CRYPTOCURRENCY: Deciphering the $2.26B of Blockchain venture and the $3.39B raised via token offering projects in 2019 so far

According to reports by Inwara and the Crypto Valley Association, as many as 583 token offerings were launched during the first half of 2019, raising a total of $3.39 billion, whilst traditional venture funding into Blockchain-first companies raised $2.26 billion. We think the token offering figure is inflated despite our attempts at scrubbing it, and reserve the right to revise. Quality of the data continues to decline, and several projects self-reported raises in 2019 are suspicious. If anything, our intuition is that real (rather than aspirationally self-reported) ICO funding is below the venture number. 

Let's break down the token offering figure. The $3.39B is made up of 69% Initial Coin offerings (ICOs), 21% Initial Exchange Offerings (IEOs), and 10% Security Token Offerings (STOs) -- see figure below for the distinction between them. Projects stemming from China raised the lion's share ($1.18 billion or 33.2%) of the total, helped by Hong Kong based Bitfinex's $1 billion IEO raise. The USA, trailed behind China raising $255 million or 7.6% -- supported by Algorand's $122 million. Trading and investing (including crypto exchanges) has been the vertical receiving the majority of investor attention with $1.25 billion raised, and core Blockchain projects following within $338 million.

Unsurprisingly, the rise of regulator "friendly" IEOs and financial services "friendly" STOs, has meant that the number of ICO projects have declined 74% to a mere 403 in the last year. IEOs have grown from 6000% to 123 projects, and STOs 16% to 57 projects. The growth of IEOs and STOs "emphasizes a higher degree of institutionalization of large crypto exchanges around the world as cornerstones of the global Crypto Finance infrastructure – and may also be seen as a response to established exchanges moving into crypto".

So is this enough to maintain a consistent growth trajectory for the crypto industry as a whole? Hard to say, but it seems that tokenizing securities tied to real estate, and repackaged ICOs sold via exchanges may or may not result in better capital markets infrastructure, democratization and roboadvisor-led asset allocation. And second, the crypto economy needs non-financial activity to succeed. People should be building software using the global decentralized computer of Ethereum (or R3 Corda or Dfinity or soon-to-be-launched Calibra) and paying for it using the global decentralized currency Bitcoin. More crowdfunding ain't that.


Source: Crypto Valley & PWC (5th ICO/STO Report), Inwara (Half-Yearly Report H1 2019)

CRYPTO: Re-making Traditional Banks with Custodian/Exchange Staking-as-a-Service

2019 has started off with a bang in capital markets blockchain -- (1) a $20 million investment by Nasdaq in enterprise blockchain FX player Symbiont, on the heels of Baakt and ErisX, (2) a Security Token Realized conference well attended by financial services execs from companies like State Street, of which 70%+ owned BTC, (3) and meaningful technical developments and financial products from folks like Tokeny, Securitize, Templum, Atomic Capital and others. But let us shift to another leg of the crypto stool this year, which is staking-as-a-service. We recommend reading the Coindesk op-ed from Michael Casey linked below, which outlines how a transition from proof-of-work to proof-of-stake in Ethereum (if it ever happens) could lead to the intermediation of crypto deposit holding on behalf of consumers. If investors get paid for outsourcing private key management to custodians, argues Casey, we re-create the fractional banking system with its pitfalls, like counterparty risk and incentive trends towards leverage. 

We agree, but aren't immediately put off by the comparison because credit is the lifeblood of inter-temporal economic decision making. Staking reminds us of two things from traditional finance -- capital requirements for banks, and interest-bearing deposits within those banks. As soon as users realize that they should be getting some interest return from their outsourced cryptocurrency accounts at exchanges or custodians, there should be broad competition around this product. If Coinbase offers 3% while Binance offers 4% of staking rewards (or vice versa), the consumer choice becomes more clear. This is exactly what banks compete on in terms of attracting deposits.

Users can already get an interest rate on their crypto for margin lending, up to 7% or so depending on the token. As an aside -- that margin lending may be a bad deal for the lender, since you are powering the short-selling of the capital asset you hold. You could also compare staking returns to dividends that corporations pay to their shareholders, as shareholders buy the equity and commit capital to an asset.  Given that these staking rewards are raw inflation (rather than cashflow earned by a corporation), the dividends become a value transfer between holders that stake and those that do not -- a tax on the unsophisticated user. Also, a dividend by law has to be passed on to the beneficial owner, which is a good thing. But that's not very anarchist of us.


Source: Forbes (Symbiont), Security Tokens Realised (agendavideo), Coindesk (Staking op-ed), Medium (On fractional banking), Token Daily (on staking as a service), Celcius Network (interest on ETH)

CRYPTO: Enterprise Blockchain Back in Vogue as SEC goes after ICO fraud

There was a moment in the development of peer-to-peer file sharing when the music labels, with cheerleading from Metallica, began to sue teenagers for millions in damages. We are ramping up to a similar period in crypto land. Davis Polk documents the bump in SEC enforcement actions targeting companies like TokenLot, Crypto Asset Management and FINRA registered brokers like Timothy Ayre. None of the violation descriptions are a surprise, especially if you've been listening to Preston Byrne: (1) TokenLot selling ICO tokens that qualify as unregistered securities without registering as a b/d and, (2) CAM raising a fund without registering as an investment vehicle while lying about having done so, (3) and Ayre brokering unregistered security tokens personally. Separately, the New York court in the ongoing United States v. Zaslavskiy has applied the Howey test in a motion to dismiss by the defendant, and found that a reasonable jury could conclude that the ICO was a securities offering.

