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.
This article does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or prudence of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.
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.
SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.
Copyright SharesPost, Inc. 2020. All rights reserved.