It took a while for people to first notice Bitcoin, but once they did, it could never be put back into its box. The altcoin rush followed in 2011, starting with Namecoin in April, and Litecoin by October; the only alt from the era that still has a place on the leader board to this day. Most alts then fell by the wayside in the 2014 bear market, but in 2015, Ethereum rose from the ashes. This paved the way for tokens, which led to the ICO boom; an early attempt to create equity tokens.
But they weren’t equities, they were utility tokens. Buyers earned the right to use the service on offer which made them more like gift cards than shares. Just as in 2014, the 2018 bear market crushed the ICOs, as in most cases, the emperor had no clothes. But I suspect the digital space would have much more to show for that era today, if it had issued equity tokens rather than utility tokens. That’s because ICO holders would own a part of a business. And even if many companies failed, as they normally do in the process of creative destruction, the prize for holding the winners would be vast. It pays to be diversified.
The power of price
Crowdfunding was supposed to be the answer for small companies to raise capital, and on most measures, it has been successful. Equity crowd funding has raised over $2.5 billion (source Fundly) helping thousands of companies spring to life. But you should wonder why this fintech solution has been so much slower to flourish than the ICO market, which has allegedly raised over $20 billion (source CoinTelegraph) in just two years? There has been an age-old problem of matching investors’ capital with promising start-ups, and the internet was supposed to solve it. It has done that to an extent, but global crowd funding should be much bigger than it currently is. In my opinion, the reason it isn’t is due to the lack of a secondary market for the shares.
The ICO market, while imperfect in its legal claim to be equity, gave investors immediate gratification. That is, they had a token which could be traded. And when the crypto market was powering ahead, like it was in 2017, these tokens shot to a premium, thus completing the circle. The greater the early gains, the more investors flocked to the market, just as they did en masse during the late 1990s tech boom.
Back then, the stock exchange of choice for young technology companies was the Nasdaq. It had 4,377 listed companies in 1998 (source Bloomberg). That dropped to just 2,626 by 2012, only to crawl back to 3,231 today. Who would have thought that the Nasdaq would lose 26% of its companies, and still have fewer listings 20 years later? One reason was surely the extent of the bubble, and the subsequent bust, which took a decade to fully play out. But the other reason would be regulation. While regulation is generally a force for good as it brings trust and security, it is also a costly burden that youthful companies struggle to cope with.
For example, it is said to cost over £400,000 to list on London’s junior AIM market today. That was the destination of choice during the commodities boom between 2003 and 2007. Again, we see the same pattern. AIM hosted 1,694 companies in 2006, and just 904 today. Cash is an extremely precious resource for start-ups and must be spent carefully. A company making several million a year, might consider listing, but for start-ups, it is beyond their reach.
Don’t bother chasing IPOs
The lack of young companies coming to market can be seen by the failure of the IPO market. It used to be a fabulous side-line for private investors, but now the only people who seem to be making money are the venture capitalists. Consider the recent IPOs such as SNAP or LYFT. They seemingly came to market at the highest price the issuers could get away with. In the good old days, the view was to leave something on the table for the buyer. How things have changed, as the seller extracts every dime they possibly can.
According to the IPO indices in the chart, the 1994 to 2000 era saw a 77% annualised return for US IPOs or 24 times your money in six years. This contrasts with the last decade which has seen US IPOs lag the S&P 500. That’s not what you might expect from the go-go corners of the stockmarket. Somewhat feeble during a ten-year bull run. No?
IPOs now lag the market
I’ve highlighted how these days the IPOs are priced for the sellers rather than the buyers. But another important reason is that small companies can’t list. Consider that Bitcoin came to market with a total network value (mkt cap) of $101,000*. For it to get to $1 billion, all that was needed was an increase the number of coins and growth in the network; something that was achieved by April 2013. Little wonder the early investors made such vast gains as the starting price was extremely low. In contrast to recent IPOs, early investors were able to participate in the value creation as the network grew.
Many of the recent IPOs, have done the exact opposite. For them, the bulk of the value creation was already reflected in the price. Facebook came to market in 2012 at $38 per share, worth $16 billion. If you had managed to buy in when it was worth a mere $100,000, you’d already be 16,000 times better off. Yet we celebrate Facebook as a market leader that has made investors 5.5 times their money since the IPO. And that’s about as good as it gets these days, as many IPOs disappoint, such as SNAP and LYFT.
It’s a stark reminder, that in order to make the big gains, you have to invest in companies when they are young and vibrant. And in order to do that, you’ll need to look beyond the stockmarket. The crowd funding platforms are a good place to start and they’ll surely be winners, but the reason they haven’t grown as much as they might have, is because there is no secondary market.