This is good news, cleaning out the opportunists trying to sell everyone their fake lottery tickets. The flip side, however, is that we now have far more human and financial capital in the space, and it needs to be directed at something. And as far as we can tell, it is again directed at the enterprise blockchain space, which is morphing to become part custody, part digital assets, part OTC trading, part consulting implementations. Remember, enterprise blockchain is a cost-cutting effort by an oligopoly of financial firms to mutualize processes and costs around the back office. Now that ICOs posited scarce, functional digital objects into digital economies, the Security Token wave is re-running the traditional crowdfunding theme through token-based securitization on public blockchain rails.

Which is why the recently announced acquisition of Chain (a payments enterprise blockchain company) by Stellar (a public chain with a built-in exchange and strong throughput capabilities) makes sense. In this way, Stellar and Chain are moving closer to Ripple's model, owning both a public digital asset and a private enterprise software. This allows the firm to build both equity value in the company, and monetary value in the tokens. Not that we think Ripple's model is necessarily right, but it's right for this market, where token prices are collapsing and good news are scarce. As another example, we attended R3's CordaCon and were impressed by the progress of the bank consortium. There are over 50 apps and 200 different company implementations, including big tech, finance, and supply chain. One example is the ECB's TARGET Instant Payments Settlement for large payments and settlements. The borders between this world and the next are getting erased.


Source: Davis Polk (SEC Enforcements), Reuters (Stellar / Chain), Preston Byrne (on ICOs), R3 (marketplace)

BLOCKCHAIN: $100 Million for Hashgraph, Doubling Down on Fat Protocol Thesis

Investors are still chasing the fat protocol thesis of crypto assets, trying to own the public highway on which everyone builds applications, and take tolls in the form of capital gains. The latest symptom is a reported $100 million investment into Hedera Hashgraph at a $6 billion valuation, with the sources of capital being institutional investors and employees. Another $20 million is planned for a public ICO. The project claims that the hashgraph, which is not a Bitcoin blockchain fork, but instead a directed acyclic graph like IOTA and Byteball, will be able to process hundreds of thousands of transactions per second while being as cryptographically robust. The pedigree of the founding team from an academic perspective makes those claims at least initially credible.

There is no shortage of contenders for Ethereum's throne, despite a good number of Crypto funds deciding together that a public smart contracts platform isn't worth its $40 billion valuation (a decision based on some very questionable math, might we add). Many platforms now claim to do better and faster what Ethereum does today -- from EOS to NEO to Cardano to Dfinity and others. And yet, we think, too many are focused on optimizing technical performance rather than user experience. Getting a functional proof of concept out is better than over-engineering something that doesn't end up working on launch at all and needs a re-write of core ideas (hi there EOS). Of course, these things were never valued at $6 billion at Seed stage before.

The other part of Hashgraph worth mentioning is the 39 company governance council that owns equity in the company, according to Forbes. This reminds us of Hyperledger and other enterprise blockchain approaches that reinforce oligolopistic outcomes. But that may be a good thing! Institutional attraction to crypto assets is steadily increasing, which validates the software even as crypto markets melt away in value. For example, look at the Intercontinental Exchange launching their crypto trading platform Bakkt, which is a collaboration between the exchange, Microsoft, BCG, Starbucks and others. The effort will convert Bitcoin into fiat, and vice versa. Whether or not we prefer public companies getting into the space is up for debate, but public companies are getting into the space.


Source: Hedera Hashgraph (CrowfundInsiderCoindeskVenture Beat), Forbes (Crypto funds shorting ETH)

BLOCKCHAIN: Tron Buys BitTorrent for (Allegedly) $120 Million


What do you do when your ICO raise nets you $70 million and then your token market cap flies to $2.3 billion without any software to back it up? We are of course talking about Chinese blockchain Tron, whose stated goal is to redesign distribution of entertainment and media content using decentralized technologies. Yes, the same Tron that has plagiarized the Ethereum and FileCoin white papers without citation, has copied Ethereum code without attribution, is using Delegated Proof-of-Stake while running one of the most centralized projects out there, and drew the ire of the usually serene Vitalik Buterin.

One thing you can do with $ billions of suddenly valuable magic beans is to buy a real property. And Tron has done exactly that by purchasing the original distributed P2P file-sharing company BitTorrent. The BitTorrent protocol took over the mantle of file sharing from Napster in the mid-2000s by slicing up media files into thousands of pieces and spreading them across a decentralized, indestructible swarm. Trackers like The Pirate Bay would point users to files that collated those pieces together (torrents), but no centralized servers existed to actually host these files. BitTorrent was a major innovation not just in piracy, but in moving large files across a growing Internet.

What this acquisition actually means from a product perspective, we do not know. BitTorrent Inc., the target, makes software that lets you search for torrents, and maintains the protocol. But we think (maybe wrongly) that even if this private company disappeared, nothing would happen to the existing activity on the network. BitTorrent doesn't really "own" its users, though it boasts over 100 million people using it. Still, Tron is getting development talent and a client that can maybe be re-purposed to ride the blockchain rails. Two parting thoughts -- (1) Kim DotCom, the ridiculous king pin behind piracy site MegaUpload had claimed to be launching a crypto-currency a few years back to power a new file-sharing paradigm, and Tron/BitTorrent looks a lot like that idea, and (2) imitation is the sincerest form of flattery, and has helped Chinese tech centers like Shenzhen move from technology knock-offs to fast execution and innovation.


