A (Somewhat) Surprising ICO Study and the Authoritative Wall of Bitcoin Death; Distributed Counsel 14



You see this a lot on Twitter.  It stands for Do Your Own Research. It turns out this is not so valuable in evaluating ICOs, at least by itself.  Instead, maybe you should just go on Twitter and see how many mentions the coin gets.  I’ll explain.  

A study performed by researchers from Columbia Business School, London Business School and the University of Utah is receiving mainstream media attention for the unremarkable proposition that “better” disclosures in ICO offering materials (like white papers, Github commits, etc.) lead to less likelihood of a total collapse in price and a greater likelihood of a “successful” raise.  This by itself is totally unremarkable and a lot of these terms are very qualitative, but the work has some surprising little nuggets in it.

The study was pretty robust: 750 ICOs from April 2014 to May 2018. It found that certain disclosures (in particular the identities of managers and technical disclosures on GitHub) were positively associated with successful raises.  Moreover, social-media activity was a really important factor, which to quote the paper “suggests that hype and investor attention play a significant role.”  Conversely, issuances with opaque disclosures were more likely to ultimately crash.  The quality of the disclosures was measured partially by using third party information intermediaries, and the study’s authors surmised that these intermediaries were a natural reaction to the absence of regulatory authority.  But the really surprising stuff was in the details:

  • Offering participation incentives (like bounties or early-bird pricing) was “positively associated with extremely negative returns.”  So the next time you see escalating pricing, think pump and dump.
  • Prohibiting US investors was strongly associated with raising more capital.  Everyone it appears is scared of the SEC.
  • Longer vesting period restrictions are positively related to the amount of capital raised.  No surprise there.
  • The most critical factors overall were providing informative disclosures in the form of whitepapers and social media presence.  The more buzz, the better the raise.
  • Ethereum was the overwhelming choice as a token offering platform (70% of issuers).
  • Getting in early paid: “A $1 investment in the aggregate (value-weighted) crypto-tokens market index in August 2014 would have increased in value to $4,621 by May 15, 2018.”  Damn.
  • But most of these coins are still losers: the median return is negative 30% but the mean return is positive 39%. The authors surmise that “the large dispersion in post-ICO returns points to the influence of outsized returns from a few successful ICOs skewing the aggregate market statistics.”  So a few home runs save the sector.

Ultimately, much of this is intuitive.  Know the managers, read the whitepaper and make sure it makes sense, look for vesting schedules, etc.  Some of it is kinda sad, like the role of social media as critical to a successful raise. Every time I think about this, I think McAfee, and that’s not good.  The $1–>$4621 is truly shocking. And I don’t think anyone is surprised to learn that Ethereum’s first killer app is the ICO. The full report is worth a read.  

Replacing the Money Supply

Bitcoin needs to hit about $213,000 to replace the current money supply in the United States.  This is more of a curiosity than anything else but think about this fact for a second: at one point in December, we were almost a tenth of the way there at about $20k.  And if Mike Novogratz was in charge, we would already be well past this number.

EU Unmasking of Bitcoin

It looks like Europe’s new anti-money laundering regulations, colloquially referred to as “5AMLD,” will take account (sorry not sorry about the paywall) of cryptocurrencies, in particular by requiring that wallets observe KYC and AML regulations.  Here again we see regulators attacking a problem (Bitcoin’s pseudoanonymity) through regulation one layer away.  A good modern example of this is internet poker in the U.S. Regulators couldn’t shut down all the internet poker sites (although Full Tilt bit the dust pretty hard), so they attacked indirectly by regulating the onramp (credit card processors and banks).  It is hard to get your hands on a software operator in Antigua, but Visa and Chase have a lot to lose.

Same idea here.  Nobody controls the Bitcoin blockchain (which is the whole point), so there is no sense in attacking the protocol directly.  Go after the onramps instead. Regulators are understanding the technology and getting smarter. This is not a bad thing.

Bitcoin Mining is Not Profitable

If you are a miner, right now the news is not good.  This post is pretty ugly all the way around, and this quote says it all: “Unfortunately, Bitcoin went into a downward trend around January. This trend combined with the heavily rising difficulty around April and May reduced mining outputs even further. As a result, some user contracts are now mining less than the daily maintenance fee requires to be covered, and thus they entered the 60 days grace period, after which open-ended contracts will get terminated.”  

Difficulty means hashrate.  Hashrate means electricity (and hardware depreciation), both of which cost money.  Hashrate and difficulty are much less volatile than actual price, which causes these dislocations.  They were beautiful things for a while (when running one S9 for a year was worth $2,000), but now we see the other side of the coin (see what I did there).  Genesis, for its part, is terminating unprofitable contracts and forcing upgrades.  My advice remains the same: you either believe in this concept long term or you do not. Both positions have merit.

This Week in the Death of Bitcoin

This short-lived segment is retiring.  Ladies and gentlemen, I give you the Authoritative Wall of Death. I can do no better.  As always, thank for reading.


Christian The Non-Giver of Legal or Investment Advice


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