Businesses are built on a very simple principle, which is to
provide value to the customer, and get paid for it. As long as the cost of
providing the business is lower than what you get paid for, you’re bringing in
the value for your business. To sustain you need enough people to pay you. Now
if this is so simple why do such big corporations fail? Hours of meetings,
bailout packages as well as the best brains can’t see the writing on the wall
& just disappear overnight.
Nothing lives forever but there have been corporations which
have enjoyed an extremely long monopolies over decades if not centuries. While
internet has challenged the status-quo & shattered them to ground, few
companies are still thriving. What differentiates the losers from winners?
It’s all about relevancy. How relevant are you to the eco-system?
The moment, you’re not, you’re replaced. Lack of relevancy can be attributed to
any reason but the most common is competitors outpacing the value you provide
for the money. It’s almost impossible to find competitors on value for money
proposition so thee best defense is to fit yourself in an ecosystem where they
stop functioning without. Sole reason of their existence is you. They’re able
to survive only because you’re breathing.
Now though it looks slightly dramatic, it’s fairly possible
but hard though.
I came across a term called Network Effect. I was intrigued
to look it up so I read few papers on this subject which clarified. Similar to
the power of compounding. Network effect provides an unfair advantage to the
Best and common example is Visa/MasterCard who have built a
brand that other companies leverage to build their business. With every stake
holder joining either of these they’re strengthening them even more making it
almost impossible to break the monopoly. It’s hard for me to think of any other
strong example than the credit card network.
There are firms which are staying relevant by providing a
value which is hard to beat. Best example that comes to my mind is Amazon Web
Services (AWS) which is used by majority of the fortune 500 companies whose
billing them in millions per month. Now even though it may make economic sense
for the client companies to build it economically, it doesn’t make business
sense because of the low returns vs bandwidth required. It may be a very small
cost in the grand scheme of things. Dropbox, Box, twitch, snapchat etc. have
lot more worries & they know they can charge the premium required to
justify outsourcing their core functionality.
Apple not producing their own hardware components or Samsung
even remotely planning to build the processing chip. They know they’ll never be
able to compete with the likes of Intel or qualcomm due to sheer volume they
do. Adidas, I believe doesn’t own either of the manufacturing units, because
they’re able to capture a higher value in selling the product.
Now the difference between Qualcomm & Mastercard is
relevancy. Qualcomm has to stay relevant by providing the best chips throughout
their dominance while Mastercard have reached a point where unless there is a
massive blunder, they’re fairly difficult to be taken out of equation.
This enlightened me to the concept of Capturing value
through building network effects. Uber, Airbnb, eBay, Amazon etc. have achieved
similar level of dominance. People on both sides of the market are aware of the
effectiveness due to supply. While many may disagree with the percentages
charged by these platforms, it’s still cheaper to go through them over
Companies at times undersell & unable to capture the
value purely due to their vulnerability to even exist in the market. Example
would be where Apple captures almost 90% of the profits generated in the sale
of it’s product. There are many items from developing countries which are bought
for pennies and then rebranded to be sold for 50-60X because original producers
don’t have the bandwidth.
So now the question is how to build this level of strength. While this is a
billion-dollar question, answer is to be the common denominator in the
ecosystem where you are the foundation. If you fall the industry falls. Be a
network, be the lowest denominator & empower others to build on top of you.
In the end once you achieved it, stay humble & don’t forget the
basics. It took a small ice berg to sink
the unsinkable Titanic.
Blockchain technology got a massive boom in 2017 raising the market cap to 770B before crashing to sub 130B within 18months. Majority of the growth was based on the hype with little or no substance to back it up & when the sale begins there wasn’t any fundamentals to support the price. We heard about big names getting into the game but none of them actually made it to mainstream in terms of products.
While dump really hurt the growth, it also stalled any major corporation interest in the space. While bitcoin has almost done 3X within spam of 4 months, we heard the news of Libracoin, a cryptocurrency effort by world largest social media giant Facebook. Skepticism aside, just an official effort from such major corporation is a big win for the industry which has more cons than pros. I’ve not disectd the paper at length but have been asked by many friends on what does it mean for the bitcoin.
As mentioned earlier, it’s in the interest of cryptocurrency since facebook has the maximum market penetration in the entire world. As of Q1’19, they have 2.38 Billion active users. No other organization or country have that kind of market reach or distribution across the planet. With them making it super simple for their users to on & off-ramp the cryptocurrency is massive. Gone are the times where Facebook was limited to sharing photos &statuses. Now it’s a complete media platform for businesses and individuals which isn’t just limited to connecting but a serious amount of commerce happens through it.
Messenger is one the most popular application of facebook with mind blowing usage.
Here are the key statistics:
20 billion messages are sent between people and businesses every month
There are 300,000 active Messenger bots on the platform
Messenger is the second most popular iOS app of all time – behind only the main Facebook app
1.3 Billion people use Messenger every month
40 Million active businesses
No other company have statistics even close to this when it comes to engagement.
Today, Facebook is not only a social media landscape rather it is the entire virtual world where from promotion to status updates to managing your own business pages can happen. And as sending messages from one place to another one is possible; the future holds a hope for something similar for payment transactions too.
Today Facebook has merged E-commerce industry into its layout and offers promotion, buying and selling of products/services. Now, imagine the payment methods used in today’s transaction; everything happens via bank, right? The digital wave has although transformed the mode of payment, but the infrastructure still stays the same: Centralized banking channels. Although, the payment method of e-commerce industry is done by banking sector today, but it will be transformed into digital currency soon. In fact, some e-commerce websites are accepting digital currency in their payment sections.
Since, Facebook is supporting a large network of e-commerce industry, it is possible that Facebook coin would be supported and promoted by e-commerce industry. Recently, Facebook has launched a new blockchain based currency named “Libra” on a platform called “Calibra”. This would support cross border transactions with the help of blockchain and that too instantly and at extremely cheaper rates.
