Hi fellow futurists -- we are thrilled about this week's newsletter, because it's a big fat treat. Over $20 billion has been raised by Crypto projects through Initial Coin Offerings since the start of 2017. That’s $18 billion more than a year ago, when we released our first primer on the space, Token Mania.
We are excited to share with you our latest 124 page update called “Crypto Utopia”, with help from Latham Watkins. Grab a free copy now and see preview for three of the sections below:
$20 Billion in Cumulative ICO Funding, 300+ Funds
Liquid Coin Returns and Correlation Analysis
The Grand Unified Token Taxonomy
$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.
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!
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?
Latham & Watkins LLP and their Fintech practice did a spectacular Regulatory, Legal and Tax section in Crypto Utopia, which on its own could be a separate paper. Here's a preview of the global state of Crypto regulation:
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