Source: Coindesk ($120MM Acquisition), Plagiarism (Coincentral, Medium from Digital Asset Research), CCN (Vitalik on Tron), Logic (On knock-offs in Shenzhen), Bitcoin Exchange Guide (Kim Dotcom)

CRYPTO: The Grand Unified Token & ICO Taxonomy


Last year, we drew a simple distinction in Token Mania: Securities and Utility Tokens. One involved the capital structure, and the other involved mutualizing assets of a company. Well, the world ended up being far more complex in terms of what software tokens are able to do and represent. Several projects in the space have been building a Taxonomy (i.e., a categorization scheme) to make sense of these activities -- with great work from The Brooklyn Project, Brave New Coin, Untitled Inc., OnChainFx, 20|30 and others. And like these projects, we now contribute into the Creative Commons an attempt at unifying and clarifying an Autonomous Taxonomy. The reason that this work is important is because good data architecture drives many downstream decisions, and also has meaningful regulatory implications.

Our top level categories are (1) General Monetary Instrument, (2) Application Utility Token, and (3) Tokenized Financial Instrument. Monetary instruments are the payment unit of crypto economic activity, with coins like BTC attempting to be used everywhere for all use-cases, and protocol tokens like ETH attempting to be used generally within its protocol. Also included in this category is the concept of Central Bank-back crypto currency. Next, we we split out Utility tokens into public (e.g., Filecoin) and private chains (e.g., UBS settlement coin). Within public, we use the thinking of the Brooklyn project, which relies on token features: ownership of internal and external objects (e.g., Identity, Cryptokitties),  economic participation (e.g., Binance  coupons), and the ability to perform activities, like doing work for rewards or purchasing a license to use a software. 

The last category of Financial Instrument primarily refers to the coming wave of (1) security tokens, which are akin to equity or real estate crowdfunding sitting on more modern, decentralized infrastructure. These assets have an established and clear role relative to capital tables of corporate entities. We expect a convergence of enterprise and public blockchains as consortia digitize existing capital markets and become interested in crypto liquidity. Also included are (2) DAOs as economic entities, (3) Insurance/Risk contracts, (4) and Digital Assets, either native or tokenized. There are a few interesting edge cases that we discuss in the full paper -- what is the practical difference between a cryptocurrency "backed" by a gold asset, and a gold asset that has been tokenized into ownership shares. Or, when does a native digital asset like a Crypto Kitty start looking like an equity interest in a Picasso?  Anything we missed?

BITCOIN: Liquid Coin Returns and Correlation Analysis


It's nice to have good data, and for this section we partnered with BITA, which is an digital asset index provider and crypto data company. They gave us granular daily information for over 200 coins, which allowed us to do work thinking about coin returns. There are too many charts to pull in, so just see below an amazing visualization of raw returns since the start of 2017. It looks like a Monte Carlo simulation, but it's on a log scale up to 1 million percent!!! That's incredible, and suggests exponential growth. But of course that growth normalizes in 2018, though it's volatility and range is still an order of magnitude more than that of traditional equities.

One of the first things we did is run a correlation analysis between the top 15 assets, and then between those assets and traditional asset classes. You can see the matrix below, and the caveat is that there is not nearly enough of a time series yet to have statistically meaningful results. 2017 and 2018 will look different. But some preliminary conclusions are interesting. First, all the coins are correlated to each other, with some separation starting for EOS, TRX and VEN. We think these are short term and idiosyncratic differences associated with fundraising. And when looking at traditional asset classes, it's a real surprise. Crypto is very correlated with all traditional asset classes, from Equities to Gold to Commodities -- there goes your main thesis! The only thing it shows separation from are Fixed Income and Real Estate. As for onchain metrics, don't even get us started.


Last point to make is that we also look into the economic path from ICO to liquid coin, and how likely somebody is to make a good investment decision along the way. Token investing is really early stage tech investing, and must passes through various filters: financing (65% fail), operating failure (50-70% fail), as well as its own scam filter (20% scams, 0.5% hacks). On top of that, ICO selection is a hard game to win -- 60% of ICOs underperform Bitcoin and Ether, and 34% of ICOs led to the loss of half of the investment already, with those trends getting tougher not easier. So definitely buyer beware!

CRYPTO: $20 Billion in Cumulative ICO Funding, 300+ Funds

Let's start with our macro bread and butter. Through June of 2018, we saw $12 billion of funding flow through into token offerings. Our numbers track only those ICOs with $1 million or more raised, so the numbers could be slightly higher, but the magnitude is correct. That's still 4x the amount of equity investment from venture capitalists going into blockchain-related companies (a number that now includes Robinhood and Revolut's pivots into crypto). So overall the trend appears healthy, until you really dig into the deals themselves. As you can see on a monthly basis, EOS and Telegram have been the elephants in the room for token fundraising. Now that they have been pulled out from active fund-raising, the underlying trend is less enthusiastic, cutting the monthly numbers in half.


Both of those exceptions have something to teach us. In the case of Telegram, the lesson is that private institutional investors are now the major driver in pre-sales, and often lead to closed rounds. In the last 2 months alone, we see a $500 million raise for video production platform Tatatu, and another $750 million to a gambling company in Asia. That means that there is not an opportunity for a crowd to participate, which in turn has led to the prevalence of Airdrops as a way to get people to hold the token. See Tatatu giving away $50 million of its tokens; in our full paper we highlight the Airdrops trends. The case of EOS teaches about the cyclical nature of capital flows between these projects. Token offerings appear to be a fairly steady function of their parent networks, sitting around 2% of monthly Ethereum reinvestment. That was a surprising finding.

On the manager side, we see 312 crypto funds controlling approximately $7.5 to 10 billion in assets. If we add in traditional instruments, like the Bitcoin Investment Trust or Bitcoin Futures, that's likely another $3 billion of exposure. So while the absolute number of entities is not exploding like last year, the asset they hold do seem to be increasing (based on extremely selective self-reporting). This has been buoyed by the entry of ecosystem funds from exchanges like Binance and Huobi, or networks like EOS. In a sense, that's recycled money from offerings, but it may still fund the right entrepreneur to build her company.


