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

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: As ICOs wind down, Developers code and Financiers finance.

Hope you like bad news. We are in an Ethereum sentiment downward spiral. As prices fall both (1) quite naturally as design result from fundraising in ETH, and (2) from an increasing number of financial derivatives shorting token economies, i.e., BitMex, ETH as a currency is less attractive to hold for a newly formed company. Dissenters from the ETH thesis are becoming louder, with some claiming that all utility token values trend to zero, and others (see TechCrunch discussion source) suggesting that ETH will bleed out all of its value into those utility tokens. While we don't agree with either and it can't be both, the end result is that ICO funding has meaningfully slowed to a bit over $300 million. That's a 2017 May equivalent. 


Hope you like good news. Ethereum's use as a decentralized computing platform is growing. While many other Dapp stores (i.e., Dfinity, EOS, NEO, Cardano) are only now getting funded on future claims, Ethereum is churning away at building useful apps. ConsenSys backed Alethio put together a chart of operation codes, which we take to mean how much computing the system is doing. More is better, as is more diversity of operations. The chart has been going around the web, but we think it's useful to reiterate as a counter to the ICO fundraising data. First you raise, and then, you build. Actually, first you sell, then you hire, then you build.


Second, while non-equity token funding is failing, security token offerings (STOs) are starting to hit the market. Should we be counting this in our ICO numbers? Take for example Tokeny, which used to be primarily an ICO technology platform. Since the shift in the winds, it has pivoted to enabling STOs. The latest projects to use its system are a $250 million real estate tokenization and a $50 million equity tokenization in a fintech company. These two deals alone match the entire ICO market from last month and are just the tip of the iceberg. No wonder that Bank of America is rumored to join Nomura and Fidelity in the crypto custody race. Investment banking fees and exchange listing fees for all asset classes are in the cross-hairs, in a way that enterprise blockchain cannot solve (e.g., accepting crypto as payment). 

Unfortunately, by the time the incumbent custodians are in the game, there may not be much left of the crypto currency market caps. The snake will have eaten its own tail (thanks Cardano!). So instead of messing with digital assets backed by the techno hope of Millennials, they will turn their sights on the familiar glow of securitization.  

Source: Autonomous NEXT (ICOs), Tokeny (STO vs ICO), ICO Journal (Bank of America), Reddit (AlethioTechCrunch editorial

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.


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), (creating a token)

BLOCKCHAIN: History of Bitcoin and the Crypto Economy

Source:  VisualCapitalist

You may not have been a crypto native from the beginning, so how did this whole thing get so big? The journey started with Bitcoin in 2008, stuck in incremental open source development for many years, until venture capitalists began to fund infrastructure (2012-2014) that could compete with financial incumbents (wallets, exchanges, miners). That funding proved some amount of scale, but the corporate world still did not trust a decentralized currency deemed to be for hackers and drug dealers. So by 2015-2016 there was a major shift to “enterprise blockchain”. Funding moved to corporate venture capital, and financial institutions joined consortia like R3Hyperledger and EEA among many others. All talk was of distributed ledgers, not public markets.
But while this was happening, Ethereum did its own token launch and came pre-built with a way for projects to be written in a Turing-complete development language, and to simultaneously raise money. This led to first a trickle and then a waterfall of Initial Coin Offerings leveraging the Ethereum blockchain. Much of that funding into ICOs came from capital gains in Bitcoin and Ethereum by early adopters. Fintech innovation shifted to crypto, and the movement became global. It started to involve regulators across the world, created debate among CEOs, and put something from the crypto-economy into the news every single day. It brought in Paris Hilton and other celebrities.
The issue is that investing into an ICO is technically challenging. The first step is just converting USD or EURO into crypto, and Bitcoin is the de-facto winner by having the largest liquidity and biggest network. Once a user has BTC however, they have to figure out a wallet, what addresses are, how blockchain works, what an ICO is, how to invest in it, and whether to trust the provider. And last, they have to contend with the regulatory overhang and uncertainty. Thus, fiat flows into Bitcoin and very likely gets stuck there.
The narrative around what is happening in crypto currency in the second half of 2017 is the entry of traditional financial incumbents into the space. First, there are now about 170 crypto funds dedicated to crypto alone. Second, the CME, CBOE and LedgerX are all providing futures product on liquid coins. Third, asset managers are starting to build more traditional vehicles, like trusts or ETNs, so that retail investors can participate using established markets. Fourth, large public companies are fueling the story with their own developments in the space. Fifth, private capital is moving in through vehicles on CoinList and Republic Crypto. And last, the media is combining all these narratives with the price of Bitcoin, which leads to even more people getting interested in the space (without understanding it).
Ethereum and Bitcoin are correlated with the overall market, so attention on any sub-part of the ecosystem catalyzes the rest. But there is also a lot of science fiction thinking about where this could end up. Will all trees be put on blockchain and their carbon production put on carbon trading markets? And of course, market manipulation, multi-level marketing schemes, and other unethical market behavior is rampant as well. What is the next stage? Regulation, rationality and legitimacy. 

