Rehashed - #23 ICO “Panic Selling” of Ethereum Debunked

Ethereum & the ERC20 Token Standard

The arrival of cryptocurrencies has democratized the investment landscape. Through tokenisation, the average retail investor is able to participate in the funding and potential upside (and downside!) of innovative new projects. Ethereum’s first use case has largely been as a capital formation platform; the protocol allows a user to create their own token. This process has become known as the “ERC20 token standard,” which oversees the issuance, distribution and control of tokens in a formalized, standardized manner. The ERC20 token standard is overwhelmingly the method of choice for new crypto projects- of the top 700 tokens by market cap, 87% are built on top of Ethereum.

As ether is the medium in which most projects receive funding, this results in many projects holding large amounts of ether in their treasuries. We can assume that a sizeable chunk of the (USD) $20 billion raised by ICOs to-date, is still sitting in Ethereum. Research from the Satis Group suggests this number is around 25%, estimating that approximately $5.4 billion of ETH (12% of the circulating supply) is held by the top 115 tokens. Not only does this create immense financial risk for projects by holding a super-volatile asset on their balance sheet, it creates a significant amount of systemic risk for the ecosystem as a whole.

Panic Selling Fake News?

The significant drop in Ethereum price over the past month (-35% vs. USD compared to BTC -11% vs. USD) has had many pointing their finger at ICOs “panic selling” the majority of ether held in their treasuries. Lets dig into this.

Santiment has been tracking the “treasuries” of various projects, calculating the amount of ether sold by examining wallet outflows. Over the past 30 days, projects have sold ~165K ether. (One caveat to note is that ether moved out of a treasury wallet doesn’t necessarily mean that it was sold; the projects may well have moved the ether for alternative reasons). Here, we assume that all moved ether is sold on an exchange or over the counter.

As Santiment covers around 25% of all token projects, extrapolating this out to the full ICO ecosystem, we get 660K ether sold over the past month. This amounts to 22K of ether liquidated per day, which at a price of (USD) $280, amounts to $6.2 million worth of ether sold daily as a result of ICO liquidations.

Interestingly, such liquidation matches the amount of new supply created each day. New supply from Ethereum mining fluctuates from 20-21K per day. However, the size of these liquidations is minute in the grand scope of things. The amount of ether sold this month is almost half of the year-to-date average monthly rate of 1.4 million ether. Additionally, we can compare to EOS liquidations occurring earlier this year. In May, EOS sold $950 million of ether (a fraction of capital raised from their year-long ICO), which amounts to $33 million per day. This sizeable liquidation of Ethereum generated by one project far outweighs the selling pressure we are seeing in current markets.

Although there are many assumptions made, the data suggests that recent ICO selling pressure is greatly exaggerated. The weakness in the price of Ethereum may more be a result of sentiment and weaker demand rather than a flood of supply from panic selling. As ICOs demand cools off (the total amount of capital raised in July is almost half that of June), weaker demand for Ethereum may be an underlying driver of market fragility.

To Sell or not to Sell?

Many projects have taken different stances on ethereum liquidation, based on time of entry and future needs. The founder of prediction markets project, Gnosis, has suggested that they will not be touching their Ethereum war chest over the next decade. But many other projects, particularly those who raised at market highs in Dec ‘17 / Jan ‘18 have already suffered massive treasury losses. A project that raised $30 million worth of Ethereum in January, just sold the last of their ether for $4 million, and there has been chatter of projects having to re-raise.

Examining the potential panic selling of Ethereum can give us insights into short-term market psychology but is near-sighted and detracts from the future potential of Ethereum as a global virtual computer. Besides, the narrative of ICO’s panic selling seems to be overstretched. Fundamental drivers of Ethereum value to look out for in the future will be the implementation of proof of stake and potential supply/inflation modifications. More on the nuances of Ethereum as an asset held on the balance sheet of crypto projects next week.

 

In the News

Institutional-grade products continue to penetrate the market. CBOE is supposedly close to launching Ether futures and CoinShares’ Exchange Traded Notes for Bitcoin and Ether (listed in Europe) are now quoted in the U.S. These ETN’s are structured like an ETF whereby CoinShares actually holds the underlying.

DFINITY, a protocol that is emerging as a ‘sister network’ to Ethereum, has raised $102 million from Andreessen Horowitz and other VC firms in its latest round.

Filecoin, the blockchain-based data storage network being built by Protocol Labs (IPFS), which raised more than $200 million last year, plans to officially launch sometime next year.

 

Upcoming Dates

Sep 30 - The VanEck SolidX ETF application next deadline for a decision from the SEC

Oct 12 - Blockworks Conference, Auckland

 

As always, thanks for joining - see you next week for Rehashed.

Freddie Archibald

 

View previous issue: Rehashed - #22 Sizing up Security Tokens

View next issue: Rehashed #24 Token Treasuries: Discounted Networks and Liquidation Hierarchies


About the author:

Capital markets to crypto convert. From Christchurch →  Boston → New York, Freddie became intrigued by the potential of the digital asset economy after plucking a book on Bitcoin off a New York library bookshelf in 2016. Her parents are thrilled that she is chasing magic money on the internet.

 

Disclaimer:  The above references an opinion and is for informational purposes only. The opinions expressed by the author do not represent the opinion of BitPrime.

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