Source: Autonomous NEXT (Crypto Utopia)

CRYPTO: EOS liquidation of Ether reserves impacts markets


ICOs were the reason the crypto prices shot to the moon last year, and they are also (part of) the reason why we are now seeing a prolonged weak market. Maybe this is obvious to some of you, but it's worth pointing out the dynamic. When consumers became excited about token crowdfunding last year, they allocated cash and their Bitcoin capital gains to buying Ether, which allowed them to participate in token sales. This year, new consumer demand for Ether has been weak in light of regulatory and execution uncertainty. But the need to sell Ether has skyrocketed because of all the ICOs that have raised crypto assets, and now again need cash to pay staff in the real world.

The $16 billion or so of ICO proceeds, if not more when adjusted for market fluctuations, is a large chunk of Ether's $45 billion market cap. The asset has shed about $90 billion of value since its peak at $135 billion. Assuming ICO liquidations of $5 or so billion led to the continued pressure on the Ether price, the negative impact has been magnified 10-20x via sentiment and illiquidity. Again, this is not the only variable at play as correlations to Bitcoin and other large coins are around 90%, and speculation still prevails. But it is important to note the structural dynamics. If you have any idea how we can test this hypothesis, let us know!

As an example, take EOS and it's $4 billion of crypto currency. The project has hit community issues almost immediately out of the gate, needing to re-write the governance structure and creating negative sentiment in the space. But more damaging is when $100 million worth of Ether is sold by EOS in a single day on Bitfinex. The lack of institutional liquidity matters because the price is far more sensitive to large blocks in response. And when a company is able to raise money in the form of its top competitor's token, and then create ongoing selling of that token across thin markets, we don't think this create good market dynamics. Further, as more large ICOs are done privately -- see Tatatu's $575 million or Telegram's $1.7 billion closed pre-sales -- the demand to buy Ether in order to buy the ICO token is simply not there.

Source: Coinmetrics (chart), EOS (CoindeskCryptoslateTrustnodes), Coindesk (Tatatu)

CRYPTO: Ethereum not a Security Because it is Decentralized

Let's parse today's state of regulation for crypto assets, and the glimmers of what the future will look like. Ethereum and Bitcoin are not securities, said a senior SEC official a week ago. Why? The argument rotates around decentralization -- not because regulators care about decentralized networks, but because you need an entity to lead an offering. The Howey test demands a common enterprise that gives purchasers an expectation of profit solely from the efforts of others. Does that make sense in the world of (1) decentralized networks set up by communities for mutual gain, and (2) changing expectation about tokens as platforms are built? Probably not, but until the courts create a new model, it's what we got, and it is beneficial for Ether.

What's probably not really beneficial for Ether as a development platform are ICOs (vs DApps). Yes, they are still the killer app for crypto, but they have also sapped ETH of its role as a currency for DApps. Instead of a single currency that can power a digital smart contracts economy, we have thousands of disparate tokens of questionable liquidity and value. And while Ethereum itself may have avoided being a security, the tokens launched using it as an offering platform are exposed to continued regulatory risk. The CBOE president, for example, expects to see SEC prosecution of many large token offerings, and potential class action lawsuits against projects that fail to deliver. No amount of disclaimers and structuring will help against an angry mob. 


To reiterate the point, ICOs have been narrowing Ethereum towards a crowdfunding offerings platform. Compare an entrepreneur's choice of Ether vs Stellar, for example, as the choice between the corporate law of Delaware or New York. In choosing a state, you have access to all the common law that has emerged from centuries of litigation. This is like choosing a programming language that has the best code libraries. Regulating this choice for financial disclosure makes no sense. When looking at a particular use case, however, regulatory approval will still be a gate. Square needed to get the BitLicense in New York in order to process crypto payments. The same type of regulation may come to Canada for exchanges and payments companies (KYC/AML for $1k transactions, reporting to regulator for $10k transactions). For a sovereign regulator, the best strategy is to control the choke points.


Source: CNBC (SEC on Ether), CrowdfundInsider (CBOE), Autonomous NEXT (Howey test), Coindesk (Square), Cointelegraph ($10k transactions), Techrunch (Square cash), NY State (Bitlicense), Ethereum.org (creating a token)

CRYPTO: 2018 ICOs at $9 Billion, But Definitely Slowing


Well, there doesn't seem to be another way to say it -- ICO activity is absolutely and unequivocally slowing down. We were optimistic that token offerings were independent of crypto currency prices -- in part because early stage technology venture activity should be separate from late stage market dynamics. But it was only a matter of time before the slowdown in crypto prices was reflected in a slow down of ICO funding and crypto fund formation. In fact, offerings as a function of crypto market cap, and especially as part of Ethereum's market cap, seem to be fairly stable as a percentage.

The numbers: if we look at all token offerings above $1 million in funds raised, 2017 saw $6.6 billion and 2018 YTD has seen $9.1 billion. So far so good, right! But, if we pull Telegram and EOS out of both numbers, we land at $5.9 billion 2017 YE and $4.1 billion for 2018 YTD. That's still a higher pace than last year, so let's drill down into the monthly figures. In particular, if we pull out Telegram ($1.8 billion) and EOS ($4.1 billion) on a monthly basis, the monthly trend look severely down -- to $560 million from a high of $1.5 billion in December 2017. So unless you believe in the continued presence of mega deals, token offerings have indeed been dragging due to continued regulatory uncertainty, tax overhang, and a lack of tangible progress in software adoption by the mainstream consumer.


