggregation process. The kicker though is the short half life of the sources -- charted below. We find ourselves swinging between various sites and their increasing and decreasing data quality! So if you ever think there's something we should pay attention to, do let us know. And without further ado, here are the adjusted figures, telling the same story as before.

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Source: Cryptoglobe (ICO data reporting), ElementusCoinSchedule

CRYPTO: September ICOs 90% Down from January, but Venture Funding is Ray of Hope.

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Source: Autonomous NEXT, Pitchbook Data, China     Microlenders

Source: Autonomous NEXT, Pitchbook Data, China Microlenders

We're really trying to make this look good! But it's not working. We've scrubbed token offering data from September, and the trend continues generally to be down. Last month saw about $300 million in ICO funds raised, with the month before that revised to a bit over $400 million, a far cry from the $2.4 billion in January of this year. If we include EOS and other chunky private token raises, the highs go to over $3 billion, suggesting that monthly ICO activity is down 90%, which of course looks a lot like Ether's price performance, but with a 3-month lag.

There are three narratives at play, which are worth exploring. First, perhaps investors have devalued the idea of buying a utility token (does nothing yet, legally non-binding), and instead want to buy equity in the same companies. To test this, we looked at Pitchbook's data on blockchain and Bitcoin venture capital raises, which you can see in the second chart below in the magenta color. There is indeed a lagged effect in venture as well, with increasing drips of capital, reaching over $1 billion in August 2018. Why is that? Two reasons: (1) fintech companies like Robinhood and Revolut pivoting into crypto and (2) Bitmain trying to vacuum up capital before the public offering. This gives us a slightly more balanced view of funding in the space -- with recent months seeing a decline in public crowdfunding, but an increase in private checks. Anecdotally, projects are selling equity and giving matching tokens for "free" to investors in the capital structure.

The second narrative is Security Token Offerings (STOs). We know many different platforms working on this space -- from Templum, to Tokeny, to Sharespost, to Indiegogo, to tZero. And while we'd love to plot STOs on this chart as well to offset the decline, truth is that STOs won't hit the market in earnest for another half-year at least due to regulatory indigestion. We tried to find that extra monthly billion in STO land, but it's not there yet. And last, we're testing a narrative about the collapse/crisis in Chinese P2P lending since 2015, and whether that risk-seeking capital wound up in ICOs. If you've got any hints on that last one about Asia, let us know!

CRYPTO: Can Stablecoins jumpstart the digital economy?

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We are bummed with the SEC's rejection of pretty much every effort to launch a Bitcoin ETF, which is at the top of the wish-list for normalizing crypto currencies and assets. The investment management value chain is now caught in a weird race: (1) either crypto custody will become regulated and build tendrils to plug into existing infrastructure, or (2) a regulated wrapper, like an ETF, must contain underlying crypto assets, and then travel along into asset allocations of regular investors. Neither is going to change the mood of the market tomorrow. So instead of focusing on financial progress, could the crypto economy show some economic progress? 

A recurring thesis for spurring on that economic activity, supported by continued investment from crypto funds and ICOs, is the emergence of stablecoins. The argument goes that if you have a virtual currency that stays pegged to the US dollar, for example, then the currency can be used to buy and sell goods without the fear of volatility (or capital gains on buying a sandwich). It can also work as a unit of account in which other assets are traded. And if we can figure out how to dampen volatility in the markets, perhaps that will also be seen as a positive by the SEC. A lot of ink has been spilled on how different projects are different -- but at the core, this is an automated macro banking algorithm that must maintain price parity, backed by assets, leverage, or fraud. One that can be manipulated or broken (e.g. below, Nubits).

We see stablecoins as incrementally helpful, but not sufficient. You still need a fiat/crypto equilibrium mechanism, and if a stablecoin becomes large enough to maintain a digital economy, it comes into direct competition with the United States government, its monetary policy, and its police force. It is highly unlikely that the US will let a decentralized or private actor print the equivalent of dollars. Who knows, maybe a central bank issued coin is still a reality -- take for example,Thailand, which is working with R3 on interbank transfers. While this isn't what most Bitcoin enthusiasts would want, the USD is the best peg to USD. Let's just get people to hold it in a Bitcoin wallet -- which is why rounding your change into crypto using Revolut, or getting a blockchain-native phone once it's out, could be so meaningful.

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Source: Medium (Nathan Sexer on Stablecoins), WSJ  (SEC rejection), CoinDesk (Thailand bank coin)

CRYPTO: 80% Down, Ethereum and Crypto Fund Performance.