BLOCKCHAIN: Do Criminals or Bankers want Crypto-Privacy?

Source:  ChainLink

Source: ChainLink

Ask any self-respecting financial incumbent about why public blockchains aren't good enough for enterprise use, and you get roughly the following response on why private chains (e.g., Ripple, Chain, R3, Hyperledger/IBM) are preferred. First, public blockchains don't have privacy, and large financial clients (e.g., hedge funds that do not want to reveal their trading positions) require it by definition. Second, interoperability is a problem -- financial institutions already have large enterprise technology vendors that power their complex workflows. Those workflows are the lifeblood of the middle office. One cannot just "put data on the blockchain" and disconnect the internal glue of the institution. Third, scale and speed are a problem. And last, banks are in the business of being Trusted Counterparties, not some hacker scheme like Bitcoin.

And yet when it comes to those exact same characteristics for the public blockchains, the banks assume that crypto-privacy is for criminal activity. At a recent ICO panel, we discussed whether gray market activity frequency was different on public chains vs banks. CEO of blockchain compliance company Coinfirm and former head of global AML for Royal Bank of Scotland in Europe suggested that the rates of illegal activity are similar inside of crypto and traditional finance. The only exceptions were Zcash and Monero, which are essentially impenetrable to crypto-Regtech firms.

Well, crypto-privacy is about to get another big boost. The Dandelion project could make Bitcoin transactions more anonymous. And the Metropolis upgrade for Ethereum will allow developers to leverage zero knowledge proofs, which are the cryptographic tool that make Zcash tick. Crypto-scalability is also around the corner with several projects -- LightningPlasmaRaiden -- and could get Ethereum to be competitive with Visa and Mastercard networks within a few years. On interoperability, consider Chainlink linking external data through APIs to blockchains and raising 32 million, or TenX converting any crypto-asset into purchasing power in the real economy, or the decentralized crypto-transactions that are powered by "atomic swaps". Privacy and scalability are pretty good when everything happens in a global interconnected decentralized mesh. Which leaves us the last point -- who is the Trusted Counterparty? Not banks.

BLOCKCHAIN: Microsoft Azure on Cryptlets

Source: Microsoft

Source: Microsoft

So this one is a bit hard to parse, but 100% worth it. Above we just established that Ethereum's open source infrastructure could be an alternate smart contract language to many of the well-funded startups. But even more so, Microsoft Azure, the enterprise cloud, is coming pre-installed with ready-to-go Ethereum infrastructure that makes the creation and deployment of these apps much easier to manage. Microsoft then could be in a pole position to be the massive hosting repository for financial data, period. The concept of Cryptlets is the tech firm's approach for separating the data layers, business logic layer and presentation layer of the tech using APIs. Read more.

CRYPTO: Enterprise Ethereum Emerges



 A new blockchain consortium has been announced consisting of JP Morgan, CME Group, BNY Mellon, Banco Santander, Microsoft, Red Hat, Cisco, Wipro and British Petroleum, among others, reports Coindesk. The list of participating blockchain startups is even longer, including ConsenSys and Tendermint. This is big news. Right now, there are a few core camps in blockchain: IBM Fabric, R3 Corda, Chain Core, Digital Asset's DAML dominate the news. They are all connected to Hyperledger, an open source repository for core code. Ethereum is another direction -- a public blockchain for computing, that can now be applied to industry use cases. We see this as a splintering of power between top-tier investment banks for who will control the next-gen infrastructure. Read more.