With the announcement, the stock price of Facebook has surged 20% cumulatively and had a very positive impact on the current crypto industry as well where the bitcoin has surpassed USD11,000 resistance for the first time in 2019. Now coming back to Facebook. Well, public also get conscious upon the discussion of any new currency. A currency backed by the centralized party; I feel, it would be hot discussion.
Facebook has got its maximum possible market share; Facebook just had to maintain that market share as expansion of can’t be done within the same industry now. So, the company with the highest market penetration can use the same to become a financial institution as well. By launching a Facebook coin, it will not only get the connectivity, but it will also get the more market share in the industry of digital currency.
The aim of Facebook is to connect people onto the single platform by which users will be able to use their every account from a single username. That is why Facebook is keep monitoring and is supporting only real accounts rather than fake accounts; for promotion and connectivity, Facebook is also completing the Corporate social responsibility (CSR). As, Facebook is providing free Internet service in the developing nations so that these nations can also get connected with the world.
Well, Facebook has the most active users in the world; so, ideally everybody has a single real account. Facebook is promoting/supporting this through connecting people’s different account onto the singular platform (User Id) through which Facebook can get to know the psychographic/physical factors of its users.
Like, in terms of applications, Facebook has connected itself with Instagram, WhatsApp, etc. Only, payment/currency sector is not connected with it. But Facebook will also attach currency with it as the company is getting the utmost benefits from blockchain technology. Facebook Coin will not be only promoted by the e-commerce industry, but it will also be transformed as the bank accounts. From currency accounts to entertainment/business profiles would be onto the singular platform by the single User Id.
They’ve the most information on what’s happening in the world but that’s not enough especially with the outlash they’ve been getting around privacy and selling data to advertisers. In addition there is a limit to how many people can be on facebook and they’re approaching that limit very quickly. There isn’t enough people on the planet. With Mark’s pledge to prioritize privacy combined with stalled growth it has to come up with new avenues to earn revenue and I think that’s where the idea of Libra is brilliant. They have the opportunity to become the world largest financial institute and payment process. They’ve access to people in regions which is almost impossible to others to get. Kids get a facebook account way before their bank accounts and I am confident a decent percentage of their users don’t have any bank account at the moment. With facebook, issue of Cash-in & Cash-out is solved and if it becomes a global standard money may not even leave the system giving it such a tremendous amount of capital that can turn it into the world most powerful empire.
With such fears there is some resistance from regulators in terms of who can sense of bit of fear if that happens. While there has been some serious questions posed by thee bitcoin maximalists, that’s a minor issue in my opinion at this point in time so let’s see how things progress
Today when we think of loan or a financial product, the
first thing that comes in our mind is bank. You want to have mortgage, go to
banks, you want to have credit card, go to bank, you want to make a deposit,
you go to bank, you want to wire, you go to bank. Though many may argue that
they use online banking but that’s still a bank and unless there is a very
strong reason for you to go to a 3rd party, you try to consolidate
financial matters through one single institute & the first choice is bank.
Their brand power, accessibility & trust factor is
unprecedented. 3rd party vendors are not more than your corner
convenience store where you go when you need something in emergency, but
weekly/monthly grocery is through Walmart or any big retail store. While price
is certainly a factor, availability everything under one roof is also very
convenient. Same is the case with bank however as opposed to big shop pricing
discount services at bank are often expensive as opposed to 3rd party. There is a premium to exchanging currency or do a wire transfer. Though
lot of it is attributed towards the fact that they can charge that premium
without churning a big chunk of their business, but the other factor is high
operational expense that they’ve to occur. While our parents were used to
banks, we’re using a combination of services to well fit our need, but it’s diluting
the dependence on bank. As the shift grows banks have to take a different
approach competing with startups & they’re well poised to do so.
While they’ve the customer base, well capitalized and have
the infrastructure & regulatory clearance.
They however may lack the thirst to innovation & are slow to move. I
however think that the best approach for them is to partner up with startups
& built a marketplace.
Now while banks have their own arrangements and partnership
for every product they offer, they do operate more like a close loop system,
but I think it’s time to change it. They should instead turn into a hub to
offer multiple services. May be like Amazon but white label. At the moment
they’re operating more like United Airways but what if they shift their model
to Expedia with a white label badge. You want to transfer money from A to B,
you’re presented with 2 options. Be there in 4 hours, it’s cost $10, be there
in 2 days, cost $1. On backend banks have APIs of startups which provide those
services and banks can use those startups to find the most efficiency way to
perform a specific service. Win for banks and win for customers. Customer churn
rate will reduce and banks will keep their branding.
There has been recent cases where banks have partnered up
with startups providing them the branding but if they do it well, they should
just actively pursue it as a business line. I don’t expect big banks to buy
into this idea soon, but the one that does will emerge as a winner and won’t
provide space to startups to displace them.
My bank of future will have very few branches and will have
partnered up with 100s of startups offering services and competiting for best
quality & cost.
I wrote about Trust & it’s importance in the last
blog post here. I’ll try to cover more on Open Financial also known as decentralized financial systems AKA DEFI. You can pickup thee
term as per your liking but as much they’re interchangeable they’re also subset
of each other depending on the reference that you apply.
An open system can be decentralized or
centralized depending on your definition of centralization & same with
openness where it could have so much high barrier to entry so it’s not truly
open. Example is being a bitcoin miner where you can’t participate unless you
run a very sizeable operation. Theoretically it’s decentralized but there are
couple of entities that control majority of the hashing power.
Trust in finance is super important
& that’s the basic of any transaction.
When you look at all the financial
system around us, we believe they’re open, but they’re not regardless if
they’re in developing or developed country. They’re operating more like silos. They
do interact but with permission very inefficiently. If you had to transfer
money from one bank to another bank in us, it’s quite doable but you’re at the
mercy of bottle necks involved in every party involved in the transaction. I still have restrictions in performing
multiple tasks that require branch visit. We do have SWIFT, Interac, SEPA &
other systems which are comparable to protocols but they’re inefficient with no
visibility into the process. There’s a
reason why majority of the world is unbanked because cost of banking is high.
