Imminent Firesale of ETH held by ICOs?

Crypto markets have taken a continuous beating since the beginning of the year. The whole crypto market lost 75% of its value and the current daily market volume is $11B, a measly 15% of the all-time-high daily volume back in January of this year, when it peaked at $72B.

The fluctuations of value in the crypto markets can have direct impact for treasuries of projects that raised millions in ICOs at the beginning and throughout the year, so our team had a deeper look into the data¹ and tried to find a few reasons for Ethereum’s performance and what it means going forward.

1. ETH is Not Under a Significant Sell Pressure from ICOs

Recent articles were giving an impression that ICOs are increasingly sellingtheir ETH. This was not confirmed by our research, which shows that 100k of sold ETH in the past month is just one-third of this year’s average monthly selling of ETH. We measured the average to be at 312k ETH per month.

Graph: 312k of ETH moved per month on average (Monthly data from 1st of September, 2017 to 22nd of August, 2018)

Not every ETH transfer from ICO wallets equates to selling, but 70% of transacted ETH is actually transferred to exchanges².

Graph: Net chart showing recent deposits to exchanges from ICOs from beginning of July, 2018.

2. ETH’s Price Decline Happening Primarily Due to Sentiment and Decreased Demand for ETH

ETH price decline is primarily sentiment driven, caused by a bearish crypto market, accompanied by a decrease in retail demand for ICOs. Ethereum hype has cooled off as investors started to become aware of the significance of scaling limits, and hundreds of projects that raised millions in ICOs which aren’t delivering on their promises. Additionally, utility tokens have become questionable from purely economic and regulatory reasons.

3. Listing of ETHUSD Perpetual Contract

Leading crypto analyst Tom Lee, Managing Partner of Fundstrat Global Advisors, said in a research note that the introduction of ether futures by the Bitmex exchange might explain the most recent decline of the second largest digital currency. Citing an analysis by Justin Saslaw of Raptor Capital Management, Lee said the ether decline, “is more due to the Bitmex futures/swap launch, and the impact of fundamentals on price is substantially less than perceived.”

BitMEX perpetual swap contracts are cash settled and enormously popular, offering up to 100x leverage. The past five launches of Bitmex swap/futures, including Bitcoin Cash, Cardano, EOS, and Tron, saw an average 30% decline in price in the following month. ETH Perpetual contract was listed on BitMEX on 2nd of August and since then ETH has lost more than 30%.

We don’t find the whole argument about futures listing very convincing as listing was always done in a bear market periods (see below), but it certainly adds to the sale side pressure.

Graph: ADA, EOS, TRX, and ETH performance after their BitMEX Perpetual contract/futures listing. Green line represents the Coinbase index which shows an on-going bear trend from 1st of January, 2018 to 16th of August, 2018.

4. Ethereum’s 7% Inflation is Not Meeting Expectations, Miners are Adding to Selling Pressure

Monetary inflation on blockchains is in large part converted into fiat as rewards are issued out. This dynamic is even stronger in bear market, where miners want to avoid FX risk and secure profits. Ether issuance is disinflationary, where current annual rate is around 7.2%, about two times that of Bitcoin. With implementation of PoS, rate will depend on amount of ether being staked and will decline annually. With Casper being postponed, expected inflation decline will not occur (block reward reduction from 3 to 0.6), while October fork going by the name of Constantinople could potentially lower block rewards from 3 to 2, if EIP-1234 gets approved.

5. Significant Amounts of ETH Still Held by ICO Projects

There is still a lot of ETH held by ICO projects. Our Santiment based data shows that 3% of total ether supply is still held by ICOs. This percentage is likely an order of magnitude higher, as we don’t have the data for 75% of Santiment listed projects, and there are projects missing from the Santiment database.

A very, very cautious guesstimate based on this year’s ICO data would be that there is currently around 10% of total ETH supply locked in projects that raised funds through an ICO this year alone.

6. Ether Price Likely at a Tipping Point for Treasuries of Many Projects

The current price of around $300 might present a tipping point for ETH. This year, ICOs raised money at an average weighted price of $670 per ETH, which means a lot of projects are under water, losing more than 50% of their treasury value — not considering fiat or other crypto hedging projects might have done³. We found out that the projects who raised up to $10M and haven’t been able to hedge their exposure are the riskiest in terms of potential firesale. They are the ones to panic sell on ETH’s downturn.

