SharesPost recently launched its SharesPost Token Index. We sat down with Rohit Kulkarni, Managing Director of Research, to discuss the new index.
What is the SharesPost Token Index?
In general, the SharesPost Token Index seeks to track the growth of tokens issued by Blockchain startups. These companies are typically younger than a venture-backed startup, and have raised capital by selling tokens. Utility tokens allow the buyer to access a service on the Blockchain while security tokens represent ownership in an asset like real estate or equity in a company. Specifically, the Index focuses on a select group of tokens built on the ERC20 protocol, a common technology standard companies use for building decentralized apps on blockchain.
What will the Index tell us?
We expect the Index to measure the performance of leading ERC-20 based tokens, which represent a broad array of Blockchain applications for a wide range of industries. Broadly speaking, we hope to learn how investors and businesses respond to this potentially promising, yet untested asset class/technology. We also benchmark the Index against popular crypto currencies in the market, including Bitcoin and Etherum.
Describe how you constructed the Index. How did you pick the tokens? Why did you exclude tokens pegged to a currency?
Using factors like market value and trading history, we assigned a weight to each of 15 tokens based on token price and the number of tokens a company issues. We believe this approach better reflects the market’s overall maturity and minimizes risk through diversification. The Index pulls daily pricing data from leading crypto exchanges and market cap and trading volume data from Coinmarketcap.com. We select tokens representative of the broader Blockchain sector with real Blockchain-based projects and a defined utility. As a result, the Index excludes tokens that are pegged to a particular asset or currency.
ICO activity is down 90 percent this year. Why?
The majority of ICOs are built upon the ERC-20 protocol used by Ethereum, whose price has fallen sharply since late 2017. Also, the lack of regulatory clarity has spooked both investors and issuers. Earlier this year, the Securities and Exchange Commission levied penalties against companies that issued tokens via fraudulent offerings. U.S. accredited investors have been understandably cautious about entering the token market. Finally, other countries like China have tightened controls over cryptocurrencies and token offerings. As a result, investors have returned to stocks while waiting for the cryptomarkets to stabilize.
Is there a correlation between the global equity markets and ICOs?
The asset class is still young, so we assume there would be little correlation between ICOs and other asset categories until a clear pattern emerges. We have witnessed both the rise and subsequent fall of ICOs during the global bull market. With that said, we believe that a bull market enables investors to take more risk and invest in riskier assets like ICOs.
How will a global economic slowdown impact tokens?
An economic downturn will have a negative effect on the token market as investors migrate to safer assets like large cap equities and bonds. However, some investors might seek tokens to diversify their portfolios. Research shows that just a 5 percent exposure to crypto assets could boost performance by over 500 basis points, nearly double of a typical stock/bond blended portfolio. A declining economy may also dampen trading volumes across exchanges and ICO fund raising. But new regulations could make crypto investments an attractive hedging option.
Does the current volatility in crypto markets offer an opportunity for long term investors?We believe so. Declining cryptocurrency prices could prompt long term investors looking for value to enter the space. Crypto is slowly gaining acceptance across the globe. Companies are introducing valid products with real world applications and we believe the conversations have changed from “whether crypto will go mainstream” to “when will crypto go mainstream.”
Are institutional investors interested in tokens? When do you think we will see institutions start to trade tokens in meaningful numbers?
Institutions have shown strong interest in tokens over the past couple of years. For instance, Yale is reportedly investing in two venture funds that focus on cryptocurrencies and Blockchain. Other large financial firms like Fidelity, Blackrock, and Goldman Sachs are offering derivative products for digital currencies and funds linked to pure crypto assets. Even crypto exchanges are targeting institutional investors. Further clarity on regulation and attractive returns on crypto assets would drive more institutions to add crypto to their portfolios.
Where do we stand on token regulation?
U.S. regulators appear to have taken a “wait and see” approach while Japan, Singapore and France have adopted a more proactive and supportive strategy. We believe global regulators currently want to: 1) identify fraudulent players in ICOs; 2) define the difference between utility tokens and security tokens; and 3) work with the crypto industry to create regulations to protect investors without hurting innovation. Overall, we’re moving in the right direction, though it could take a few more years before we see a common set of standards emerge from different regulators in the United States and other countries.
The International Monetary Fund recently warned that cryptocurrencies could create “new vulnerabilities in the world’s financial system.” What’s your reaction to this?
Today, there are more than 2,000 cryptocurrencies and tokens available for trading on global exchanges. This proliferation within a relatively short period of time has prompted scrutiny from key stakeholders, including regulators. Global financial agencies have launched investigations to root out fraud and other vulnerabilities in the system. At the same time, other leading global agencies like IMF have been increasingly critical of the asset. Longer term, regulations that protect investors and increase cybersecurity will help improve market efficiency and boost global confidence in the cryptomarkets.
CONFLICTS: This report is being published by SharesPost Research LLC and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation, and SP Investments Management LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost Inc. SP Investments Management is the investment manager of the SharesPost 100 Fund, a registered investment company, and other funds.
Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction. This report does not constitute an offer to provide investment advice or services. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.
Information regarding companies in the SharesPost 100 List available on the website has been collected from or generated from publicly available sources. The availability of company information does not indicate that these companies have endorsed, supported, or otherwise participated with SharesPost. Company “thesis” is the opinion of SharesPost and is not a recommendation to buy, sell, or hold any security of such company.
Investors should be aware that, at any given point in time, the SharesPost 100 Fund (the “Fund”) may or may not have an ownership interest in any of the issuers discussed in the report. Accordingly, investors should not rely on the content of this report when deciding whether to buy, hold, or sell interests in the Fund. Instead, investors are encouraged to do their own independent research. Before investing in the Fund, investors are cautioned to carefully consider the investment objectives, risks, charges, and expenses before investing. For a prospectus containing more information about the Fund, please visit www.sharespost100fund.com. Read the prospectus carefully before investing.
ANALYST CERTIFICATION: The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.
Analyst compensation is based upon various factors, including the overall performance of SharesPost Inc. and its subsidiaries and the performance and productivity of such analyst, including (1) feedback from clients of the SharesPost Financial Corporation and other stakeholders in our ecosystem, (2) the quality of such analyst’s research, and (3) the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost Inc., including brokerage sales.
DISCLAIMER: This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.
Any securities offered are offered by SharesPost Financial Corporation, a member of 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 and involves a high degree of risk. It should only be considered as a long-term investment. You must 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. You should complete your own independent due diligence regarding the investment, including obtaining additional company information, opinions, financial projections, and legal or other investment advice.
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.
SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, SharesPost Investment Management, the SharesPost 100 Fund, and the SharesPost 100 List are all registered trademarks of SharesPost Inc. All other trademarks are the property of their respective owners.
Copyright © SharesPost, Inc. 2019. All rights reserved.