What have we done? How are we going to fix this?
We broke the Crypto market and now we have to fix it!
As the dust settles and the Crypto asset market finds itself at a market cap of $300bn, where it was just six months ago, many are reeling from the carnage of the last 3 months. After all, it was 3 months ago when the market topped $850bn after increasing 800% in under 6 months.
Investors are licking their wounds and asking some tough questions about their investment choices, and if the stats are right, then there are a lot of investors licking a lot of wounds. One survey speculated that as many as 20% of Americans are holding some kind of Crypto today. Whereas I don’t believe this statistic, I do believe that the herd did arrive and …they got trampled.
There is no doubt that in the absence of significant institutional capital the last frenzy was caused by the man is the street, buying in the hope of turning his $10000 loan into several million overnight. It was an easy formula, buy, hodl, for a few hours, call your friends and tell them you just made 15% in less than a day. Who needs a day job?
To me the signs were everywhere , albeit the greedy part of me convinced myself that there was a way to go before this bubble pooped. In Mid December I had just finished a speaking gig and I was wearing my trademark Bitcoin shirt. I sat down for a dinner with a friend and an elderly (70+) couple Jewish couple commented on my shirt. Surprised, I asked them if they knew what Bitcoin was… It was as this at this stage that Reeva unholstered her phone and her reading spectacles. Holding the phone as far from her face as she could, she squinted her eyes behind the glasses and managed to click on the Coinbase app to show me her holdings — it was at this point that Hymie, her husband commented — “If you think we made money on Bitcoin, Reeva , tell him what a killing we made on XRP!”
I WAS SHOCKED! I wouldn’t have placed them as hodlers let alone people that call Ripple XRP and have made a ‘killing” out of it.
It was at this point that the waiter honed in on the conversation and told me that he had just downloaded the new INVESTING.COM app for Crypto. Surprised again, I quickly downloaded it whilst he continued to explain to me why Bitcoin can’t do down any lower — Bitcoin was @ $13500 that day and I kept thinking to myself — “ when the waiter tells you about Bitcoin the bubble is about to pop” — and boy did it pop! The markets crashed 70% and wiped out Hymie, Reeva and the waiter!
I should have known. I did know. I didn’t have balls to lose the upside!
Now the dust has settled and we are all reevaluating our positions and decisions. After all, most of us swore we would never hold anything but Bitcoin and Ethereum and today our Blockfolios are littered with 3 letter codes usually with the word “protocol” after them and a ton red arrows. While BTC is at around 40% of its ATH some Alts are down nearly 90%!
So, what happened and what happens next?
Simply put, we were in a frenzy. Led by the momentum of Bitcoin and Ethereum, investors got caught up in a FOMO frenzy that led them into a host of Altcoins in the hope that some of them will be the “next Bitcoin”! Investors skipped levels, moving from investing in Blockchains to investing in applications and sometimes into …well, nothing! Marketing mastership fueled this frenzy by creating artificial scarcity and terms like ,“Pre-Private Pre Sale”, “hard close” and “Bonuses and Discounts” drove investors further into the tunnel!
This was the frenzy that we shall call TOKEN 1.0.
Investors bought into the hype that was a new asset class called “utility tokens” and since it was a new asset class no one knew how to structure it — let alone how to value it.
Companies gave tokens away to advisors and capital raisers as if they were free! Oh wait, they were free! They created no obligation on the company and so the net effect on the balance sheet was a cash inflow with a “liability” that MAY materialize in the future but probably won’t!
But, as the bubble popped , as quick as the money flowed in and the gains realized , quicker were the outflows and the losses — in a matter of days investors were left asking serious questions of the investments they were holding, many flocked to the whitepapers, the same whitepapers that they had neglected during the time they invested and those that could manage to work their way through them quick realized a few things about the utility tokens they were holding.
Firstly, none of the tokens create ANY obligations or liability on the company . ZERO! You are not entitled to a share of the remaining funds, you don’t have a vote on the direction of the company and in fact there is no obligation on the company to build ANYTHING.
1. Some utility tokens had no utility at all. Yup, there are some tokens that could not explain the actual utility of the token at all. There were a whole lot of words on white paper but none that could truly describe exactly what the token actually does.
2. Some ,though they have utility are not required to run the network. There are many tokens that may be linked to a great service/software BUT are simply not required to run the network . The user can use the token OR Bitcoin , Ethereum or Fiat. Simply put — you don’t need the token. The token is optional and therefore pretty useless.
