Like most market periods, the first half of 2019 can be characterized in various ways. It may, for instance, be considered as an extension of 2018’s precipitous declines in the market valuations of most crypto assets, or, equally, as the period that saw the final capitulation and bottoming that was generally seen as marking the end of 2018’s ‘crypto winter.’ Others might focus instead on 2019's first half, a period hosting a strong bounce from BTC's lows, which approached $3000 USD. Such a rebound divided observers: some considered it the start of a new bull market, while others reserved judgment on its larger implications. Other disruptions in early 2019 are substantial year-over-year declines in cryptocurrency market fundraising amounts, a decline that may appear even larger than it actually is, given the dramatic decrease in fundraising via the token sales that consisted generated such volume of media commentary throughout much of 2017 and 2018.
Yet, despite the evident ruptures that marked early 2019, the period equally represented several important elements of continuity with preceding periods, and appreciating these can also provide important insights into the evolving nature of the cryptocurrency and blockchain markets. In the broadest sense, the ensemble of both continuities and disruptions are perhaps most tellingly considered as indicative of a continually maturing market, where early exuberance is giving way to a more professional, sustainable approach, and arguably one better suited to the development of robust infrastructure and enduring innovations.
Fundraising in the Blockchain and Cryptocurrency Space
One of the most widely noted industry fundraising trends throughout late 2018 and the first half of 2019 was the decline of token sales. This decline occurred fairly uniformly across all forms of sales, whether so-called ‘Initial Coin Offerings,’ (ICO’s) or Simple Agreement for Future Token (SAFT) sales, which had originally been argued to represent a remedy to the regulatory uncertainty of ICOs. Compounding the apparent weakness of the token sale market was the continued absence of robust growth of the eagerly anticipated and regulatory-compliant Security Token Offerings (STOs.) Many observers have eagerly developed expectations around the STO market, frequently describing it as the future of innovative and compliant sales. Thus, its limited development to date has only reinforced a general sense of a stalled token sale market.
In the face of these lackluster results, the growth of Initial Exchange Offerings (IEOs), with nearly $1.6 billion raised in 2019, seemingly defies this trend of a decline in token sales. However, both the limited volume and value of such sales once Bitfinex’s $1 billion IEO is removed, as well as widespread reservations about whether these IEOs have a meaningful future, leave it difficult, at present, to view IEOs alone as the future of the industry.
Yet, while the decline in fundraising amounts since late 2018 is quite clear, as seen in the above graph, when fundraising efforts are considered from the perspective of number of sales or other fundraising events, a somewhat different image appears. Specifically, while the rapid growth and subsequent sharp decline in token sales is evident across a roughly 15 month period spanning 2017 and 2018, what emerges as equally striking is the relatively steady nature of equity-focused fundraising efforts. These equity financings both predate and continue at a relatively steady rate even after the decline in token sales begins in earnest. Most of these are defined as early stage equity rounds to the kinds of institutions and professional investors that frequently invest in early-stage startups, such as Venture Capital firms, Private Equity groups, and Hedge Funds. Represented by the gray component of the monthly bars below, the modestly surprising overall steadiness of the rate at which these professional investors have continued to make equity investments in the underlying businesses of early-stage companies in the cryptocurrency space appears to be a meaningful commentary upon their views of the cryptocurrency space’s prospects.
Further revealing insights emerge from a consideration of fundraising events by type, several of which are clear in perusing the below graph showing the average fundraising amount by event type over time. One observation is that, somewhat contrary to the public perception that frequently associates the cryptocurrency space with token sales, equity sales clearly represent the oldest type of fundraising in the industry, dating back to 2010 and significantly preceding the 2013 appearance of token sales. Perhaps unsurprisingly, given the nature of these sales to professional investors, the trend line for equity sales also illustrates how the amount of these sales has remained low throughout virtually the entire history of industry, despite a modest uptrend over the prior 12-18 months.
