Have your coins turned into shitcoins?
Nearly two years have passed since the ICO craze, most of the tokens launched in 2017–2018 have actually died or become zombies. Some of you may have cut loss. Some of you may still hodl. If you are the latter, this article is exactly for you.
We hope this article will answer some of your lingering questions and nudge you to take action one way or another. The overarching questions that we hope to shed light on are: Who’s hodling the top ERC-20 tokens? Which coins have turned into shitcoins? Which tokens are worth hodling?
Note that we should take answers to these questions with a huge grain of salt since most on-chain metrics can be gamed.
Before we start, here’s a little background on how we picked which tokens to analyze. We look at the top 50 ERC-20 tokens by market cap and strip out tokens that are not traded on popular exchanges, stablecoins, and DEX tokens. This leaves us with a sample size of 36 tokens (detail in the spreadsheet at the end). Let’s begin!
1. Who’s hodling these tokens?
Among the 36 tokens, we look at two key metrics: 1) how many tokens are held by exchanges and 2) how concentrated the token holder composition is. First, the ratio of tokens held by exchange signals if the tokens are held for protocol or dapp usage or for speculative trading. If more tokens are held by exchanges, we believe we will observe higher velocity (as a result of speculative trading) and the less valuable the token will be. Secondly, we look at the ratio of tokens held by whales vs retail holders to assess if the tokens holder composition supports the token to create and capture network effects. (also note that Whale may split their tokens across multiple wallets)
How many tokens are held by exchanges?
The higher the ratio of tokens held by exchanges, the higher possibility that the tokens will be held for speculative trading. Tokens held on exchanges are mostly used for speculative trading, market maker, or retail investors who don’t control their own private key. Let’s not forget market makers who profit from buying and selling tokens. Therefore, the higher the ratio of tokens held by exchanges, the more susceptible the tokens are to trading, market making, and — possibly — wash trading. All of which can lead to artificial prices. On the other hand, the more the tokens are held for usage, the lower the velocity and the higher the value of the token.
From our 36 sample size, about 30% of token supply is held in exchanges’ cold wallets. IOST, QuarkChan, Odem, Aelf, and Gifto have an alarming level of tokens held by exchanges. DigixDAO, Bancor, Augur, BAT, OmiseGo, and Aragon have a relatively low level of tokens held by exchanges. Note that these are also projects that are founded earlier in the cycle when there is less speculation (with the exception of Bancor and OmiseGo to some extent)
How concentrated is the token holder composition?
We look at how concentrated the token holder composition is by looking at the ratio of tokens held by whales vs retail holders. Since the value of a protocol comes from the network effects it creates, tokens will have a hard time creating value if they are held by a limited number of people. Here, we assume that wallets with tokens >=1% of total supply are whales (note that this group includes the team wallets and also individual whale wallets).
Not surprising, we do see some degree of centralization with a median of 43% of token supply being held by the team and whales. Centralization can lead to the same problem as above: tokens are held by a group of people who might not use the tokens to build, use, or create value.
Next, we want to see what’s the optimal ratio for the team and whales in combined. Taking IPO as a starting point, research shows that founders typically hold 15% of the company. If we add 10% on top of this for employee stock option pool and another 10% for whales (or early investors), we can assume that an optimal point should be around 35%, a point that allows the team to have enough budget to build the protocol while does not hurt token network effects.
We found QuarkChain (91%), QASH (82%), Polymath (74%), Crypto.com (65%), and Chainlink (64%) to have a very concentrated ratio of tokens held by the teams and whales. Meanwhile, HOLO (24%), Aelf (25%), our good-old OmiseGo (29%), Golem (33%) and BAT (35%) have quite a decentralized holder base.
While many of these, if not all, metrics can be gamed, we think you can be aware and perhaps be cautious on the tokens that have a high ratio of exchange and whale holdings.
2. Have your coins turned into shitcoins?
What do we mean by that? We believe that a healthy token project should adhere to two key criteria: 1) the team has not sold a large portion of their tokens since the token launch and 2) large whales (likely those crypto funds) have not sold the tokens either.