There is an argument that unbanked don’t need a bank because they are poor but
in fact they’re poor because of barrier to financial tools.
To bring down cost of banking or access
to other financial tools, unbundling of the system has to be done & DeFi
makes it possible. I’ll give you example of how that can be done. Right now if
you look a the process of loan origination, there are mainly 3 parties at a
financial institute that make it happen. They’re
Debt issuer makes the business case for
the loan, while underwriter assess & approves the risk & loan, and debt
raiser finds the money to fund the loan. Though they all belong to same
institutes but there is a friction between them since they’re responsible for
their own departments. Now hypothetically what if all three work independently
and are able to scout outside their institute, that’ll ultimately benefit the
customer. Chances of success are much higher due to participation of more and
more players. Now the biggest pain point here is trust. Would they trust each
other now that they’re dealing with outsiders ?
That’s where DeFi & protocols become
important. Now I’ve simplified it a lot, but this is how it’s supposed to work.
E-Mail is based on Simple
Mail Transfer Protocol
(SMTP) which is common across the globe
so your interface can be whatever you like it be but for transmission it has to
follow SMTP standards.
I’ve been particularly excited about
Decentralized exchanges & protocols which empower small players to build
interesting applications. ERC20 based tokens on top of ethereum were a success
which lead to thousands of applications being built serving different used
cases. While different chains don’t talk to each other at the moment, but
that’s going to change in coming days.
No one size fits all and that’s the case with
financial apps too. Needs are different based on demographics so niche apps are
required to serve them well. While protocols are scary for the majority but there isn’t any neeed to be paranoid about the
utility. What percentage of people around us knows how does SMTP work. They
just use gmail, Hotmail etc. It wasn’t possible to transact online without using a 3rd party.
Decentralized exchanges make it easy. Now we have tools to hedge, lend, borrow
that are gaining popularity on the internet as well. I am very excited about
this development because it opens up the financial world to everyone with
internet access, which is billions of us. Local, national, international all
can enjoy the tools without any discrimination.
Coming back to trust issue where I laid the
importance of trust in financial transactions. Protocols make this job easy
& playing field for every participant. As long as you satisfy the protocol
rules, you’re in. Your app doesn’t need to have a track record of centuries or
decades to participate. Rules of pedigree are broken here.
Status quo enjoys the trust, regulatory
barriers & support of the top movers & shakers but soon their kingdom
will be challenged. There’ll be a revolt by the millennials where they’ll move
to alternative options which probably will be built on decentralized financial
system which is open, non-discriminatory and fair to to every one. It’ll be a
war where incumbents have to innovate, competitive to a very rare breed of
smart and intelligent engineers globally who’re building tech apps to serve the
customers much better. I expect majority
of the incumbents to give up or find intelligent ways to build partnership
& integrate into the decentralized system.
Some of these things might look alien, tails from utopia
but there is serious work in progress where transactions are growing with more
and more participation from community and institutes alike. Tech companies have
tendency to go parabolic once they find market fit & I expect this the case
here as well.
“It takes ages to build trust & seconds to destroy it”
Trust is super important for any aspect of life.
Our economy is built on trust. We interact directly or indirectly
with external factors throughout our day based on the trust that they’ll
perform as we expect. With passage of time, trusts get stronger & stronger
which leads to higher confidence in our own ability to perform. During any transaction,
trust is super important. Once it’s established the transaction goes through
In ancient times, humans primarily only depend on their small
tribe with less need to involve a foreign element but with passage of times as the
civilization have evolved, we have to work with unknown parties on daily basis.
Our modern economy is built on multiple layers of trust where we are trusting
the system to perform as we expect.
Due to my interest in Finance, I’ll focus on that portion only where
the biggest example is the bank who controls our money. Regardless of whichever
bank you see, there is generally a sense of trust and credibility. There is
very rarely a thought that the bank will just shut down tomorrow or run with
your money. We also have insurance where we do expect them to pay us whenever
we have a claim. There are also government institutes where we believe they’ll
be watching out for the bad actors and protecting us if some thing goes wrong.
This all system is TRUST. Though we actually can count couple of
the institutes, they themselves are depending on multiple other. Living in a systematic
society and 1st world country, we’re used to trust and certainly take
it for granted. It’s like the water that would come when we open the tap; because
that’s how I’ve seen since I am born.
With globalization, we’ve to trust international players as well
as new entrants. Majority of time we don’t have an option or have no other
choice. Recently there has been multiple cases where the trust has been shattered
for the masses, sometime deliberately some time by accident. Example of deliberate
would be company selling your data to a 3rd party without your
consent or manipulating your opinions while in accidents where they genuinely
were hacked. While I’ve been fairly cautious, I can’t possibly live off the
My first encounter with crypto was 7 year ago and have to admit
that it wasn’t a conscious decision but with passage of time I’ve gone deeply
in love with the philosophy of open networks, cryptography and free-market
economy. While there hasn’t been a single school or thought or system which has
been able to put things in order on global scale, it’s hard to resist admiring
a system which is built on such fairness. I won’t say it’s the utopia I dream
of, but much better than other monetary systems which we have.
It wasn’t possible in the past to deploy such a grand operational
financial system purely based on trust and cryptographic algorithms. Bitcoin network
is running for more than a decade with the maximum uptime possible without any
singular authority. Recently I came across a report which said that 1 in 5 American
own a cryptographic asset. That’s massive because it may be in top few spots
when it comes to an asset class. In case of bitcoin, you don’t care who
generated the bitcoin or how much effort he has to put in, as long as network
accepts it, it’s part of the system.
If you look at this behavioral change where the entire system is
flat level field for all the participant, this put disadvantage the status quo
at a massive disadvantage. Bitcoin and other cryptocurrencies are an experiment
and relatively in the industry, but the impacts on economy & behavior are very
undervalued. Companies and individuals are building and contributing towards a
system with a self-rewarding schema that’s designed without any flaw. Yes there
are needs for improvement but the philosophy behind it can be replicated
towards other fields of life.
