ICOs: Two birds One stone

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The digitization of financial services means that we are at the very early stages of tackling two significant social impact topics (Jason Bates says “Digital Banking is only 1% done”):

Financial inclusion – mainly in the “Rest”

Tokenization of the economy – on a global basis

Since the tokenization of our economies is really nascent, we are at risk of thinking of different aspects when we hear the term. We are even at risk of dismissal altogether of this emerging reality, from those that see this as fraud, exuberance, a fad. Jamie Dimon, a Greek immigrant that made it on the billionaire list, being one of them. Others, look at the thousands of tokens that have been issued (over 6,000 and growing as we speak) and the ever-increasing ICO rounds (over $250mil lately) and are naturally, worried about this young market.

There is room for all these concerns but the market will grow and advance with or without our opinions, thoughts, and concerns. The reality (including stumbles and crashes) will be exactly as Richard Olsen, co-founder and CEO of Lykke describes it and as David Siegel, CEO of 20|30 and the Pillar Project, quotes in the opening of his in-progress e-book The Token Handbook:

There won’t be millions of tokens. There will be millions of kinds of tokens. Richard Olsen

Today we are mostly focused on the thousands of fundraising tokens with a just a few functionalities, like tokens that represent ownership, or some rights, or rewards, or incentives.

Tokens are not only alternative fundraising (crowdfunding) weapons that make VCs stay up at night because of fear of extinction; as some like to believe.

Tokens will enable network effects and the creation of ecosystems, we cant imagine with the current business processes. These are the “other kind” of tokens that Richard Olsen is referring to, I believe. So, stay tuned.

The Zurich ICO summit organized by Smart Valor

For now, we mostly see crowdfunding kind of tokens and most of them can’t answer the question “Why this token?” without admitting that it is a quick, techie way to crowdfund and “acquire users” or it is an existing app that is tokenizing its self. Actually, in many cases, ICOs look more like Initial User Acquisition Events – IUAs. In some cases, like Civic which already had an app, the ICO was a cheaper way to KYC and onboard users and at the same time finance their growth (Civic can answer clearly the Why question).

What is important to keep in mind is that the technology of ERC20 tokens that has clearly facilitated the explosion of ICOs, isn’t going to help in building a community (be it developers or users) and therefore, there is no magic way in building “Network effects”.

A token sale can be a financing tool and a user acquisition tool! But it is not panacea for network effects.

Smart Valor, founded by Olga Feldmeier (ex-Xapo), organized the first ICO summit in Zurich with an amazing lineup of speakers from around the world. I was able to watch part of the conference which was streamed live. From the opening speech of William Mougayar and then some of the topics and angles during a few panel sessions.

Smart Valor is a blockchain venture that is focused on the tokenization of all kinds of alternative investments (real estate, funds, private equity etc.) on a decentralized platform that can make them accessible to Emerging markets. In other words, private banking kind of financial services for EM. You can hear more about the value proposition in this interview.

William Mougayar, the keynote speaker, reminded us that June 2017 was the first month that ICO funding ($600) surpassed the total seed-angel fundraising ($500mil). He shared his insight that on Sep 1. the market cap of cryptos was around $172billion and the amount from ICO crowdfunding was $1.7bil. This shows that ICOs were 1% of the total market cap. So clearly, there was simply a shift (diversification maybe) of 1% from cryptos into ICOs.

He reminded us that Ethereum ICO’d in the summer of 2014 and Ether started trading only one year later (summer 2015) when the network went live. Will this be one aspect of the self-regulatory standards that ICOs adopt going forward?

Here is my collection of self-regulatory standards to be considered. A few inspired from the panel discussions and a few additions of my own.

  • No more white papers, unless they are exceptional highly computational academic breakthroughs
  • No more token trading before the protocol or the app is live
  • More Smart tokens that release funds as milestones are achieved
  • Allocation of tokens with the whitelist technique (i.e. KYC users-signup and guarantee a minimum token allocation) so that communities are built and whales don’t dominate.
  • Avoid Slack and Telegram for pre-ICO community building because they are vulnerable to phishing (Chainalaysis reports $250mil have been hacked to date).
  • Ventures that can answer the “Why the token?” question with a vengeance, join the IGF.

Miko Matsamura from Pantera Capital (a San Fran. $100M ICO-only fund) highlighted a new self-regulatory effort the ICO Governance Foundation (IGF) which is an international organization and Swiss Foundation whose mission is to protect global ICO investors and facilitate capital formation for ICOs. It aims to create something like S-1 filling for ICOs. The Crypto Valley Association (CVA) also issued recently a code of conduct around ICOs.

Panel participants here. Source of original image

Efi Pylarinou is a Fintech thought-leader, consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Shapes and colors of the booming US crypto hedge fund space

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At the end of March, I covered Polychain Capital which caught my attention since Andreessen Horowitz and Union Square Ventures funded them with $10million. In Polychain Capital: A hedge fund investing at the Protocol layer of Web 3.0, I started with the motto: “Today is the slowest day of the rest of our lives”, and just 4 months later Polychain Capital is proof of accelerated growth. They have already accumulated already $200mil in assets under management.