Among this year’s ICOs, there are at least 150 of them who currently have less than $3M of ether and might be good candidates for firesale in case they didn’t hedge properly. The total amount held by these projects amounts between $150M to $250M. The firesale of such amounts shouldn’t impact the market price by too much, if ETH demand doesn’t weaken and there is not a sudden rush on the ask side of the order book. Again, our estimates are done by assuming no hedging was done by these projects prior to ether slump and are most probably lower in reality.

Graph: Balances from 1st of January, 2018 to 20th August, 2018 of bigger and smaller projects that had an ICO last year.

Since the beginning of the year, “smaller” projects from our 2017 ICO sample sold 62.8% of the ETH they raised in 2017, while bigger projects sold only 18.7% of their 2017 ETH stack. This confirms obvious thesis that smaller projects are more aggressive when it comes to ETH liquidation.

7. Smaller Scale ICOs Might Perform a Firesale But Their Impact is Limited

Although there has been a lot of large ICOs this year (Telegram, EOS) which were able to attract private investors’ money, the public sales are cooling off. In Q2 2018, an increase in ICOs that raised below $5M was seen: there were 69 projects raising below $5M, almost 4-times as much as in Q1 — which had only 19 projects raising less than $5M⁴. The recent ETH slump resulted in 50% decrease of projects raising in Q2 which means there is more and more smaller projects that are undecided whether to hold to their ETH position or lock their treasury value by selling it.

The ether domino effect, a threat which would result in founders selling their ICO-raised ETH to save their treasuries and accelerate the price decrease, might materialize due to weaker ETH demand.

Although we saw some bounce in ETH sent to exchanges in the last week or two, and smaller ICOs present a higher risk for panic selling, their total ETH holdings are limited and shouldn’t impact ETH price significantly. As pointed out, the data clearly shows high ETH selling activity even prior to recent price decrease, particularly among smaller ICOs.

Our Opinion

We believe that the current sell-off is mostly sentiment driven and due to weaker ETH demand. ICOs are cooling off, consequently providing less demand for ETH, accompanied by Ethereum scepticism about dApps and blockchain use for certain services, utility token use and regulatory uncertainties. On a positive side, most of ETH held in wallets is still held by large ICOs which don’t expect to sell their holdings anytime soon, as they hedged during the year and have enough firepower to last them for a while.

We always advised our clients to diversify their crypto portfolio. Currently, we see less downside for Bitcoin, but at the same time Bitcoin has less upside than Ethereum if market reversal happens due to traditionally higher beta for Ethereum.

Since it is hard to time the bear market turning into a bull market, ETH positions should be kept, but we advise to limit it in regards to the above concerns. Our experience tells us that most of the ICOs are very Ethereum biased in their treasuries. We strongly advise clients to have enough fiat firepower to cover their costs for at least 12 months, and to actively manage their crypto part of portfolio, based on such market signals, while waiting for market reversal.

The research involved in this article was a team effort — Primoz Kordez, Saso Moskon, Tilen Drzan, and Marko Stemberger.

Information provided is not to be considered as an investment advice.


1 We used data from Santiment and Coindesk database and performed analysis using Ethereum blockchain. Santiment database of ETH held by projects has data for only 140 out of 618 projects. Furthermore, Santiment doesn’t include all ICOs. On the other hand, Coindesk includes majority of ICOs this year and their raised USD amounts, but doesn’t tell us what amount of ETH these projects raised, so we needed to make some assumptions which are very conservative: smaller projects raised mostly in ETH, whereas larger ones also raised in other currencies.

2 Not every transaction to an exchange represents a sale of ETH. Founders might use such transactions to hide ETH path — in such case there is more ETH held by them than figures show.

3 We don’t know how much projects hedged during the year and to what extent current ETH slump really impacts their treasuries. According to our estimation, a lot of ICOs have trouble converting larger crypto amounts to fiat and hence they were limited in terms of hedging possibilities. Additionally, founders were mostly still bullish on ether throughout the year according to our experience.

4 We looked only for ICOs from the beginning of this year. We estimate that last year’s ICOs have been able to hedge their treasuries due to a high increase in price towards the end of the year and do not posses an increased threat for a firesale.