Security Tokens Continue Unprecedented Climb!— July 2020 Review
Every month, the Security Token Market research team and I compile the security token trading and data analysis report. If you haven’t read the July 2020 report already, compare all asset prices, volumes, and more in detail here.
OSTKO & TZROP Are in a League of Their Own
The headline this month in the security token industry comes from the massive success of Overstock and tZERO. Following its tokenized airdrop to public shareholders in May, Overstock’s “Digital Voting Series A-1 Preferred Stock,” or better known by its security token ticker, $OSTKO, has seen massive gains in the following weeks since an initial May selloff.
According to data sourced from stomarket.com, $OSTKO opened trading on July 1 at $19.60 with an $85.6M market cap. The shares closed an explosive month at $57.50 increasing its market cap by 195% to over $251M by July close. $OSTKO is the first security token to cross a $100M market cap in 2020, and now has a market dominance of 64% at July close. $OSTKO’s strong performance shows that investors aren’t scared of security tokens as an investment vehicle, and the opportunity to capitalize on arbitrage opportunities on the tZERO ATS has translated into increased interest in the marketplace’s own token, $TZROP, as well.
tZERO’s token price rose 233.33% in July as investors have a renewed confidence in the platform’s ability to launch additional assets for trading. Unlike the $OSTKO token, $TZROP does not represent ownership in the tZERO marketplace. $TZROP token holders own the right to receive a dividend of up to 10% of the company’s gross quarterly revenue. In theory, as the platform sees increasing aggregate trading volume through additional listings, the firm will return more revenue, resulting in a higher dividend payout for investors. At this time, however, no known dividend has been issued to shareholders.
tZERO’s total listed market cap closed at $334.5M, creating $224M in total value across its two listed securities. On top of an ever-increasing market cap, tZERO also has seen record trading volumes this month, with $7.8M in $OSTKO and $TZROP shares transacted in July.
The OSTKO/OSTK Arbitrage Opportunity is Closing
$OSTKO’s initial selloff (hitting a low of $7.50 on May 22) has proven to be purely an overcorrection due to the initial airdrop. Many investors may have discounted the real book value of the $OSTKO token, which represents the same legal classification and liquidation preference as $OSTK public stock, yet the first week of public trading saw a significant selloff as institutional investors and late-adopters of security token technology sought to flee the asset, in favor of more traditional investment options. Traditional shares held strong in the initial period and begun to lead the way for both asset’s success in June.
The arbitrage opportunity between these two assets quickly became clear to investors and enthusiasts alike, and $OSTKO followed $OSTK’s ballooning valuation across June and July. The tokenized shares outperformed the public stock in each month (+39% and +38% in respective months), inching the tokenized shares closer and closer to the public share close price. Assuming that the additional risk associated with a security token offering is negligible, the price of these two assets should be nearly equal in the long run.
After two months outperforming $OSTK, the $OSTKO security token has continued that momentum into August, already up 30% in the first week of trading. One exciting question remains: how long will it take to see the $OSTKO token trading at a premium to the public stock?
Liquid Real Estate Assets Are the New Stalwarts
Hard assets like real estate traditionally have lower volatility than we see in the equity markets, but as we’re seeing in the tokenized market, real estate can still generate tremendous returns for investors. Featuring a daily-paid dividend returning an average IRR of 11% and an equity appreciation nearing a similar additional return, these assets have been in tremendous demand from investors around the world. Issuance platform RealT, who leads the industry with 9 secondary-trading real estate properties based in Detroit, has sold out 17 out of 19 total listed assets on their website.
9943 Marlowe Street, RealT’s first tokenized property, has now officially been trading on Uniswap Decentralized Exchange for a full year! In that time, the token realized a 7.95% equity return on top of the 12.34% dividend, totaling a 20.29% total return in the first 12 months. Incredible!
