Strong 2017 Followed by the 2018 Crypto Winter Creates an Attractive Entry Point
The emergence of cryptocurrencies and Blockchain tokens promises to fundamentally remake the private capital market. In 2017, the total value of tokens grew to $37.7 billion, a nearly 19,000 percent increase over the prior year. Companies and investors raised over $6 billion last year through initial coin offerings, a mark they have already matched this year, with still another quarter to go. To appreciate the rapid growth of token sales, consider that U.S. startups (i.e., seed and Series A) in 2017 raised an estimated $8 billion using traditional private placement.
Given this intense interest in the crypto space, we set out to to measure security token market performance in a meaningful way. The resulting SharesPost Token Index reflects our larger mission to provide liquidity to the asset category through a combination of trading, asset management, research, and data. The Index consists of companies that use the ERC20 protocol, a standard protocol adopted by the majority of Blockchain companies to build decentralized applications. These companies are often younger than typical venture capital (VC) companies and have yet to build an actual product.
To determine which tokens the Index will cover, we employed a market-cap weighted methodology that incorporates data like trading volume and trading history. The Index’s current list of ERC20 tokens is here. We will rebalance and reconstitute the Index’s weightings and members at the end of each calendar quarter.
Using July 1, 2018 as the baseline, we reviewed the Index’s performance back to Q3 2017 and compared the data to Bitcoin and Ethereum prices. The results were not surprising. Although the token market has suffered short term volatility, the asset presents a promising opportunity for longer term investors. Bitcoin has stayed almost flat since July 01 2018 while Ethereum prices dropped 50 percent. Our Index has dropped 45 percent over the past two quarters. But on a cumulative basis, the Index grew 17 percent from Oct 01, 2017 through Oct 01, 2018 while Ethereum dropped 17 percent and Bitcoin increased 59 percent over the same period.
The market has been volatile over the past 90 days, which means the Index’s roster of tokens has changed quite a bit. Between Q2 and Q3 of 2018, the Index added 3 new tokens: Pundi X (NPXS), Holochain (HOT) and Bancor (BNT), which replaced Digix Global (DGD), Aion (AION) and Kyber Network (KNC). Binance Coin (BNC) continued exert the most influence on the Index with its weight increasing from 27 percent in Q2 2018 to 31 percent in Q3 2018.
The Index’s average market cap grew 2x from $2.6 billion in Q3 2017 to over $5 billion in Q2 2018, while peaking at 8x in Q1 2018. Over the same period, the number of eligible tokens also grew from 10 in Q3 2017 to 28 in Q2 2018, peaking at 58 in Q4 2017.
(+) Upside drivers: Index newcomer Holochain (HOT), which promises to be a faster and more scalable solution than Ethereum, saw its market cap jump over 137 percent since the beginning of the quarter. The token’s trading volume also grew exponentially from an estimated 0.7 million to over 3.5 million over the past 90 days. Holochain’s potential partnership with Mozilla and its launch on Binance at the beginning of the quarter helped gain attention from the crypto community and fueled its recent growth. 0x, an open protocol for a decentralized exchange, experienced a relatively lower drop (18 percent)) compared to Ethereum (48 percent), because of its progress with protocol development post ICO.
(-) Downside drivers: The primary reason why we see decreasing market caps and trading volumes is due to recent moves by the largest tokens concerning their individual mainnets (technical foundations on the Blockchain), which has decreased the significance of Ethereum and ERC20 protocol. As a result, Ethereum’s value fell 48 percent, compared to a 4 percent rise in Bitcoin over the past. Loopring (LRC- a decentralized exchange protocol), Augur (REP- a blockchain base betting platform) and Populous (PPT- smart contract invoice finance platform) contributed most to our Index’s decline. Decreasing user bases and unstable platforms were factors that drove lower valuations for these tokens. Average trading volume over the past quarter fell 50 percent across the 15 tokens in the index.
Over the past decade, the number of cryptocurrencies has grown from just one (Bitcoin) to over 1,500. The aggregate value of all tokens grew to $37.7 billion in 2017, a nearly 19,000 percent increase from 2016. The chart below shows more than 2,000 companies have raised over $13 billion since 2014. In our recent reports, we have highlighted the huge potential of the cryptocurrencies and their underlying Blockchain technology.
The growing interest in these digital assets has even prompted U.S. exchanges like Chicago Board Options Exchange (CBOE) and CME Group Inc. to permit trading of Bitcoin futures. Derivatives, including futures contracts, Exchange Traded Funds (ETFs), and crypto asset funds, will likely proliferate over the next few years, targeting relatively risk averse investors interested in exposure to the crypto markets. Regulators will need to quickly develop a framework to oversee these markets. Stablecoin’s emergence is a step in the right direction. Some of the world’s largest financial organizations, including Fidelity, Blackrock, and Golmand Sachs have started to make large investments in building crypto infrastructure and creating derivative products around it. Once skeptical of cryptocurrencies, these financial giants have recognized the high volatility and minimal co-relation of crypto assets with the regular stock/bond asset classes.
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Securities referenced in this article may be offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.
Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative, involving a high degree of risk, and investors should be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and investors should conduct their own, independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or investment advice.
Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.
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