That said, the uncertainty will get resolved. Even if Western regulators constrict the space into a narrow box, there are many legitimate jurisdictions that want to be crypto Delaware. Look at Japan: from Rakuten tokenizing $9 billion of loyalty points, to Mitsubishi bank talking about launching a cryptocurrency. Fear is worse than truth. And, we may indeed be entering the era of mega deals. Many of last year's token projects were built by new teams, like Seed stage venture. This year, more mid-stage companies (e.g., 50-250 employees) are tokenizing some asset of their existing operations. And next year, we may start seeing late stage companies bringing their own DLT projects to the market, and marrying them with public crypto. Just look at the Internet wave: March 2000 was the peak value share a percentage of market capitalizations. Despite the crash, the web has never been more present or important than today. Will crypto follow the same hype cycle curve?


Source: Autonomous NEXT (aggregated ICO data), Kleiner Perkins (IT as %)

BLOCKCHAIN: Scams in Crypto: 20% of ICOs, 5% of Twitter


Getting a wrap around just how much scamming and fraud there is in the crypto ecosystem is a challenge -- but not impossible. As the industry continues to put up impressive fund-raising figures (with new issues at about 2% of Ethereum market cap per month), just how much of this will become valuable projects? We've written before about how creative destruction is natural for startups, and that failure rates in the mid 90% are a reasonable outcome. We've also pegged hacking of Bitcoin and Ethereum to have been responsible for about 14% of money supply in those pools. But what about outright theft and lies?

Two ideas. First, the WSJ analyzed 1,450 ICOs and found that 271 or 18% of them are just total raw scams. Fake copied white papers, team member photos taken from stock photo websites, nothing behind the project but malfeasance. Yikes. And another version of the same was The North American Securities Administrators Association going after nearly 70 ICO issuers in a coordinated action of regulators across the US and Canada called "Operation Cryptosweep". Which is a totally sweet name, for what is a really regrettable but required clean-up of the crypto ecosystem. A 20% chance to lose your money, for no philosophically meaningful reason, is the wrong price to pay for good financial technology in our opinion.

And second, don't forget the propaganda bot armies. Sure, they can influence elections and spread misinformation, but we didn't expect that they would be used for financial warfare this quickly. The practice in question is copy-cat accounts on Twitter that look like a Twitter influencer claiming to give out free crypto currency, if only you send them money first. This is hacking of the human kind and we monkeys fall for it all the time. As a comparisons: (1) email phishing maxes out at 0.70%, according to Symantec, and (2) bot automation is at approximately 10% of all activity on Twitter. Given that the crypto ecosystem is more prone to Internet memes and bounty programs, we would expect the rate of phishing to skew higher, say up to 5% for crypto-related conversations. So watch where you point that digital wallet.


Source: WSJ (18% scams), NASAA (Operation Cryptosweep), Bloomberg (Bot PhishingHacks at 14%), Autonomous NEXT (Failure rates)

CRYPTO: The Mega ICO and Future of Crowdfunding


Let's dive one more level deeper into the 1Q 2018 numbers. Our accounting methodology puts ICO funds raised into the latest  month in which the ICO was still active, which can make for lumpy data as the market becomes more institutional. This becomes painfully clear with EOS and Telegram, which we define as Mega ICOs and exclude in industry estimates. But what do things look like if we DO include these two projects?

Well, ICO fundraising jumps from $3.4 billion to $6.8 billion, which is the total amount raised in all of last year. According to this version of the story, there is no token fundraising slow down of any kind, whatsoever. We have already matched what happened in the past. And if we look on a monthly basis, instead of seeing a normalization in April/March that takes us to the levels previously seen in last September/October, the funding totals are accelerating to all time highs. What is going on?

Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Source: Autonomous NEXT, Token Report, Pitchbook, EOSscan

Two things. First, the Telegram raise of $1.7 billion highlights the trend of outside venture capital money moving into the crypto economy to buy tokens. This is not the "crypto capital gains" thesis of 2017, where early winners wanted to diversify their holdings, but instead the "let's not miss out" thesis of venture chasing last year's success. The other side of the coin is that high-profile projects can lean into this fear of missing out and run pre-sales, rather than offer tokens to the public. In turn, this can minimize regulatory risk if done for accredited investors only.

Second, the year-long EOS token offering took in about $800 million of value in 2017, and 1.6 billion of value in 2018 according to EOSscan. Talk about a financial black hole! EOS is the opposite of Telegram, publicly open to the world for contributions of any size. One way to interpret its approach is a prolonged attack on Ethereum at the protocol level, pulling the currency of one "world computer" to fund a direct competitor.  Maybe it's some sort of futuristic M&A, where a decentralized Internet super-organism eats its own tail and rises anew. And last, we found the below chart on non-Ethereum token offerings very interesting. Meaningful competition for the use-case of launching an ICO are already out there -- NEM, Waves, NEO, Stellar. Ethereum is seeing over 100 monthly new projects, but the race is not yet fully won. Are decentralized networks a winner-take-all market? Are they a market at all?

Source: Token Report

Source: Token Report

CRYPTO: Initial Coin Offerings 1Q 2018 in Review


There's a bear narrative in the air about ICOs and crypto currencies. It starts out by suggesting that last year was a bubble around Bitcoin, that many unscrupulous parties tried to jump on the bandwagon and take naive investors' money. This spilled out in the fintech, crypto and public markets. See, for example, Long Island "Blockchain" being de-listed from NASDAQ. Or India cracking down on crypto currencies. Or the ban on Venezuelan crypto petro currency. And on top of this, regulators across the globe are recognizing Initial Coin Offerings for what they are -- unregistered securities offerings from unlicensed institutions. Not surprisingly, we don't quite agree.