Ether, the second largest cryptocurrency by marketcap and enabler of $20+ billion of ICO issuance, got beat up quite conclusively this week. At one point, it was down over 82% off the year's high, recovering to 78% off the year's high. Yeesh, for anyone who wants this Crypto thing to do well. And for many, Ether's fall is confusing because (1) the number of developers building on top of the platform is increasing, (2) the number of ICOs on the platform has not meaningfully slowed down, (3) ConsenSys has dozens of enterprise and public projects that move the ecosystem along, and (4) it has a first mover advantage. The underlying qualities of the systems are, in theory, better than same time last year.

One driver is the negative sentiment in the Crypto fund community. We point you to the sources below, particularly a Tetras Capital paper that uses the store of value / money velocity argument to short Ether, and a strong-willed rant from the CEO of a crypto derivative exchange about the weak hands of Venture investors entering the trading game. While we agree that sentiment is a major driver, especially as funds buy and sell together, we disagree with the money velocity arguments. However, the ICO phenomenon did hurt Ether's function as currency. To use a project on the Ethereum platform, users have to buy and pay with a third party token that was issued primarily for fundraising. They don't use ETH to pay for the service. This in turn makes ETH less versatile, and less useful as a unit of account or medium of exchange. And second, ICOs that have raised ETH as their currency of choice have to sell it to fund operations.

Sure -- Ethereum could have scaled faster, traditional banks could have opened their doors instead of putting up regulatory walls, the SEC could have approved an ETF earlier. But investor sentiment now seems to disregard the steady and positive contributions by developers and entrepreneurs. Maybe this is because most of the 370+ crypto funds formed at the middle of last year, and missed out on the early boom. Looking at the self-reported performance of some funds in our database shows the extent of the damage. We have two samples: July 31st and April 30th. In each case, we compare them to the BITA 50 index, which tracks the top 50 liquid coins. The first chart shows both the returns and the index, the second chart just shows the difference. The reported outperformance averages around 20%. Given the BITA 50 index is now down about 70%, we expect that most crypto funds are at least 50% underwater for this year. No wonder so many are rushing to hedge through shorting.

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CRYPTO: Great Investment Research, Bribery and Corruption

We fell down the rabbit hole. It all started with the stellar ICORating market research report for Q2 2018. When writing Crypto Utopia, we dedicated a section to analyzing ICO failure and returns by industry. ICORating takes the analysis one step deeper, looking at raises by geography, technical development stage, and even token structure. A couple of interesting takeaways: (1) 25% of all ICOs ended up raising less than $500k, which helps adjust our figures that look only at $1mm+ ICOs, (2) less than 10% of projects were able to list on exchanges after funding, (3) as we previously identified, EOS's endless ICO suggests a lengthening out of the fundraising process for projects like PumaPay, Moover and VideoCoin, (4) the highest return by sector has been in exchanges, which is not a surprise given recent capital markets trends for Binance and Huobi. Links and charts below, go read it.

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But then we started thinking about the business models for research in the crypto space. We've seen three approaches. First, there is free, open research and data. Examples include Messari, Coinmetrics, CryptoCompare, Coinmarketcap, Medium and various other tools. Messari's model is a combination of EDGAR, Crunchbase and Wikipedia, so consumers of the data are also the contributors. Other sites are supported by ads, through aggregators like Cointraffic, with the coin price data they provide driving hundreds of thousands of clicks. In this case, consumers are the product that advertisers (i.e., ICOs) purchase. The second model is to charge a subscription fee to crypto investors -- Digital Asset Research, Fundstrat, and  Autonomous NEXT at the institutional level, or Santiment and Picolo at the retail level. In this case, the investor pays a fee for the work done, which aligns incentives.

The last model is like a credit rating agency -- think Moody's. The firms get paid by issuers to rate their offerings, which creates a conflict of interest. In the  traditional world of finance, rating agencies failed to warn investors about Enron or the 2008 subprime mortgage crisis. In the crypto world, this includes companies that list tokens (e.g., Coinschedule, ICO-List, Tokenmarket, Cointelegraph) and companies that rate tokens (e.g., Digrate, ICORating, ICOBench). Prices for ratings range from $500 to $20,000, depending on the platform. While folks like ICORating have clearly invested in intelligence and analytics, others like ICOBench have been called out for corruption. "Experts" on the system ask projects for $500 per 5-star rating (threatening to downvote otherwise), and the system itself is charging users 2BTC for "expert status". Not great. That said, until investors themselves realize that research and intelligence are not free, such models will continue to proliferate.

Source: ICORating (Q22018 Trends), Autonomous NEXT (Crypto Utopia), Hackernoon (Cost of ICO Marketing), Corruption (ICO Bench Charging ExpertsExperts Taking Bribes)