Let’s dig a little deeper into who’s holding the tokens. Within the >=1% criteria in the previous section, the wallets can be divided into team vs whale wallets. We looked at projects’ ICO wallets and found those team wallets usually hold >=10% of token supply. Therefore, we make an additional assumption that wallets with tokens >=10% of total supply are team wallets and those with 1–9% of total supply is whale wallets. From this, we can flag if teams and whales have sold off the tokens.
Has the team sold off?
If the teams have sold off, it can signal that they no longer believe in their projects and may now be retired on the beach of Mexico. Do note that this is a very rough finding as there are many reasons why team wallet may be reduced, for example, the team might split their holdings into many wallets; the team might transfer the tokens to multiple team members’ wallets; the team might have done a big airdrop (for example, OMG did an airdrop worth as much as 5% of token supply). Our assumption can be strengthened if the tokens are transferred from team wallets to exchange wallets. We can do this by marking the tokens held by the team and plot if the tokens make their ways to the exchanges, but we’ll leave this in-depth analysis for some other time.
Guess what? Some of the projects we love also had massive liquidation! We found that Gifto, Kyber Network, Bancor, OmiseGo, and PundiX have a large reduction in the number of tokens held by the team from the day of the token launch vs the end of 2018. On the other hand, QuarkChain, Populous, Power Ledger, Odem, and Aragon had an increase in the number of tokens held by the team.
Have whales sold off?
Since it’s hard to definitely conclude whether the team has sold off or not, we also look at the change in whale holding (wallets with >=1–9% of token supply) for a more complete picture. Take this set of data with a grain of salt because many tokens still have lock-ups which means investors can’t sell even though they want to.
We think 1–9% is a range that can capture a majority of crypto funds and high net worth holders. If you think of it, a crypto fund typically ranges from 20–100+ million in asset under management. If they hold 1% of (let’s say) Gifto which has 1 billion token supply, that’s 10 million tokens. Say the price per token is 0.28 (price at launch), that’s 2.8 million in investment amount, 14% of a 20 million fund and 2.8% of a 100 million fund. To us, it makes more sense for funds to take a smaller position (a holding of a single-digit % of token supply) per one ICO project.
We found a decrease in whale holdings for BAT, Enigma, Chainlink, Power Ledger, and Loom. On the other hand, we found a material increase for Bancor, Gifto, Aeternity, Ziliqa, Aelf, and Augur. We were a bit confused with some of the result. Gifto and Bancor, for example, increase here while their team holdings decrease. We think they might just allocate tokens from one team wallet to team wallets or from one to multiple reserves.
With data on the change in the teams’ holding being quite tricky to draw any conclusions from, we put higher weight into the change in whales’ holding. Aeternity, Ziliqa, Aelf, and Augur are faring well on both metrics. However, Bancor, Gifto and Power Ledger shows a conflicting result.
3. What are the tokens worth hodling?
Based on all the metrics above, we can summarize that the tokens worth hodling are those that fulfill the following characteristics:
- Have a low ratio of exchange holding (ideally less than 30% of total supply)
- Does not have a concentrated token holder composition (ideally less than 35% of total supply)
- Has not been materially sold off by the team (ideally decrease less than 15%)
- Has not been materially sold off by the whales (ideally increase more than 20%)
Ziliqa, OmiseGo, Augur, Aeternity, Golem, Aragon, and Aelf match our ideal criteria. However, we’d be cautious on tokens that fail key criteria, particularly tokens that have been sold off by whales. We recommend you to closely monitor IOST, Odem, WAX, Decentraland, Qash, Power Ledger, QuarkChain, Civic, and Gifto.
The most important thing to emphasize is that these metrics have many caveats and require cross-checking with news related to token activities. This serves only as a benchmark for further analysis and is meant only to complement other information, such as protocol activities, before you make the sell (or shall I say, cut loss) decision.
Data can be found in this spreadsheet.
Subscribe to CoinHatcher weekly newsletter for research pieces like this. And, please give some claps if you find this useful!
