It has been another eventful week in the crypto highlighting important implications for token holders. Exchanges have begun delisting the asset Bitcoin SV (BSV) seemingly as a response to Craig Wright’s recent aggressive assertions about his identity as the pseudonymous creator of Bitcoin, Satoshi Nakamoto. This has some interesting implications for token holders and once again highlights the unique differences between cryptocurrency and normal markets. Let’s dig in to the situation and what you can do to mitigate any fallout this might cause to your portfolio:
Who is Craig Wright?
Craig Wright is an Australian computer scientist whose name has been floated around for about the past three years as one of the potential people behind Satoshi Nakamoto. There is currently no strong evidence that Wright is Satoshi and he has become increasingly unpopular in the cryptocurrency ecosystem.
How was Bitcoin SV created?
In November 2018, the Bitcoin Cash (BCH) community went through a hard fork due to philosophical differences within the community, primarily around the issue of block sizes. The resulting hard fork created two new cryptocurrencies: Bitcoin Cash ABC and Bitcoin Cash SV. BCABC was represented by Roger Ver and BCSV was helmed by Craig Wright, each with mining partners backing them up.
Exchanges that previously listed BCH generally responded to this event by halting BCH trading in the lead up to the hard fork and watched the hash rates of the two new coins to see what would happen. Most exchanges ended up listing both assets eventually, although there were discrepancies in naming conventions. Some exchanges decided that Roger Ver’s fork, BCABC was the “winning” fork and kept it with the original Bitcoin Cash ticker.
How stocks are listed in the normal world
In the United States when a company wants to list their stock on a public market they must go through an Initial Public Offering (IPO). This is a highly onerous process where a company discloses an enormous amount of information, particularly financial information, while also sharing information on their intended vision and business model. It is a months and sometimes years long process that tends to cost companies hundreds of thousands of dollars in accounting, legal and marketing fees. The company must select an underwriter to advocate for them to get listed on various exchanges. While the market is generally limited to initial IPO investors, the idea is that the stock will become available to run of the mill retail investors in a short period of time.
Current listing processes for cryptocurrencies to exchanges
While it’s obvious that listing cryptocurrencies on exchanges is not necessarily a one-to-one comparison to company IPOs, it is fairly close. Like many things in the public blockchain environment, there is no one standard for listing cryptocurrencies on exchanges. It is up to each exchange to make the determination individually. After a wave of community discontent over cryptocurrency exchanges charging projects exorbitant listing fees (although this is similar to the process for companies who IPO on the major stock exchanges), many exchanges made their listing prices public or did away with them all together. Let’s compare the high level public listing criteria from some of the most prominent exchanges.
What is most notable about these exchanges and their listing rules is that they have incorporated more community oriented benchmarks, something that the IPO process doesn’t contemplate. While these are just high level values that each exchange has decided to compare token listing applications against, it is unclear how each exchange will go about actually measuring these criteria.
Current delisting process
On the flip side, exchanges have not been as public about their criteria for delisting cryptocurrencies. In traditional equities markets, exchanges will generally only delist stocks if their trading falls below a certain price for a sustained period of time.
If we compare this to the BSV delisting example, it seems that it was precipitated by some particularly antisocial behavior by its leader in social media. Wright put out a bounty to find out the person behind the popular twitter account Hodlonaut. He then threatened a lawsuit against Hodlonaut and another popular Bitcoin thought leader, Peter McCormick for defamation as they have accused him of lying about being Satoshi Nakamoto and generally being a fraud.
These lawsuits precipitated a strong community response against Wright. Binance CEO, Changpeng Zhao, retweeted an activist tweet from Bitcoin Magazine with a startling message (image below).
The CEO of Binance was threatening to delist an asset unless its leader withdraws lawsuits that are not associated with his company. If this was an equity market in the United States, Zhao would have received a cease and desist letter with accusations of market manipulation, similar to what’s happened recently to Elon Musk.
Following this threat, Binance announced they would be formally delisting this asset from their exchange. Shapeshift’s leader, Eric Voorhees, also indicated on Twitter that his exchange would follow suit and delist BSV. Kraken, after conducting a Twitter poll to their users, announced in their blog and on Twitter that they are delisting BSV as well.
Implications of delisting on the asset
It’s clear that BSV is losing the cryptocurrency popularity test. That is also translating to their asset price. The price of BSV has tanked from $80.07 the day before Zhao’s tweet to $59.29 on April 15th (according to the closing prices on www.coinmarketcap.com). That’s a decrease of about 20% compared with a Bitcoin decrease of 5% for comparison. So the delisting of BSV has resulted in a decrease in the asset price. We can also assume that because there are fewer exchanges to trade on, the liquidity of BSV will decrease as well. It is possible that BSV trading volumes will pick up on exchanges that are still listing BSV, but because of the size of the exchanges that have delisted it, it will be hard for it to maintain its liquidity. The natural next question is, what makes BSV valuable at all? The delisting of assets like BSV add to a crisis of legitimacy around the underlying technology.
What to do if one of the assets you hold is delisted
There are some logistical issues that are associated with the delisting of cryptocurrencies from exchanges. The exchanges that are delisting BSV are supporting withdrawals for a certain period of time so if that is where you are storing this asset, you’ll need to move it off. If you want to transact with the asset in the future you’ll need to make sure that you have an account on an exchange that supports it, go through an OTC desk, or direct trade with a trusted party who has an interest in buying/selling it.
It is possible to continue to mark the value of BSV according to the markets that still trade it. However, if the wave of exchanges that are delisting it grows to be tidal, we are faced with the question of how do you value an illiquid asset? This is a question that is relevant across tons of altcoins whose markets have dried up. Meltem Demirors and Jill Carlson put out a really helpful article and podcast episode defining the metrics by which normal markets and assets are valued and how we might think about applying those concepts to crypto markets and assets.
To echo one of the points made in their discussion, when the liquidity disappears from a market, the holder of the asset must mark it down. If these assets continue to be valued against Bitcoin (the asset by which most other cryptocurrencies are price correlated), it is not giving an asset the true picture of the portfolio. There is some precedent for this in traditional markets from the Basel banking regulations that might potentially be appropriate. The moral of the story is that as crypto holders, and especially crypto funds, we need to be accurately reflecting the value of our portfolios and not using the excuse of absence of guidance as a crutch to prop up the assets under management metric.
Cryptocurrency markets and exchanges are extremely young compared to institutions like the NASDAQ and NYSE. The standards that are emerging for listing cryptocurrencies on exchanges continue to be murky and are not uniform across the industry. However, the community and “social good” have emerged as values that prominent exchanges are taking into account when evaluating tokens. It also appears to be a metric in the delisting process.
The fall from grace of BSV over the past week has been directly correlated with increased societal disgust against its leader. These developments have also played out largely on Twitter, rather than in reporting disclosures as with traditional markets. From the U.S. regulatory perspective, although cryptocurrency markets are immature, they are still classified as assets so their holders must treat them as such. But it begs the question, why did these exchanges list this asset in the first place?
The BSV delisting is a precedent setting action. It is something that token project leaders must keep in mind as they build their brands and products in the absence of a formal rule set. BSV is also only one example of an asset delisting. Binance had already delisted at least five other assets this year for various reasons.
After the enormous flurry of ICO activity in 2017, it makes sense that as the market has matured we would see some natural attrition of projects coming off of trading markets. We will likely see more in the future as well. Individual traders and institutions would do well to ensure that the value of their portfolio accurately reflects the value of their assets, even in the absence of clear guidance.
Thanks to Adeola Ogunwole for her contributions to this article.