We looked at $1 million+ ICOs over the first 3 months of 2018 for an updated set of charts (see below). But first, a review. 2017 saw $6 billion in token sales (non equity), as compared to about $1 billion of traditional and corporate venture equity going into blockchain companies. That means 6x the funding, 6x the human capital, 6x the interest. So far in 2018, the same pattern holds. Despite the macro crypto slow down, we see $3.5 billion of capital flow into tokens in Jan, Feb and March. Now, there is some underlying slow down relative to November and December of last year, and the number of projects starting fund-raising in March is lower. Some high profile companies are choosing to airdrop instead of ICO. But at a high level, the crypto economy is going to be far bigger this year than last year. This is because, we believe, the early stage ecosystem of company/project formation should be uncorrelated from large coin cap prices. The same can be said about -- for example -- the price of BAML stock and the number of startups raising Seed funding.

Further, there is continued differentiation in the projects across industries. The infrastructure layers of various currencies and protocols are still being negotiated, representing about 25% of the 2018 raises. Many investors continue to look for value in fat protocols (we think this is hard due to network effects). The financial infrastructure, like banks, investment tokens, and decentralized exchanges, are still being put in place, also about 25%. Real growth, however, is coming from things like Identity, Gaming, IoT and other decentralized applications. File that one under obvious.


As a last point, we're sharing our latest number of crypto funds: about 251, not including the 9 or so that shut down or pivoted. The number is not growing as quickly as we'd expect -- partly because it's a more difficult environment to raise, and partly because folks are being less vocal about what they're doing. Our intuition is that there's probably 60 or so vehicles we are yet to identify. And on the other side of the equation, many traditional venture funds are starting to buy tokens. Does this mean traditional venture should start being listed as a crypto fund? Blockchain is infecting all the capital markets, which is just what technology does.


CROWDFUNDING: Most ICOs Have Already Failed - But So What?

Source: Autonomous NEXT, TokenData, CB Insights, Mattermark

Source: Autonomous NEXT, TokenData, CB Insights, Mattermark

An article on Bitcoin.com discussed some rough metrics for ICOs to date, claiming that of the 902 ICOs from last year according to Token Data, already 46% have failed. That's $104 million down the drain -- not to mention the opportunity cost of token appreciation and the funds that disappeared through various scams. So are things as bad as the article makes them out to be? We dove into the numbers, and came away with the opposite conclusion.

In looking at the Token Data underlying data set, there is an important distinction. And that is the difference between failing to raise capital and failing to execute on an idea after having raised capital. The Bitcoin.com article combines these two into a larger headline. But when we look at the "failing to raise" stats, things are not so dire. In 2016, that number is 14% and in 2017 it is 28%. This is in line with the intuition that it is now harder to raise money in crypto than before as investors become more discerning. But it is still far easier than raising money on Kickstarter, for example, which sees a 64% failure rate.

And second -- if we do the math on operational failure in 2017 ICOs, the answer comes out to 18%. That may seem like a lot in a short period of time. But we can compare this to the percentage of Seed stage startups that fail to raise Series A, thereby failing to achieve enough operational traction to move to the next round. A Mattermark data set suggests that 68% of early stage companies wipe out without going to the next round, and CB Insights shows similar numbers, with 40% failing to raise and 14% exiting the market. Runway for venture-backed companies is usually 18-24 months. If ICOs continue to fail at their current pace, perhaps the numbers will look even more extreme than traditional startups. But today, 18% is far below the 60-70% comparison.


CROWDFUNDING: Jan 2018 Initial Coin Offering and Crypto Fund Numbers


2018 is off to a bumpy start for the trading of large cap crypto assets. But we hold the view that pricing accuracy of $100B+ tokens isn't particularly meaningful for the technology progress in the space. It measures sentiment, which perhaps reflexively prices the market, but isn't all that helpful for figuring out what's happening in the world. On the other hand, the flow of resources -- from capital, to human, to corporate -- indicates something more real. When people choose a new way or a new product, the super structure may change. 

We updated our ICO and crypto fund data as of Jan 2018. The first finding is that ICO funding, which is a metric for the early stage entrepreneurship in the space (like Angel and Series A funding), is looking quite healthy. 2017 ended with $5.4B of ICO proceeds going to projects raising over $1mm+, and the one month of January already has $1.4B in flows. That doesn't include either Telegram's $1B+ planned ICO, or Overstock's $250-500mm raise, so we expect this level to continue through the year.  It may be harder for an individual ICO to raise capital given higher standards and competition, so in that sense, the market is equilibriating with the Venture Capital market. Vesting schedules, performance targets and covenants are becoming standard as the early crypto funds are joined by mega venture like Andreessen. Traditional early stage investors are writing equity checks into blockchain companies, but those numbers are less than 20% of the overall equation.


Coindesk makes the point that in Ethereum terms, actually the funding levels are fairly stable and not increasing. From our view, that's the whole point! The crypto Cambrian explosion was driven by capital gains in Bitcoin relative to fiat. Of course people are taking risk at the edges, using their winnings to fund more work. But there is indeed some danger that if the smart token platforms collapse in value, ICOs will have less purchasing power and thus facilitate less development. This is a real risk. And given that an increasingly large proportion of the ICO proceeds are funding utility tokens (magenta in the graph) and fewer platforms/currencies, actual economic activity within the apps has to appear for investment value to exist. 

The second data point is that the number of funds continues to grow. We point to crypto capital markets volatility as a positive for the plethora of trading, quant and index funds entering the market. In total, we are tracking 225 crypto funds across 7 strategy types (hey there Salt's credit fund), and see assets in the space being between $3.5 billion and $5 billion. The diversification of strategies point to an earlier observation that crypto has collapsed all asset classes into software, putting hedge fund managers and venture investors into the same exchange. No wonder there's pandemonium.