3. Some have utility but their value creating mechanism isn’t yet clear. This was covered in a great post by Kyle Samani* where he examined the token models out there and suggested a few new models. Many tokens though required to run the network have not clarified the mechanism that will create scarcity with increased usage and as Kyle alludes, in the MV =PQ, if there is little friction the V becomes very high and so the token simply has no real scarcity.
4. Some though dubbed utility tokens are actually securities tokens and entitle to holder to revenue share or sorts. These are fast being delisted leaving the investor with an amazing token that can only be traded on…. Wait for it, ETHERDELTA!
We got so caught up in the hype of utlity tokens we forgot to check what the actual utility was of the utility token let alone the value metrics.
I think it’s safe to say that with the current basket of 1600 or so Token 1.0’s we probably won’t ever see a market cap of $850bn ever again, especially given that we wiped out the man in the street and destroyed any chance of accelerating capital inflows.
This though is not the end of the bull run but rather just then end of a wave and as every surfer knows, one needs to be patient until the next wave comes in.
Where is the next wave coming from?
If we want to attract new capital, different capital, we need to change.
The dumb money came to the party and got wiped out. Now the money is smarter and the proposition of investing in a token with the properties listed above doesn’t really attract these investors — I can’t understand why :)
If we do want to attract the next wave of capital, a serious wave, we need to create a new type of token — Token 2.0
Whether or not we refer to it a security or just give it a few of the characteristics that a regulated token may display, this token must be closer linked to the company and must create some kind of obligation on the company towards the token holder. Though we may deny it, the buyers are investors and not people that actually want to use the network (don’t worry I the SEC doesn’t get this). Amongst these obligations we should consider the following:
1. Use smart contracts — we are so quick to sell the concept of a smart contract to all industries yet the one place we don’t use it is in our back yard. Surely we should raise capital with certain milestones in place and if the hurdles aren’t met then this should constitute a non-performance, giving investors a right to exit?
2. Compulsory use of tokens — If you are using a utility token to raise capital from INVESTORS (not fools) then the minimum that you can do is put them in a position where if the software/product is successful the token does have value. The minimum you can do is make the token the only way to activate or transact on the network — no options.
3. No double dipping — issuing a utility token and using it for the purpose of raising capital is done so as an alternative to parting with equity. There are many advantages to the equity holders including; no voting right and hence no dilution of control and the ability to execute multiple ventures in the same company BUT companies should respect this and pass on ALL of the value in the project to the token holders of which they are usually the biggest holders. I have seen too many tokens issued in companies where the equity holders are conflicted as to where the value should lie — in the equity or in the token! I believe Vinny Lingham wrote a blog in this regard.
4. Token metrics — the token metrics and model should be detailed upfront and investors should easily be able to calculate the future value of the token by adding in few simple variables such as Usage, Revenue and network size. We cannot continue with vaguities!!
5. Reporting — the company should have an obligation to report to the token holders on the progress , the performance and the holdings of crypto. Investors must be treated as investors and should be given information that allows them to evaluate the performance of their investment.
Now, I know you are reading the points above and saying “this would make it a security”. So be it! Perhaps the next wave of tokens is a wave of security type utility tokens , a new asset class that combines the concept of utility with the regulation of a security. Perhaps this is the way to unlock the smart money and get the boat moving again!
So where does that leave the Token 1.0 Holders today;
The bad news is that most companies that issued tokens probably won’t exist in a year or so and so the good news is that you won’t need to worry anymore.
Then we will get 2 types of companies that remain;
The first will build the software and make no attempt to increase the value of the utility token. After all they still own the equity and the utility token holders have no rights. They are now well capitalized and they will roll out the software and the value of the equity will increase while the utility token holders are simply forgotten about. I suspect that the majority will adopt this approach and especially as markets become competitive and any burden placed on the company by the utility token may make it too difficult to compete!
Then, there may few companies that actually restructure their token to be more in line with Token 2.0 and these may actually reap the benefits of the network effect though initially this may hurt the founders pockets.
Token 1.0 was a great experiment. If you’re still around it means you got in early enough and managed to survive the correction with some reserves still in hand. So when you are done with the pity party you can write off the losses to school fees, pick yourself up , dust yourself off and take a long hard look at the next token you invest in!
Trade well my friends!