Crypto has built a trust that didn’t exist in the past and is only
getting better from here. Systems will improve & I expect a hyperbolic
economic shift due to induction of new products, ideas through collaboration.
World is turning out to be more equal playing field and should get
more flatter from here on. This is healthier and with more financial openness, we’ll
have a much better world .
I am really looking forward to decentralized financial systems AKA
Bitcoin is considered to be too sacred when it comes to critisism in cryptocurrencies. Bitcoin minimalism has developed a cult culture where anything that comes remotely close to taking away the dominant position from bitcoins in cryptocurrency is hit with criticism. While I don’t disagree with the BTC dominance, it is hurting the growth of ecosystem. Altcoins also known as shit coins have diluted the space but they’ve a reason to exist.
My involved in the industry span over 7 years & have witness bitcoin narrative being sold shifting from transfer of value to store of value. Ethereum was at one time referred to as bitcoin 2.0 though the function & use case was totally different. As much as I love bitcoin, matter of fact is that bitcoin wont’ work with security tokens & there has to be a different chain to accommodate this use case.
Here are few of the reasons why Security tokens have a different trajectory from bitcoins.
Bitcoin is decentralized & there isn’t any restriction on who can own, transfer or mine bitcoin. There is absolutely no KYC or filter to censor any one. With STs, there is a set of regulation that gets tagged along & impossible to be imposed with bitcoins. If some thing can’t be audited & controlled, it won’t fly with regulations.
Bitcoin till date have kind
of stigma attached to that which has refrained multiple brand names and status
quo to stay away due to additional risk that may have a bad reward/risk ratio in
their books. For STs, blockchain should
come clean with no prior baggage
There is a sizeable quantity of bitcoin that are lost forever due to one reason or another. Similarly there has been incidents of hack or private keys loss. In traditional world, if you lose your certificate you can get a duplicate, but in blockchain if it’s gone once, it’s gone forever. STs must have a mechanism to reverse & fix these transactions
Reason why Bitcoin is now
referred to as storage of value is due to limited functionality. There is very
little which you can do with your bitcoins. Yes there has been forks to improve
some of the desired features or sidechains, but overall it’s like running a
bullet train on existing track. You’re losing efficiency. STs need creative functionalities which will
need an entirely new chain
Lack of KYC
With STs every stakeholder
is identified, and this process is enforced. With BTC that’s not possible and there
isn’t any discrimination between any of the participants.
This list isn’t exhaustive
but just gives a rough overview why there would be a new chain(s) that will
serve the next layer of Security tokens. Once this has been realized among the
industry, there would be more R&D into developing those protocols.
general consensus about ICO is that the days of ICO (Initial Coin Offering) are
over post 2018 crash, IEO (Initial Exchange Offering) is generating similar
kind of buzz wave. I can see lot of co-relation
between ICO & IEO when it comes to FOMO, interest, price manipulation etc.
Major difference between IEO & ICO is IEO is supported by an exchange while
ICO has to get listed on an exchange. Due to ICOs performing really bad in 2018
mainly due to lack of liquidity IEO does covers that portion rally well. While there
are only handful IEOs executed, results are very encouraging for initial buyers
with returns resonating to ICOs in early days. I expect it to follow the same
hype cycle of ICOs but on a relatively smaller scale.
cover this more in detail.
is an IEO?
exchange offering is administered or conducted on the platform of a digital
exchange also called cryptocurrency exchange on behalf of the startup that
looks for funds for its newly issued tokens.
ICOs generally use their own website or 3rd party tools to conduct the
token sale process which isn’t link to exchange. Post-sale, exchanges get involved
where they determine if they want to list the token or not. Through IEO, exchange
listing risk is mitigated.
facilitation however come with a price tag which is either a fix fee or percentage
or combination of both depending on the arrangement between token issuer &
exchange they’re using. Generally the fee structure varies from 50k USD to 500k
in fixcost plus 5-10% of the total sale.
struggling exchange business, this can provide much relief to their operations
if done correctly however they won’t like to conduct lot of them to keep the
are IEO and ICO different?
I’ve mentioned the major difference between ICO & IEO, here are the fine prints
In case of ICO, fundraising is conducted at the
token issuer’s website while IEO makes use of the platform of the digital
exchange that conducts the token sale.
The crowd sale counterparty for ICO is the
project developer but in IEO, it is the cryptocurrency exchange.
The smart contract is managed by the company or
startup conducting the token sale for ICO and in case of IEO; it is the cryptocurrency
exchange that manages the smart contract.
In ICOs, the marketing budget needed by
fundraising companies is significantly high. The project would have to invest
many resources to get the attention of the public and investors. In Initial
Exchange Offering, the marketing budget is relatively low as the exchange
actively markets the tokens of the startup.
There is no screening required before a startup
can launch an ICO but is required in IEO and the exchange screen the company
before it allows it to fundraise on its platform.
Another difference is that only after the
funding gets completed, ICOs mint their token while tokens are generated by the
project and sent to the exchange platform in case of IEO.
IEO promises higher Liquidity, transparency and
protection than does ICO.
Vested interest of exchange provide some level of oversight over the project.
crisis for ICOs
“When Binance?”is possibly
one of the most asked question in telegram channels because investors are
looking to offload their purchased tokens for multiple returns and moving onto
the next one. As if running the project itself isn’t a hard task, exchange
listing consumes both human & financial capital.
Creating a token is super
simple but listing it is super hard specially on big exchanges. Though there
are probably more than 300 exchanges globally, 1% of them own 90% of the volume
& that’s where the competition comes in. Not just that exchanges are
charging for exchange listing fee, the volume need to be significant else there
is a danger that the token will be delisted. To avoid that firms do pay up for
market making, which isn’t just ethically & legally questionable but also
financially expensive. Orphan tokens end up in decentralized exchange or tier 3rd exchanges where volume is close to nothing. As per few reports only 1 out of 5 tokens
was able to be listed. Number for tier 1 exchange is probably 1 out of 15.