If you would like to have your fund added to the list, or to get access through an institutional subscription, please reach out here

REGULATION: Taxing Crypto and Jurisdiction Shopping

Source: Cointracking

Source: Cointracking

The American 2017 tax-year is over, which means a whole bunch of people are panicking about how they should pay taxes on their cryptocurrency gains without becoming Wesley Snipes. To start off, we highly recommend some professional tax advice, as well as the Forbes and Bad Crypto podcasts on this issue. The short answer is that nothing has really changed since the 2014 IRS memo treating crypto as property, which means anytime you get in and out of a crypto asset, that is a taxable event. But let's broaden the conversation to jurisdiction shopping, which is the practice of companies choosing where to domicile entities (like funds) and do business to optimize their choice of law. Israel just proposed some favorable ICO tax rules, which would allow ICO proceeds to be legitimized. Many of today's crypto companies have an entity in Gibraltar, Singapore, Switzerland or Estonia. Why?

There are several reasons we've heard that cryptopreneurs go jurisdiction shopping: (1) taxable treatment of ICO funds raised, (2) ability to open a bank account despite a decentralized fund-raising, (3) capital gains treatment on crypto currency transactions, and (4) treatment of token distribution to founders and advisors. As tax professionals develop sophistication in the space, these become more and more important. 

ICOs today try to avoid equity tokens so that they do not run into securities law, with its registration rules and requirements. But that implies the ICOs are selling digital goods, subject to Income tax on the profits. To solve this, projects structure a foundation to receive the revenue as a grant. That didn't work so well for Tezos. Second, the bank account issue is why we see so many foundations start in Gibraltar, where AML/KYC standards are more permissive, and thus companies can open bank accounts with proceeds from contributions of thousands of anonymous people online. On capital gains, we will likely see massive confusion come tax season, in whatever jurisdiction. The most conservative reading is that any crypto-to-crypto exchange is a taxable event, and requires the payment of fiat on the capital gain. Similarly, a purchase with Bitcoin of a sandwich will trigger a capital gain (or loss) realization for the price of the sandwich -- so you'd be paying tax there too. Check out Cointracking as a possible solution to at least know what you owe.

The last piece is probably the most invisible to folks who have not started private companies before. These tax issues, especially around illiquid private stock, pop up all the time. Imagine a startup worth $100 million and you join as VP Product, and get 1% of the equity, which is not yet liquid. Well, you also immediately get a $450,000 tax bill, payable that year. So in early stage tech, there are many solutions for these problems -- like options, 83(b) elections for stock that vests, and so on. Crypto has none of this. If a founder wants to file an 83(b) election and pre-pay their taxes on worthless tokens, they can't because the tokens are not equity. Or similarly bad would be having to pay tax on allocated founder tokens valued at a Tezos valuation in cash upon receipt. So the traditional tools do not work, and the potential tax burden to individuals involved in the space is quite severe. That's one way to slow down the pace of innovation.

CRYPTO: Economic Rent-seeking is Universal

Source: American Institute for Economic Research

Source: American Institute for Economic Research

The post-AI and post-crypto world will reconfigure many of our basic economic assumptions and requires a bit of philosophizing. So forgive our attempt, but we need to talk about economic rent-seeking and wealth creation. The Peter Thiel definition of building a successful company is to discover a piece of information around which a monopoly can be built. Building a monopoly is the primary reason that supports the venture capital industry model of rushing to massive unprofitable scale fist, and then creating moats and extracting value (i.e., economic rents from the monopoly/oligopoly position). See Amazon, which has leveraged not-caring about profitability into an unshakeable bedrock of retail. And once you have rent-seeking monopolies in place, they grow tendrils into media, politics, and customers -- and are very hard to remove. This snowballs and leads to extreme inequality, which is exacerbated by the power laws of software and the attention economy.

In the crypto world, there is a techno-utopia story that posits that a decentralized open technology ecosystem will be the antidote to centralized institutions that are controlled by questionable interests.  A key argument by bitcoin maximalists is that central banks print fiat money at will (often at the behest of bailing out Wall Street), which represents debt that erodes regular people's hard-earned savings through inflation. The argument goes that Bitcoin, on the other hand, has a fixed supply of currency and therefore cannot be manipulated to enrich some particular hegemonic party. This view is unsurprisingly contentious and only tells some of the story. We may be upset with instances when governments, which are to some extent accountable to citizens, use sovereign power to lower our purchasing power. But does that mean anyone and everyone else should be able to do the same?

Crypto currency and tokens issued by projects, through ICOs or reverse ICOs or airdrops or forks, are all a version of money printing. Mature capital markets do this all the time, through the issuance of debt and equity that time-shift financial resources to enable productive use. We allow and regulate such activity to encourage economic growth -- but may rightly be concerned that oligopolies have captured the process and are taking economic rents by being closest to the river of money. But does that imply that any individual at any time should be able to issue personal currency in billions of flavors? And that those most enriched by this process are those with the highest control of the attention economy -- i.e., the armies of bots pushing the latest altcoin, the ICOs with the best bounty programs, the biggest celebrities, the largest pump and dump Telegram groups? Disagreeing with central bank policy execution does not imply a right to be a Bernie Madoff.