The good news is that there is a solution than brings back the spirit of the 1990s, in a modern and compliant manner. By combining the dynamic digital market place inspired by crypto, and the regulatory certainty of the old world, the equity token is set to take the market by storm.
‘Digital Securities’ (Equity tokens) have arrived
The tokens created on platforms such as Ethereum, have been unregulated, and confined to the ICO. In order to create real securities on blockchain — equity, debt, fund interests, and so on, you should look to creative solutions from the likes of Globacap (globacap.com).
Globacap, a regulated securities firm, are pioneers in the area of digital securities or ‘equity tokens’, including issuing the world’s first digital equity natively on blockchain. These are blockchain enabled securities, that are real shares that comply entirely with existing UK company and securities law, which means issuers don’t need to use additional intermediaries such as a nominee.
Digital securities, and firms like Globacap, promise to transform the securities market, particularly for private companies. When tokens are transferred to a new owner, in-built processes automatically fulfil the administrative and legal requirements of an equity ownership transfer under UK company law, effectively providing instant settlement. This is not limited to UK shares, but could be shares in companies around the world, and also bonds or other debt instruments, fund interests, and so on.
The administrative gains are significant. A small company such as mine can manage a shareholder register of thousands almost as easily as a register of five. Corporate actions, such as buybacks and stock splits can be done with the click of a button, doing away with the reems of paper and legal fees that usually accompany these processes. As an additional benefit, any capital raise done through a platform like Globacap’s ensures that all investors pass KYC and AML checks, jurisdictional requirements are complied with, and any restrictions can be enforced: in short, they make regulatory compliance easy — and cheap.
The additional benefit is that existing institutional custodians can directly participate by hosting a blockchain node, gaining direct access to and visibility of the underlying assets. This allows both retail and institutional investors to participate equally and transparently in tradeable blockchain securities.
There are as yet no exchanges ready to list digital securities in Europe, however these are coming soon. The Gibraltar Stock Exchange is actively working towards listing tokenised equity later this year, the London Stock Exchange is currently engaging in a trial listing of a tokenised share, and start-up firms such as Archax (archax.com) are gearing up to directly list digital securities of all kinds.
Crypto Composite has a digital token
And that brings me onto my own company, Crypto Composite Ltd. The idea came about in late 2013, when I first became interested in crypto. I wanted to know whether I should invest in crypto, and in order to do that, I had to better understand it. As a fund manager, specialising in multi-asset and derivatives with 21 years of experience, the lack of data was frustrating. I wanted to know how to value crypto currencies, and soon realised it was a network effect situation. That simply means that a crypto’s value reflects the size of its network. All the necessary data was hidden inside the blockchain; it just need to be revealed and interpreted. And that is exactly what we have done. I can now look at crypto via our statistics and have a good understanding of the risks and opportunities. Is it growing? How quickly? Does another crypto offer better value? What is the downside? Have I missed the boat?
The journey has been technically challenging because we felt it was important to deliver real-time information, as if we didn’t someone else eventually would. It also had to be secure and scalable so that we could host, potentially thousands of blockchains. After much deliberation, we recently decided the time has come to open up to the world. You can see our test Beta site at https://bytetree.com/.
We will soon be delivering information on dozens of cryptos (where there are networks worthy of measurement), which will help investors make better, and more informed, decisions. We will also supply data to affiliates, and help to shape the market place in a variety of different ways. I would love to reveal our full plans, but some things are best kept as commercial secrets. For more information about the raise, please visit https://platform.globacap.com/invest/deals/21/deal-summary .
When I decided it was time to raise capital, I looked at private placement and crowd funding. But I then realised, that I still had the problem of what next? Coming from a market background, it makes perfect sense to me that equities should be freely exchangeable. Recognising that floating on AIM or Nasdaq would be costly, I opted for an equity token. The speed of innovation surrounding the crypto space is mesmerising, and when these regulated digital exchanges come to be, animal spirits will take over.
What we are witnessing is simply globalisation on a peer to peer scale. Since the fall of the Berlin Wall, globalisation has been about corporations and capital markets. But when it comes down to the individual investor, we have been largely contained within our own home market; especially for start-ups. And that’s what make equity tokens so exciting. The vision is that they will be listed across multiple exchanges, in different jurisdictions. The best ideas will face fewer hurdles and find it easier to raise capital than ever before. And the private investor will be spoilt for choice. All they will need is a first-class data provider to help them separate the wheat from the chaff.
Did I mention ByteTree.com?
*Most people will tell you Bitcoin had a $250,000 market cap in August 2010, but that wasn’t the case. It’s true that there were 3,745,800 Bitcoins in existence at the time, but only 1,315,871 were in circulation. Anyway, that’s another matter, and one of the many reasons I founded ByteTree.com.