Over the past year, despite the stricter regulatory pre-positioning towards the crypto world (digital “currencies” or “assets” and tokens) in the US, the growth of dedicated hedge funds aiming to capture the boom is stunning. In early July Forbes reported Crypto Boom: 15 New Hedge Funds Want In On 84,000% Returns

“43 projects raised $1.2 billion in initial coin offerings since May 1, according to Nick Tomaino’s The Control, and with stratospheric returns for so many ICOs — 82,000% for Ethereum, 56,000% for IOTA, 44,000% for Stratis, 21,000% for Spectrecoin” excerpt from Forbes.

There is clearly a summer boom in investment vehicles that are only suitable for accredited investors in the US and are deployed a variety of strategies to gain exposure in the booming space.

“From July 1, 2016, the value of bitcoin rallied from $680 inch-close to the $3,000 mark in mid-June and is now trading around the $2,650 mark. This impressive 12-month rally caught the attention of institutional investors who want their piece of the pie in this new high-performing asset class.” excerpt from “How Big Money Investors Will Boost the Price of Bitcoin

There are some investment vehciles taking the buy-and-hold Buffet style approach, that end up in retirement accounts. There are others that are closer to the approach of futures and commodities trading, and could end up in the “alternative” allocation of HNW portfolios, since the 90s alternatives can’t promise anything close to the spectacular returns of the crypto asset class.

There is a mesh of digital currencies of sorts of capitalizations and of tokens of all kinds (utility, or equity or hybrid). And more recently, there are investment companies that are issuing or plan to issue their own token (ICO) that gives exposure and liquidity to various of their fund vehicles.

This is my categorization of the US crypto hedge fund space right now. If I have missed any hedge fund and if the strategy changes in the future, please let us know in the commentary below.

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US crypto hedge fund space – more details

Mestable Capital was founded by Lucas Ryan, Josh Seims and Naval Ravikant, the chief executive officer and cofounder of Angel List, in late 2014 and has $45 million in assets under management.

Crypto Assets Fund (CAF) invests in bitcoinetherzcash, ripple, litecoin and dash. It is the first fund focused on Latin American family offices and is co-founded by former senior manager at Bain, Roberto Ponce Romay. The first tranche has raised $10mil and aims to grow to $50m.

The BKCM Digital Asset Fund is an investment fund for institutional clients that so far has invested in bitcoin, ethereum, litecoin, ripple and Zcash, among others. It strategy is hybrid: Buy-and-hold for about 50% of the tokens, ICOs for 20% and actively managed for the remaining. Investments consist of foundational protocol tokens such as Bitcoin and Ethereum, currencies such as Litecoin, XRP, Zcash and Stellar, plus tokens such as Golem Network Tokens (GNT), Augur’s REP and Siacoin.

Alphabit is a Cayman Islands-based fund with $13 million AUM aiming to raise $300 million and also offer an ICO. Its uses a mix of manual trading, algorithmic trading, and ICO investing. It has so far invested in Ethereum, Ark, Ethereum Classic and PeerCoin, as well as ICOs MetalPay, Blocktix, Matchpool, Aeternity, and Skycoin.

Blockchain Capital is a unique case because it is the first VC that in 2013 started investing on blockchain companies, like Bitnet (sold to Rakuten) and Coinsetter (sold to Kraken). This spring, they raised a third round ($50mil) to invest not only in blockchain startups but also tokens. Then they tokenized $10 mil of this fund, selling BCAP tokens to the public (but only accredited investors in the U.S.).

Auryn Capital will launch this month with a $12.5 million. It will be the holding company for a crypto hedge fund that is actively managed with a mix of technical and fundamental strategies. It will also launch a decentralized exchange, and ICO incubator, and token called Karma (to launch this September).

SuperBloom launched in July with both a $10 million hedge/venture fund as well as an accelerator/investment bank. SuperBloom plans to hold a $30 million pre-ICO crowdsale for the Seed token this month for both accredited and non-accredited investors to fund its accelerator companies. Seed holders can exchange the token for an individual company’s pre-sale token for a 20% discount.

The BlockTower Capital fund, will also launch this month with about $50 million, and uses a mix of strategies: Event trading; new coin listings; “activist” investing in smaller cryptocurrencies and helping them gain traction with developers and on exchanges; and invest in themes such as decentralized file storage.

Coinshares 1 LP is the 2nd fund that Masters’ Global Advisors launched in June with $5 mil. In AUM. It is a Jersey-based fund investing in protocol tokens like Ether, Tezos and EOS. Its first company investment will be in decentralized ticketing platform, Aventus.

Pollinate Capital is a new hedge fund with more than $100mil committed for actively trading digital assets with strategies similar to Long/Short quantitative trading of futures and commodities trading.

Pantera Capital is launching a new hedge fund, Pantera ICO fund, focused on investments solely in tokens that power public blockchain protocols. Pantera was the first US Bitcoin investment firm in 2013.

The founders of Koalah, a mobile app in which players can bet on the outcome of games using bitcoin, launched in July Grasshopper Capital an actively managed cryptofund with $25mil. They are using a mix of fundamentals, event-driven arbitrage trading and algorithmic trading. The fund has so far invested in Ether, Civic, Bitcoin, Singles and Storj.

Efi Pylarinou is a Fintech thought-leader, strategic consultant and investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.