Many of the assets are trading at premiums from their initial listing prices, and an interesting figure that I explored was these asset’s trading volume to market cap ratio. In my research I was unable to find a predetermined name for this metric, so since we are relating an asset’s liquidity by standardizing its market cap, I am deciding to call it the Adjusted Liquidity Rate (ALR) for the purposes of this exposé.
In my calculations, the average tokenized real estate property had a 4.9% ALR, ranging from a low of 1.49% (Marlowe) up to a high of 9.13% (Patton). The median range was in the same as the average, right around 5%. What I found incredibly interesting is that $OSTKO and $TZROP were half that, at 2.33% and 2.38% ALR, respectively. These real estate assets have sold out with ease, with over $2 million in assets tokenized so far, and each successive token sale oversubscribing demand. With assets like $OSTKO, investors are split between the public stock or the security token, leading to much less ‘hype’ or core investor interest, and therefore, a lower ALR.
Despite the large volume posted by the tZERO platform since the launch of Overstock, we’re seeing a more dedicated and engaged market in the real estate sector. $OSTKO also pales in comparison to its public market alternative, $OSTK, which measured a 188% ALR in the month of July. The difference here is seemingly explained by two key factors — much more institutional capital in the public markets leads to much higher daily volumes certainly increases the pool of buyers, but on top of that, an active derivatives market can drive public market volumes, with short-sellers representing 12.8% of the outstanding $OSTK shares, greatly adding to the outbound volume of the asset.
Do Fund NAVs Align With their Trading Prices?
Two of three live-trading funds have posted their updated Q2 NAV values, with mixed feedback from the market. Both tokenized funds have differing asset types in their portfolios that can include crypto, cash, and other investment assets. The NAV represents the net assets of the fund — including but not limited to equities, crypto, and cash — which is then divided by the outstanding shares of the portfolio. This dollar value signals what the current present value of the portfolio is. From there, investors can determine if these valuations are fair, in which case the share price would match the NAV. In cases where investors feel the NAV does not properly represent a fund’s value, the token will trade above or below the NAV.
- $BCAP (Blockchain Capital) led the way in July, posting a Q2 NAV of $4.47, up 25% from Q1, signaling that companies in their portfolio have been successful — which we saw through higher-valuation financing rounds from Securitize and through acquisitions like Harbor. Other assets in the fund may have appreciated as well. Its share price quickly followed suit, jumping from $1.83 to $3.22 the same week as the Q2 NAV was covered on securities.io. However, this price swell did not last, with the most recent transaction closing the price at $2.89. However, the token’s largest volumes since February were posted on the rise to $3.22, with over $16k traded in that 24h period, compared to the $2k selloff that brought the price back down to Earth.
- $PRTS (Protos Asset Management) posts monthly NAV reports on its website and the most updated figure (June 30th) is $0.27. Following its May 31st NAV report of $0.29, the token saw a selloff from its price of $0.46 to match the $0.29 price. Since declining by two cents in the most recent report, $PRTS hasn’t seen any trading volume.
- $SPiCE posted its Q1 NAV, and according to their website, the $1.32 value has not changed from Q4 2019. Compared to its share price on OFN of $0.96, the market seems to have determined that the company’s NAV is overvalued respective to the present value of the shares. The market may disagree because of a lack of faith in the $SPiCE liquidity, which is a valid concern, considering the token has gone weeks without trading activity. Many other factors are important to consider when determining the cause for price change as well.
All three funds have done a good job of providing information transparency. While some are more active than others, it seems that of all tokens, the funds are providing the most up-to-date transparency on the underlying value of their assets, and publicly disclosing these audited financial statements is a tremendous way to build legitimacy and liquidity for a burgeoning asset class with relatively obscure assets. Investors require research and credible, primary sources to discern investment opportunities, and it is the responsibility of the issuer to provide this information.
Thank you for reading my July 2020 Market Report Review!
Want to get in touch with me? Questions? Comments? You can drop me a line at kyle@stomarket.com, Twitter @kylesonlin, or LinkedIn @kylesonlin. Talk to you next month!
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