It cost anywhere from $100,000 for tier 2/3 to $3M
for tier 1. There has been claims of charging $5M – $8M during the bull markets
as well. Exchange rather than specifying it as listing fee, they call it due diligence
cost. In all honesty, they’ve to perform the due diligence because they can get
into trouble by offering something that could be fraudulent.
State of IEO:
first ever cryptocurrency exchange that embraced IEO was Binance and launched
its IEO platform Binance Launchpad. BitTorrent (now bought by TRON) conducted a
token sale on Binance Launchpad in January and raised $7.2 million in a short
span of 15 minutes & generated 4X returns within days . Fetch.AI was the
second IEO on the same platform that hit a hard cap of about $6 million in 22
seconds. The Binance Launchpad was a success and how could other exchanges miss
out such a lucrative opportunity (they charge listing price and a percent of
the fund raised) as they started launching their own IEO platforms.
Singapore based major exchange Huobi jumped into the ring by launching its own
IEX platform. However, to look different from its competitors and to attract
more investors, they named their fundraising model DPO Direct Premium Offering
and is prominent for allowing users purchase crypto at a price lower than the
market price. KuCoin wanted to “reveal the hidden blockchain gem” and launched
their KuCpon Spotlight. The Malta Based exchange OKEx announced about the
launching of their platform OKJumpstart for holding IEOs on March 13. Bittrex
IEO is an upcoming IEOs scheduled to be launched in the first week of April.
vs. IEO. Which one is preferred?
in July 2013, Mastercoin held the first ever ICO initial coin offering which
was vigorously followed by many Blockchain projects fundraising in the same way
however ICOs have many flaws slowing down the progress of fundraising and this
engendered the need for other means of fundraising like STOs Security Token
Offerings and now IEOs which has actually created a buzz in the crypto world.
people might argue that IEO is the same old wine in a new labeled bottle but
that is not true. Though both IEOs and ICOs share the same rationales of IPOs
Initial Public Offerings, both are fundamentally different. What makes IEO
unique is that the project has to pass through a comprehensive assessment by
the exchanges in order to curb problems face by ICOs-Scams. This way, IEO
becomes riskless for investors to put in their money unlike what the scenario
had been during the ICOs craze when investors would invest in any ICO including
those who could offer even a white paper. This is the reason why majority of crypto
experts prefer IEO over ICO.
of RAID IEO is a best example here. Bittrex had recently cancelled the IEO for
RAID project just hours before the start of token sale. The reason behind why Bittrex
cancelled IEO for RAID was the termination of partnership between the e-gaming data
analytics platform OP.GG and RAID. Bittrex considered the partnership between
the companies an important part of the project and the termination of the
partnership simply made the token sale redundant and not in the interest of the
consumers of Bittrex.
Advantages of IEO
biggest advantage of IEO for the team/project is quick access to vetted
investors and hence funds just like the companies that after launching their
IPO initial public offerings get their name listed on NASDAQ exchange and get
access to funds. Couple of days ago I read in an autonomous research that ICO issuers
have no other option but to pay an amount anywhere from $1 million to $3
million to get their tokens listed on an exchange. Further adding, there are
additional costs as well like they have to spend on running marketing campaigns
and hiring advisors. Since exchanges still charge high listing fees and share
in the funds raised for conducting IEO, the startup/team behind the token get
time to focus on the project development and not on marketing and fundraising.
is an open secret that exchanges earn a lucrative amount of money in the form
of listing fee and share in the funds raise which further depend on the size of
the platform. In addition, IEO participants after creating an account on a
particular exchange might still roam around and ultimately become regular
investors who participate in IEOs face the least risk. They simply create an
account on an exchange and can participate and purchase tokens in any IEO launched
on the exchange instead of creating many accounts and dealing with a number of
wallets on different exchanges. Leading exchanges such as Binance make sure the
projects pass a vetted process of assessment before the token sale gets
conducted on the exchange because they do not want to loose costumers by
getting their reputation spoiled by cooperating with an illicit or fraudulent
project which means there is always a higher degree of trust in case of IEO. However,
in case of ICOs, you could be at risk if you are not good with spotting scams
and dubious projects. A legitimate exchange will never host scams so if you are
a member with one, you would face the least risk. Initial Exchange Offerings
IEOs allow investors to take part in Initial Coin Offerings ICOs with low risk.
Non-compete between exchanges
When a token is launched independently
there isn’t any affiliation with a specific exchange so it can be listed on
multiple exchanges exposing itself to lot of users. My concern is that if a
token was sold through a specific exchange there may be reluctance for other exchanges
to list it specially the competition one. While goal of crypto is to build an
open financial system, this may lead to a silo approach.
Lack of volume
While IEO does guarantees exchange
listing, it doesn’t guarantee a volume. If the volume drops a lot, there is a delisting
marketed as utility tokens, there is a chance that they’re a security in
multiple jurisdiction. In that case they would have be classified under Security
Tokens, which I’ve covered in detail here.
While there is a guarantee that
it’ll be listed on exchange, the firm offering the token may delay listing due
to any factor. Major factor would be product not being ready or bear market.
Lack of lock-up period
In case of traditional IPOs,
there is generally a lockup period for early investor but so far there isn’t
anything like this in IEO. This can
create a pump & dump scheme, so buyers beware & don’t buy into any
to become an IEO participant?
need to follow five steps to take part in IEO.
Throughout the last year,
the fame of ICO has dwindles to great extent but they still are the main mediums
for fundraising for many cryptocurrency projects. So first of all you need
to be sure if an IEO is going to take place by checking the website of the
You need to know about the
exchange that will conduct the IEO. If you are already registered on the
exchange and have a wallet, you move on to the next step. If not, you need
to create an account on the exchange in order to participate in IEO
because a token issuer may sign an agreement with only one out of many
exchanges and in that case, you would have no other option but to create
an account on the exchange.
