2017 was a landmark year for crowdfunding. The JOBS Act passage coincided with blockchain, opened the door for a record in capital raised through ICOs (initial coin offerings) for early stage companies as well as Wantrepreneurs with an idea and a whitepaper. ICOs were launched with fervor and ease.
The ERC-20 protocol made it extremely simple for anyone to create a token and launch on the Ethereum chain. It basically did for tokens what Wix did for personal websites. It also didn’t hurt that during 2017, ETH went from $8 to $800, turning anyone who owned ETH at the time into an Angel Investor, parlaying their gains into new projects with hopes of 100x returns.
Many of these new companies did not have great plans on how to execute their ideas with their new capital, and most assumed they had five years of runway to figure it out. What was worse than operational execution was their treasury management.
Treasury management is a foreign concept to many people, both with and without real business experience. This is where you manage your liquid capital assets (money) to:
A) insure that it is appropriately denominated in the currencies of your short term liability exposure, and
B) place capital earmarked for longer term liabilities in safe investments that might earn you a modest return or beat the rate of inflation.
To explain more simply, assume you receive US$1 mm to operate your business for 1 year, but you have hired developers in Europe, sales people in the UK, and have an office in the US. You might convert enough of your US Dollars to Euros and GBPs to cover one year of costs that you have to pay out in those currencies.
Why? Because currencies can drastically fluctuate against one another, and you want to make sure that you can pay your bills in the currency they are owed in. If you don’t believe me, Google “Turkish Lira”, “Thai Baht”, or “Swiss Franc.”
Proper investment of longer term capital is also extremely important due to inflation. In Western economies, inflation rises at a modest 2-3% a year on average, but some goods and services may increase in price more than 3% annually. If you were holding an additional $1mm for runway in year 2, but when year 2 came around, you realized that developer salaries went up by 10%, you no longer have enough runway for year 2 because on an inflation-adjusted basis, you only have $900k for developers.
A typical ICO that raised capital in 2017 may have raised $30 million worth of ETH. They employed a treasury management strategy of holding on to ETH because, well, ETH always goes straight up in price, as was their prior experience. They would only sell their ETH for Fiat when they needed to, and at the last minute, just in case they missed a 5% move upwards in that extra 24 hours.
Today, the $30 million in ETH raised at the end of 2017 is likely worth $10 million, which is not enough to finish their project. The developers working on the project, who were happy before accepting the company’s token for payment, no longer will accept it, and want fiat for payment.
Why? Because their side investments in crypto have lost money all year and their current project’s token is not liquid. With less money, and a need to pay people (including themselves), a company’s runway has gone from 5 years to 6 months. This, of course, causes panic selling in ETH, pushing the price back below $300.
For companies that are utilizing treasury management, they have been talked into investing in crypto fund of funds charging 1 and 10, that spread their investments across many crypto hedge funds, for “diversification”. This is not good treasury management. This is taking your current risk, layering on alpha (which is more risk), and paying two sets of fees (the hedge funds are also charging 2 and 20 on top of the 1 and 10) for the privilege of increasing your risk. In 2018, these funds have lost money faster than if you had just held ETH.
We expect continued pressure on ETH as ICOs panic sell to pay their bills. Many ERC-20 projects will fail, which is expected as the failure rate for a startup is 90%. However, poor treasury management could push the failure rate much higher.
- The XRP/XLM battle rages on, with XRP falling 30% and XLM falling 9.5%. Ripple and Stellar have been classified as competitors ever since Jed McCaleb left Ripple to found Stellar in 2013/2014. While they tackle different sectors of banking (transaction fees vs. remittance network), they are always brought up in tandem for comparison. While XRP has been the dominant project thus far, it seems to be losing significant steam to XLM. (Disclosure: We own XLM, We do not own XRP)
- Ethereum Classic was listed on Coinbase and Coinbase Mobile yesterday. This will be the 5th cryptocurrency added to actual Coinbase. It should be noted that ETC has been trading on Coinbase Pro (formerly GDAX) with BTC/USD/EUR pairs since August 7th. ETC is the only large cap ($1 billion+) cryptocurrency trading down since it was listed, lower by 4.5% against BTC. Buy the rumor, sell the news.
- Bitcoin clearing more transaction volume than global gold markets since 2017. On pace for $1.1 trillion in 2018 tx volume – Gold on pace for 0.4 trillion. What does this mean? Nothing really. BTC is easily tradable, Gold is not. Gold still has an edge over BTC in a global apocalypse. (Disclosure: We own BTC, we do not own Gold)
Steven McClurg is a founding partner and CIO at Arca Funds, an asset management firm that creates and manages institutional and retail investment products investing in and utilizing blockchain technology. Prior to Arca Funds, Mr. McClurg was a Managing Director and Portfolio Manager at Guggenheim Partners. Mr. McClurg also has experience as an analyst and trader in corporate, sovereign, and emerging market bonds. Additionally, Mr. McClurg oversaw Guggenheim’s private equity portfolio. During his career in financial services, Mr. McClurg helped develop many exchange traded products such as Bulletshares, an ETF that liquidities in target years to coincide with bond maturity, and GSY and GIY, both actively-managed ETFs. Mr. McClurg holds an MBA and MS from Pepperdine University, where he has served as a guest lecturer.