Rehashed - #24 Token Treasuries: Discounted Networks and Liquidation Hierarchies
Discount to Book Value
Because of the price appreciation of ether over the past 12 months, and even with the latest “sell-off”, many tokens are trading well below the value of crypto held in their treasury. Adopting a measure from the equities market, this can be likened to trading at a ‘discount to book value.’ Book value is simply a company’s total assets minus total liabilities and serves as the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. When compared to the company's market capitalisation, book value can indicate whether a stock is under or overpriced.
We can make a similar comparison in crypto, whereby networks with large amounts of ether held on their balance sheet often trade at a deep discount to book value. Essentially, many projects hold assets which are worth more than the total value of their respective circulating tokens. One of the most resounding examples is Aragon (ANT), which has consistently been trading below 50% of ‘book value.’ By tracking their ethereum wallet, we can observe that Aragon hold 237,465 ether, worth (USD) $46 million at current prices. Aragon currently has a market capitalisation of (USD) $21 million. Even if we consider Aragon’s total supply (circulating + non-circulating), we arrive at a total market value of (USD) ~$23 million, still a deep discount to book value. Gnosis (GNO), as mentioned last week, is in a similar position, where they raised large amounts of ether, that have a market value well above the market value of the network. Multiple crypto projects are in similar circumstances.
Legally, this is a grey area. As this space is still highly experimental, the legal relationship between tokenholder and network is still uncertain. General consensus is that cryptocurrencies and utility tokens owe their holders nothing; ICO agreements are fairly clear that tokenholders have no residual rights to a project’s assets. However as the crypto markets continue to mature, we may see legal clarity develop around this issue.
Token Capital Structure
There hasn’t been much thought devoted to the latter half of a token lifecycle, particularly the idea of bankruptcy. As such activities may eventuate the token sphere, it is important to consider what a tokenholder may be entitled to. Once again, if draw on traditional finance, in the case of bankruptcy, there is a very clear liquidation preference outlined in the capital structure.
Equity holders are very the last group of investors in the hierarchy to get paid out on assets and often miss out on any slither of compensation. As current consensus dictates, tokenholders would remain a level below this as they have no rights to claims on assets.
However because there is often no debt financing in crypto networks, with the implementation of effective lobbying and potential legal changes, there may be a large piece of the pie left over for tokenholders in networks that trade at deep discounts to book value. Although current agreements (with security tokens as the exception) generally dictate that tokenholders have zero claims to assets, it is highly likely that in the event of a bankruptcy, we will start to see disgruntled tokenholders attempting to make a claim on a project’s treasury holdings.
Will we start to see the formation of distressed crypto funds that buy up tokens that are trading at dramatic discounts to book value, in the hopes that they will be able to lobby for claims on treasury assets, in the case of M&A or bankruptcy? Such action would greatly benefit the wider tokenholder base and will certainly be an interesting narrative to watch over the next few years.
How to Effectively Deploy Treasury Capital?
As it stands, because tokenholders have no residual rights to a network’s treasury, the best they can hope for is that projects leverage that value on the balance sheet to create value for the network itself. The jury is out on how this is best achieved. ‘Ecosystem funds’ seem to be the most common use for excess capital thus far. For example, EOS sold all of their ether raised, with ~$1 billion in fiat committed to venture funds that are dedicated to investing in platforms building around the EOS ecosystem. However, it’s unclear whether investing in a protocol’s ecosystem via venture deals is value accretive to the protocol. The current venture investment climate is extremely frothy; general excess of capital is pushing valuations, particularly in the crypto space, to astronomical levels. This, coupled with prolonged investment timelines creates inappropriate amounts of risk and unnecessary conflicts of interest that just don’t make sense for such early stage projects.
In the News
After a brief run-up last week, the market returned to its lows, with ethereum taking a beating. Pundits were quick to blame the headlines suggesting that Goldman Sachs scrapped its plans to open a bitcoin trading desk, which turned out to be fake news. It's more likely that we are in prolonged bear market territory; if we look at the fundamentals, transaction volume needs to increase to justify current prices.
A savvy redditor has been tracking the movements of a bitcoin wallet believed to be related to the original Silk Road marketplace. The wallet containing 111,114 BTC, dormant since 2014, indicated that over 15,000 BTC were transferred to Binance and Bitfinex over the past couple of weeks. The fact that Binance is a crypto-only exchange couple with the alleged illicit nature of the funds, suggests that the depositor most likely cycled the bitcoin through other altcoins, specifically privacy coins. This could partially explain the relative outperformance of monero over the past few days (+26% vs. BTC).
Satis group released a mammoth report on valuation this week. The key takeaways: the amount of cryptoasset market value needed to support economic activities is estimated to expand from (USD) ~$500B next year to $3.6T in 2028. Satis believes that the biggest driver of cryptoasset value over the next decade will be derived from the penetration of offshore deposits. Currency and privacy networks will be the largest beneficiaries, as most fundamental value will stem from store of value use cases.
Following the public release of the Bitcoin dataset earlier this year, Google is now releasing an Ethereum dataset which contains smart contract function calls, analytics and on-chain transaction time-series and transaction networks.
Ethereum’s dataset which contains smart contract function calls, analytics and on-chain transaction time-series and transaction networks.
ShapeShift, notorious for its ‘exchange without account’ model is releasing a compulsory membership program in a bid to stay compliant under continued regulatory scrutiny.
Chinese and American tech companies continue to dominate the blockchain patent space: Alibaba, has 90 blockchain patent applications, followed by IBM with 89 applications.
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.
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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.