You need to complete your
KYC Know Your Costumer which is an anti money laundering AML procedure.
Once you are registered with an exchange, you would have to go through a
sought of verification procedure to reduce security risks. You need to do
it as soon as possible because it may take the exchange some time to get
your identity confirmed.
Now you need to find out
the crypto option that is available. You normally have the options for ETH
Ethereum and BTC Bitcoin over the exchanges except for some in the likes
of Binance who go with their own tokens.
Finally, you need to wait
for the time until your Initial Exchange Offering IEO starts. Make sure
you are present minded and do not miss the token sale for it might only
last for couple of minutes or may be less (the case of Fetch.AI).
The next fundraising boom?
Back in 2017 & 2018, ICO engendered a fundraising boom
in the crypto space but a notable number of ICOs were conducted by scammers,
looted investors who blindly trusted every ICO and this was the sole reason why
ICOs lost their glory and prestige. In addition to ICOs with dubious nature,
ban on ICOs in countries like China, Macedonia, Nepal and Ecuador exempted a
big source of funding for the startup and companies who wanted to fundraise for
their tokens. Since IEO ensures provision of high level trust, security,
project credibility and instant fundraising, it is no doubt going to engender
the next fundraising boom in the crypto space and hence will become the
standard model for raising funds.
said that, one might argue that there is nothing like a perfect crowdfunding
model/mechanism because since Mastercoin till the present day IEO, we have been
seeing so many crowdfunding mechanisms with ICO the most prominent among all but
due to the arrival of IEO, even ICO looks in hot water. Things can change. We
have seen things getting flipped 180 in matter of days. Who knows about the
future? The life span of IEO could be shorter than that of ICO as well. It
depends on how advanced the new crowdfunding mechanism is. A more advanced CFM
than IEO will no doubt dwindle the prospect of survival of IEO. But for now, the
perks and benefits promised by IEOs are way too lucrative to be ignored and as
a result, it will take priority over ICO but I still think STOs are the way to
go for any similar offering.
The velocity of an object is the rate of change of its position with respect to a frame of reference and is a function of time. Simple example is car travelling at 100 mph. Though it’s a concept of kinematics, relevance can be derived in economics and more specifically in tokenomics.
In tokenomics, price of token is directly linked to usage. However, usage isn’t the only metric & this is where velocity comes into play. Gyms operate on a 100X principal to be profitable. They’re looking to get 100 times memberships than the capacity because they know not everyone is going to show up at same time, but if they do they’ll in trouble. What if a single membership is valid for 1 person at any given time & people can share it. This will lead to 99% drop in their memberships collapsing their 100X model.
Basic premise with respect of membership is that it’s linked to an individual person vs individual usage & isn’t transferable. In case of tokens, this model does have a flaw because they’re so easy to transfer. Take an example of gym where a company issued 1000 tokens for a gym with a capacity of 10 people. Now there is an intermediately company which bought 10 tokens & setup a rent-seeking program where users can rent whenever it’s needed. In this case, gym business has been screwed. None of the users have incentive to hold membership because they can borrow it whenever they want.
This is where the concept of token velocity comes. Since the basic promise behind holding a token is that you get something in return. Now the question is whether these returns are perpetual or one time. If it’s one time, then there isn’t any incentive for the owners of the tokens to hold them but if they can be flexed over time, they would have incentives to hold them as long as they see the benefit.
Similar to automotive mph term, here it’s uot which stands for “usage over time”. More usage in a short span of time leads to higher demand & lower usage over the same time would lead to lower demand. Usage is directly correlated to demand & result into price changes.
One Time Returns could be:
– Accepting cryptocurrencies to facilitate customers or attracting a new set of customers. Seller don’t have to hold it because the benefit has been reaped & is one time only
– Accessing a network to perform a single usage action without preserving your history. Example would be buying a concert ticker which is one-time event. You may attend other concerts but there would absolutely no correlation between both of them
– Proof of Work (PoW) tokens, miners can immediately sell it because the output has been achieved
– Transfer of value where a company requires a payment in specific token and you only purchase it for that specific payment.
– Stake in decisions that you’re passionate about. More like a voting power. Example would be uber drivers earning tokens & have a say in the company policies based on how many rides he has completed and similar rights for the riders.
– Right to participate in a network without transfer privileges. Example is having a membership to a club where you can’t transfer your membership. If you decide to give it up, it’s burned and never available again.
– Identity management in the network. You may use Facebook once a day however you want to preserve who you’re & despite the concert example given above your identity does matters
– Novelty or exclusivity where there are only a specific number of people allowed into the network. Once it’s closed, you can’t participate anymore.
– Pedigree building where companies incentivize long term holders. More like a loyalty give away. So, if you’ve a token of a movie theatre for 5 years, you’re allowed to book the best seat
– Profit Sharing. If the network is growing and sharing the economic upside with the token holders, they’ll hold the tokens to reap the benefit. It’s similar to dividend paying stocks
– Price appreciation. If there is an economic upside with holding tokens that’s based on fundamentals, users would like to hold the tokens. All praise to the rising sun however it does lead to plateau or crash after a while if the fundamentals aren’t there.
– Secondary benefits such as discount at a restaurant if you hold a specific gym membership
– Discounted network spent where if you earn tokens within the network & spend it back into the network, you get a discount. Example would be Airbnb allowing host to get 100% off on the fees AirBnb charges if you spend you don’t withdraw your earning.
– Discount on company products if you’re holding their tokens. So if you’re amazon token holder, you get 50% discount on the profit that amazon makes off that sale
Since tokens do allow frictionless transfers, they would come up with schemes to reduce token velocity. With higher token velocity, they’ll struggle with building an ecosystem and it’ll have a negative impact on their pricing. It’s the network strength & demand that can allow them to decrease token velocity. Ultimately if a token is so strong that it does start acting as an asset class that’s where the companies will be able to grow exponentially. Companies will have to look into the velocity problems to encourage long term holders for non-speculative reasons.