While the stated motivation for much of the crypto movement has been to solve economic rent seeking by traditional finance and governments, we are now at a place in the industry where crypto is full of rent-seekers. Crypto investors have focused on owning the protocols of the new world. That means owning the highways on which information travels and taking a toll (through capital appreciation) any time someone uses the highway. Is that a productive outcome for global wealth distribution? Look at the blockchain name game and the reverse ICO phenomenon. Telegram is aiming to raise $2 billion for which it will give out no equity, with 52% of the tokens will accrue to the company owned by the founders. Looks like a self-minting of billionaires - a massive economic rent on controlling a popular messaging platform that dilutes the ecosystem. And that's not to mention the self-enrichment from premining in forks like Bitcoin Gold

But the traditional system is catching on! See Japan's largest bank, Mitsubishi UFJ Financial Group, which plans to launch its own coin in 2018. If it is okay for tech firms to extract this type of value, then those who are most familiar with the money printing process will do it too. As another data point, Bank of America has more blockchain patents than IBM, trying to create intellectual property control over a resource that is meant to be open source and free. We need only look at the sideways journey of the web -- with the loss of net neutrality and the walled gardens of Facebook and its newsfeed algorithm -- to understand the danger of unabridged rent-seeking behavior on public goods.

So after all that, what is the answer? We don't have many. But we know at least to (1) highlight that rent-seeking is a universal human trait that exists in all types of communities, and (2) avoid cultish beliefs that are allergic to evidence. Penny for your thoughts?

CRYPTO: Skeptical View on Pinball Machine of Bitcoin Valuation

Source: Pinball machines (in different flavors like Crypto tokens) by  Rob DiCaterino    

Source: Pinball machines (in different flavors like Crypto tokens) by Rob DiCaterino

Much of the current price movement in crypto currencies today is speculation, which we may want because there is a precious grain of underlying technological breakthrough and innovation. For example, avoiding the Bitcoin fork was helpful to keeping the community together and correlates with a positive price impact. Or, token launch activity shows Ethereum being used for a "killer crypto app" and validates blockchain for enterprise, which should therefore correlate with a price increase. These things can be naively measured as transaction volume on the blockchainrelative to the value of the overall market supply.
But on the concerning speculation side, price seems to go up regardless of whether the news is good or bad. Just having crypto in the media increases mindshare and exposure. So, for example, Bitcoin futures being launched on the CME and CBOE is in large part a way for traditional financial companies to take short positions on the price of Bitcoin. But the market is interpreting all developments in financial services around Bitcoin as positive. Or, China cracking down on ICOs mostly just puts ICOs into the news, which leads to retail investors reading about crypto coins, which creates a desire to invest, which leads to them buying Bitcoin. So there's this unintended consequence. Perhaps we can separate out technology or mindshare adoption from actual utility or financial adoption to justify the rapidity of growth, but that requires some science fiction thinking.
Further, the private, public and crypto markets are connected like a Pinball machine. Valuations in the private markets for Fintech can be 5x higher than those in the public markets -- see OnDeck vs Kabbage. Valuations in the crypto markets are 5x higher than those in the private markets. Venture investors see this price disparity, where ICO funding is driven by a near limitless supply of crypto capital gains, and some push their (unprofitable) portfolio companies to do ICOs. Because those companies have VC credibility and an operating product, like Kik for example, they raise multi hundred million dollar rounds without much effort. Venture investors have a fiduciary responsibility to monetize this, so they may exit after the ICO and lock in their pre-sale discount. Traditional fintech is also bleeding into crypto markets because fundraising is easier, there is no equity dilution, and startups can tap a narrative of actually disrupting the incumbents, rather than supporting them as vendors.

As more and more companies launch ICOs, retail investors become aware of the trend. Most are not technically savvy enough to buy Crypto, other than perhaps at Coinbase. Note that Coinbase now has more accounts than Schwab. They also look in the public markets for anything resembling blockchain, bidding up assets like Overstock. Supply and demand means that very few public companies will get this asymmetric benefit right now -- thus the rush in by traditional finance to offer products that trade on regular exchanges (e.g., Van Eck). And in response, the crypto markets look at the public markets and see "the mainstream economy" adopting or pricing up crypto companies. That is interpreted as a positive development for the whole ecosystem. But it could, instead, just be capital flows looking to find a way to back an idea in low supply. 

ONLINE BANK: Blending Neobanks into Cryptobanks

Source:  FTPartners

Source: FTPartners

Revolut is adding 3,500 people a day to its digital bank, reaching 1 million accounts, because it will provide the ability to store Bitcoin this December. The startup does not yet have a banking license.

The concept of neobanks or challenger banks is notoriously imprecise, blending in somewhere between online banking, mobile apps, digital lending and personal financial management. Here's a try: neobanks are (1) primarily consumer focused, often with integrated budgeting, (2) mobile or chatbot first, and (3) replicate the use-cases of deposit savings, lending, and money movement. That doesn't mean they have bank licenses or need them. Plenty of tech startups can build user experiences, and API those into financial backends from firms providing bank-as-a-service. Apple did this, for example.

Adding to the complexity is the emergence of cryptobanks, a set of institutions trying to replicate the functionalities of traditional banking services for crypto consumers and investors. And these things will blend together soon enough as you can see in the charts below from Financial Technology Partners and Slava Solodkiy. While neobank darling Monzo has raised EURO 71mm (and let's not forget Transferwise's $280mm), cryptobanks are on the path to raise $150mm this year according to Slava. If the trajectory follows ICO funding in general, we would see an exponential rise in financial institutions dedicated to crypto. Oh wait, we already do.

Source:  Slava Solodkiy

The reason that neobanks have taken off in Europe, but not in the United States, is because international money transfer can be priced at near-zero by digital challengers, pushing out the incumbents. And that matters in Europe in a way it does not in the US. A 3% credit card markup added to a 3% foreign exchange markup makes for expensive international travel. In the US, this is nearly irrelevant, which is why much more time is spent on personal financial management and roboadvising. But once we get to crypto, watch two things: (1) the use of cryptobanks in failing third-world economies, and (2) the toll booths along the crypto/traditional economy border. Hats off to Revolut for leading the way.