Blog Article | Rohit Kulkarni
Posted: October 25, 2018

New SharesPost Token Index Highlights Opportunity For Long-Term Crypto Investors

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.

Digging into Index trends over four quarters

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.

Exhibit 1: SharesPost Token Index since inception with a 1 year historical view
Exhibit 1: SharesPost Token Index since inception with a 1 year historical view
Source: SharesPost Research; Index values for Bitcoin and Ethereum are based off their market caps
Exhibit 2: SharesPost Token Index since inception
Exhibit 2: SharesPost Token Index since inception
Source: SharesPost Research; Index values for Bitcoin and Ethereum are based off their market caps

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.

Exhibit 3: Index constituent weights as of October 1, 2018
Exhibit 3: Index constituent weights as of October 1, 2018
Source: SharesPost Research
Exhibit 4: Index constituent weights as of July 1, 2018
Exhibit 4: Index constituent weights as of July 1, 2018
Source: SharesPost Research

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.

Exhibit 5: SharesPost Token Index has a market cap of over $5 billion as of October 1, 2018
Exhibit 5: SharesPost Token Index has a market cap of over $5 billion as of October 1, 2018
Source: SharesPost Research
Exhibit 6: Growing list of eligible tokens for the SharesPost Token index
Exhibit 6: Growing list of eligible tokens for the SharesPost Token index
Source: SharesPost Research
Q3:2018 SharesPost Token Index Performance Drivers

(+) 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.

Macro trends in Crypto ecosystem point towards more investment opportunities

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.

Exhibit 7: Over $12 billion already raised through ICOs by September 2018
Exhibit 7: Over $12 billion already raised through ICOs by September 2018
Source: SharesPost Research; icodata.io

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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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.

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Rohit Kulkarni
Article Author

Rohit Kulkarni

Rohit is the Managing Director, Private Investment Research for SharesPost Research LLC. Prior to joining SharesPost, Rohit was a Vice President, Senior Analyst at RBC Capital Markets.

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SharesPost Token Index: Tracking the Performance of Utility and Security Tokens

PLEASE READ THESE IMPORTANT LEGAL NOTICES AND DISCLOSURES

This blog post is being published by SharesPost Financial Corporation, member FINRA/SIPC. 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, LLC is the investment manager of the SharesPost 100 Fund, a Registered Investment Company, and other funds. These entities and funds (hereafter “SharesPost”) does, seeks to do business with and owns the companies covered in this research report. Consequently, investors should be aware that SharesPost has a conflict of interest that could affect the objectivity of this report.

None of the information contained in this blog post 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 does it 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 advisability 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.

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 such company has endorsed, supports or otherwise participates with SharesPost. Company “thesis” are the opinions of SharesPost and are not recommendations to buy, sell or hold any security of such company.

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