5 years ago, we installed the first bitcoin ATM in Toronto at Decentral. These 5 years passed by quickly. I am humbled by the people I met, experiences I had & opportunities I got through that experiment.
That venture started as a fun weekend project that turned into a business. Today it’s a thriving company. I’ll cover that story later but today I’ll write about why I think Bitcoin ATM is a killer use case for cryptocurrencies.
It’s fairly easy to buy bitcoins in today’s age & date however it wasn’t the situation in 2013. We had disasters like MTGox in addition to some shaddy exchanges which wanted you to transfer funds to an offshore entity. At time it used to take months before you can see your money in bank account. Bank accounts were also getting shut down for just dealing with an exchange.
Idea behind Bitcoin ATM was very simple. It’s a simple machine that converts fiat into bitcoins & vice versa. It was considered one of the most unpopular startups due to it’s nature. Like here everyone is building next generational cryptographic solutions & here we were cranking steel boxes with cash recyclers. In the utopia world of crypto, it was hard to make an impression & was laughed upon.
5 years passed by & today there are over 4,000 BTMs serving performing millions of transactions every year. For majority of people, their first interaction with bitcoin was through Bitcoin ATM. I do often come across stories of how people use these machines. It’s one of the most important component of the entire cryptographic currency movement.
I still to date believe that one of the most weakest link in the decentralized financial world is traditional banking. Today if banks shut down any exchange bank account, they’re done. Building an exchange using a bank is like building an AirBnB in the lobby of Marriot
Here are some interesting use cases around how these Bitcon ATMs can do more than just
People can buy stable coins through it & store it in their wallet. Banks are generally only interested in banking the top 1% so there is a big number that can be served.
Infrastructure as a Service
These BTMs can be used to offer services to unbanked directly from these machines. Companies can built applications targeting this market segment & BTM can serve as an intermediary
Despite digitisation majority of the money remittance is done in cash. 80% of the expenses for a money transmission company are due to location & KYC. BTM can slash these expenses by 95%
If you look at any financial institute, they’ve to dependent on SWIFT or central bank network for transfer of fund. Through BTMs foundation of an independent financial system that be laid which can be built parallel to legacy. This system have it’s own rail tracks allowing more flexibility. There is a bigger opportunity to build a network of BTMs which can perform any function that any other financial institute can perform.
These BTMs can have cash recycler and in an ideal scenario there isn’t any need to replenish or fill up the cash. They can independently operate & replace any branch effectively improving profitability 5X.
Have you ever used a Bitcoin ATM or is there a Bitcoin ATM nearby yours ? Also what else do you think these BTMs can do ?
Financial cycles are often misunderstood by majority. It’s a zero sum game where transfer of money takes place from one entity to another. It’s combination of analysis, research but luck outplays every other factor. Markets react irrationally majority of the times.
Either you’re a fund manager or an individual managing your personal portfolio, what’t the #1 question that goes through your mind.
“Is this a great time to exit or enter”
There are three types of sentiments that exist in the market at any given point of time.
Every one in the market has a conviction behind his decision once he is able to identify the trends based on the information he has. General trend is to follow the trend and don’t ride against the wave, however if you look at history biggest gains are made when people went against what market was doing.
Warren in the letter explained how well the stock markets have performed & index funds was the best investment that people could’ve made, but he outlined the 3 biggest traps for any investor
Trading too much & incurring fees
No or little stock analysis
Poor skills at timing the market
He also mentions that though these are the obvious ingredients for failure, they’re added to the receipt of success repeatedly
Gold mines are found when you’re patient and have your own strategy. I’ll cover the following
Why is it a good idea to go against the market
Why crashes always follow bubbles
Why risk-free is actually the most riskiest approach
Before I dive into more details, let’s start with the basic notion behind investor mentality. He is always looking for one thing
Buy assets with high value at a low value. Delta between actual value & value he paid is the profit
My job is to invest in a wide variety of assets & construct a portfolio with different strategies to yield results beating the market average. History suggest than less than 33% of the people are able to beat the market average, but the returns for 33% are so high which keeps the remaining 67% in the game. Luckily, I am among the 33% so far, but I could be on other side of the table anytime.
Luck plays an important role in any investment outcome regardless of how much research one has done. Some are better at guessing by chance or by research, but no one has a crystal ball to predict accurately. Best thing an investor can do is to construct a thesis around a hypothesis, build a strategy around it with a backup plan & then discipline himself in following it. Every failure or success should take him back to the working sheet to validate or invalidate his assumptions.
While research is good, the biggest factors involving the market cycles are large-scale economical, geopolitical or market-related events including but not limited to security, war, military take-overs, political instability, natural resources discovery, big trade agreements or a technological breakthroughs. With advent of internet, every one has access to this information & now it’s up-to their intellectual ability to absorb, assess and guesstimate the impact on the markets.
There are multiple types of traders. It could either be day-trader, long term investors or just wicks scalper. Regardless of whoever you are, it’s the exact same mission. Beat the market with your decision. You can either be investing in hope of price increase, generating cash flow or just diversifying your asset to preserve capital, but every move you determine is nothing but just a speculation. Everyone is hoping to be smarter than others, but that rarely happens.
In the past, I acquired assets which were a steal but also picked up garbage that still to date I can’t believe. Biggest jackpot is when you’re able to time well. It’s like striking the ball in the right direction from middle of the bat. It’s super hard to time it well, so best is to have an exit and entry price & not worry about over optimising your gain. Just minimize your losses.
So what’s a cycle? They’re similar to any wave that you see at the ocean which comes and go however waves can be bigger or smaller. Despite their unpredictability, if you look at a longer time frame, you can have some level of confidence of the future. Example is night comes after day, but the time sun rises and set changes from season to season. We may or may not have a White Christmas in Toronto, but ruling out snow in January/February is very hard.
It’s easier to be right in the longer time frame while very difficult to be right in a short time frame. Reward to be right in a shorter time frame is higher but Risk reward ratio just doesn’t justify the action.