A number of additional observations on specific facets of the industry are equally apparent in the above graph. For instance, the near-total end to private presales for public token sales that has marked the last 18 months is evident in examining the teal line, which illustrates how from their appearance in early 2017 pre-sales boomed, only to decline to virtually nonexistent amounts as 2019 proceeded, likely a direct result of the declining volumes of token sales and secondary market trading during this period, both factors that would have discouraged sale participants from opting for the longer token lock-ups often associated with presales. And just as the prominent swings in the average raise amount per SAFT fundraising event speaks to the noisy and volatile patterns of these sales, and most importantly to the effective failure of SAFTs to solidify a position as a regulatorily-compliant manner of completing token sales, this volatile pattern is equally apparent in describing the history of IEO and STO sales as well. IEO’s, for instance, saw the following volatile pattern in 2019:
Despite the volatility in number of IEOs earlier in 2019, before a more stable trend in the number of raises emerged, the relatively steady trend in the raise amounts—generally between $2 and $9 million per raise—does illustrate a steadier pattern in terms of amounts raised in IEOs. The similarity of other sale types, whether STOs, SAFTs, for instance, speaks to the lack of clear and established trends in the space.
Interpreting Market Direction Indicators
The above-noted volatility of fundraising events lends itself to a number of possible interpretations, many of which can be understood as indicative of considerable uncertainty over future market directions. Specifically, whether there will continue to be liquid trading markets in the associated tokens of the wide range of infrastructure and applications being developed appears to be uncertain, given the declining nature of fundraising trends for certain sale types, as noted above.
Another indication of potential concerns over future directions of the crypto markets can be observed in the chart below, where Bitcoin's valuation is seen alongside of Smith + Crown’s estimation of the Bitcoin dominance ratio, which measures Bitcoin’s relative percentage of total cryptocurrency project market valuations. Bitcoin’s own rise over the last six months, dating from March 2019, even as the Bitcoin dominance ratio continues on its own uptrend that dates to early 2018, is likely best characterized as a sign of a less than entirely healthy cryptocurrency market, given the way market activity tends to be retreating to a small number of the most prominent assets. Unlike the second half of 2017, where Bitcoin’s dominance declined even as Bitcoin itself rose, indicating broad buying interest across a range of assets in the space, this latest uptrend has clearly been marked by a decrease in interest in the range of assets across the cryptocurrency sector.
What this increased Bitcoin dominance ratio ultimately means remains to be seen. By any measure, much of the market’s 2017 interest in a variety of token sale assets was premised upon often highly speculative assessments of the potential impacts of new projects. From this perspective, the rising Bitcoin dominance ratio can be seen as merely an indication of more realistic attitudes towards many of these projects. Other aspects of the increasing bitcoin dominance ratio are likely related to ongoing questions regarding the legal and regulatory compliance of many cryptoassets. Additional concerns are likely related to ongoing discussions centered around the challenge of valuing different crypto assets, a theme Smith + Crown has been exploring elsewhere.
How this trend of a rising Bitcoin dominance ratio will evolve, and what it portends for the broader sector, is a question that bears careful watching. While the question may not even be definitively resolvable until some of the many regulatory uncertainties looming over the sector are themselves settled, the relatively steady orientation of investment activity across different industries within the space remains a steady trend. This is seen below where the two dominant industries, that of information technologies, including new blockchains themselves, and finance, remain considerable ahead of competing sectors in terms of funds raised.
The enduring nature of these two sectors’ dominance itself leads to an interesting question: while advocates of security tokens and their various promises repeatedly laud the possibilities for the tokenization of a very wide range of assets, the reality is this divergence of industries and project types receiving funding has yet to be seen. Whether this continued concentration in the same sectors that have dominated fundraising virtually since the inception of the industry is merely a function of the fact that the oft-hailed security token revolution has yet to manifest itself, or perhaps a reflection of more pronounced challenges in efforts to broaden the nature of tokenization efforts, this observation appears to be central to the current weak fundraising environment. Like several other questions facing the sector, this question bears careful observation over the next few quarters.