Today we’re fortunate enough to have access to so much information that we can plan our day very concretely. Though we don’t know if it’ll snow on 25th December, but history shows that there isn’t any January without any snowfall.
While it becomes super hard to predict a specific trend during the day, long term cycles are fairly easy to identify. We were in the longest bull run in the history with every assets giving returns that were unprecedented in the history for the last 10 years. General public does exactly opposite to Buffet suggested. People will jump into an asset class when it has already reached the peak and will shy away from getting into an asset when it has bottomed out.
Bubble-Burst cycle keep on repeating rewarding the smart, lucky and patient people while taking it away from the people on the other side.
Focus on Long term:
“There are only patterns, patterns on top of patterns, patterns that affect other patterns. Patterns hidden by patterns. Patterns within patterns. If you watch close, history does nothing but repeat itself. What we call chaos is just patterns we haven’t recognized. What we call random is just patterns we can’t decipher. what we can’t understand we call nonsense. What we can’t read we call gibberish. There is no free will. There are no variables.” ― Chuck Palahniuk
If we look at the great depression, dot-com bubble, 2008 recession or any other similar event, there are many commonalities. Biggest one is the rate at which things are changing. Similar to body, economies or growth can’t rely on steroids for long. You can have a shot here and there but overall it should have merits. Back in 2013, I recall there were only 2-3 investment firms which remained in single digits till 2017 where every one wore the hat of Blockchain VC with reported number of more than 100 in 2017.
Mushroom group of these wanna be investors was toxic because companies were raising millions in seconds where they won’t have even be able to raise 10k from traditional industry. Result bubble burst and cryptocurrencies have lost 90% of it’s market cap. This isn’t the first time it has happened and probably won’t be the last one. These however does act as a filter for part-timers. I read on this topic here
While things generally do recover, it may take much longer in few cases. Though there is more VC invested today in startups than 2008 but the house ownership hasn’t returned to even closer to numbers of 2008.
Overall, with population growth economy has to grow and research shows the poverty levels are improving as well, so there isn’t a mystery behind achieving reasonable growth. Perseverance is the goal. As they say whatever that goes up must come down.
Biggest challange with the short term mentality is to understand investor psycology. Research shows that 90% of the decisions that we do are irrational. Very few people are disciplined and our spontaneous decisions make or break our lives. We have our own mood swings, good and bad days & in few extreme cases it’s more like a pendulum from unbounded euphoria & bottomless despair.
#1 reason for short term market mentality is those pendulum mood swings. It could be euphoria-driven greed that lead you to go all in or despair-driven fear that lead you to sell everything. Either people think this is once-in-a-lifetime opportunity or the world is going to end. Biggest mistake people make is when they convince themselves that this time will be different.
Even though your heart is saying that markets are irrational, you get in for a swing trade. It just take one person to panic and the stack of cards start to follow down creating a dominos effect. Fear of greed or fear or losing, both are dangerous.
Though it’s super easy to comment on it, when you’re in the moment, it’s very hard to resist even for the best of the best.
An early example is the case of Sir Isaac Newton and the South Sea Company, which was established in the early 18th Century and granted a monopoly on trade in the South Seas in exchange for assuming England’s war debt.
Investors warmed to the appeal of this monopoly and the company’s shares began their rise.
Britain’s most celebrated scientist was not immune to the monetary charms of the South Sea Company, and in early 1720 he profited handsomely from his stake. Having cashed in his chips, he then watched with some perturbation as stock in the company continued to rise.
In the words of Lord Overstone, no warning on earth can save people determined to grow suddenly rich.
Newton went on to repurchase a good deal more South Sea Company shares at more than three times the price of his original stake, and then proceeded to lose £20,000 (which, in 1720, amounted to almost all his life savings).
This prompted him to add, allegedly, that “I can calculate the movement of stars, but not the madness of men.”
The chart of the South Sea Company’s stock price, and effectively of Newton’s emotional journey from greed to satisfaction and then from envy and more greed, ending in despair, is shown above.
Lesson learnt is that herd mentality kicks in after euphoric greed predominates kicking out all the sanity a person have.
Resisting such emotions is very very tough and I have to fight it out every time I am in that situation.
What worked has me may not work well for others but I had more success when the risks were higher. You can get a good price and if you can factor the risk, it comes out be a better deal.
People pay a premium when markets are good but they all give a massive discount when the markets are down.
While every one has access to the market data or media, very few are able to separate sentiments from rationality. I purchased few houses from foreclosure couple of years ago & I can’t believe that I was able to purchase houses for 10% of their value. Cash flow remains almost the same as well. So I bought few and sold them at rent-to-own with taking down payment higher than what I paid for the house. I wish if I knew more about it back then but there is always another time.
Many people won’t know that house prices in 2010 touched around 1945s level. 1945 as a reminder was post-world war II era when the entire world was going through a great depression. Economy, GDP, Population and other factors are no where closer to 1945, so that buy made perfect sense. Population, GDP was at-least double if not more in 2008 over 1945 but the house price levels were the same. Even though 2008 was a tough year but I was getting too much discount to pass.
While I don’t know if such times will ever return but if you’re patients, you can have success. As they say ” Let the price comes to you”
Take a longer time frame while making a decision. Population is increasing so that’s a very easy factor to account for. Facts like population, inflation, GDP are easily available. We’re producing far more kids than before, incomes levels have gone up & people are working longer hour even post-retirement. Efficiency is increasing day by day in every field of life.
While US economy is growing at 2-3% per year & regardless of how slow it looks like, it is really good however it can’t be sustained for long. Though we live in the most peaceful time of history, it doesn’t take lot of time to shift things over. This is the reason, we’ve to extend our time horizon and focus on things which are sustainable in the long run.
Here is what I would be doing if I am going into the new year as an investor
Construct a thesis around a hypothesis, build a strategy on how to achieve it with a backup plan & then discipline himself in following it. Every failure or success should take you back to the working sheet to validate or invalidate his assumptions.