“That’s Our Two Satoshis” - The Issues & Potential Solutions For New Token Issuances

Jeff Dorman, CFA
May 6, 2024

Thats Our 2 Satoshis Logo

Screenshot 2024-05-06 at 11.42.41 AM
Source: TradingView, CNBC, Bloomberg, Messari
Macro matters, macro doesn’t matter, macro matters, macro doesn’t matter
One of the most important factors all institutional investors seek is  “lack of correlation”. Despite a common goal, it is often misconstrued. Digital assets proponents highlight crypto’s lack of correlation.  Over any longer period of time, the data speaks for itself.  Adding digital assets to a portfolio not only increases the Sharpe Ratio (units of return per unit of risk) but also smooths out the portfolio's volatility due to the uncorrelated nature of digital assets relative to bonds, stocks, and real estate. 
We’ve been on record many times discussing how 2022’s higher correlation between digital assets and other asset classes was an anomaly and that, for the most part, macro does not make a big difference for digital assets. 
But sometimes, over short periods of time, it does.  And last week was one of those times.  Stocks up.  Bonds up. Crypto up. The U.S. Dollar down. The market moved in lockstep. The FOMC press conference tempered concerns that the Fed would pivot towards a more hawkish direction of rate hikes, which is marginally supportive for all long-duration risk assets like crypto and equities. Concerns about a hawkish Fed have supported USD strength since the March U.S. CPI print was released in mid-April. Still, Fed Chair Powell threw cold water on that during his press conference and specifically mocked the idea of Stagflation, staging “I don’t see a stag, nor flation”.  
And just like that, at least temporarily, all asset classes responded positively and in unison to a supportive monetary policy. 
But while prices were higher, not everything was copacetic in crypto land…
…The Souring Sentiment of New Token Issuance
Written By Arca Venture Partner, David Nage 
Since Q2 2022, after the events of Luna, Blockfi, Celsius and FTX, new token issuance all but dried up as market sentiment soured and regulatory scrutiny prevailed. From a venture perspective, most deal structures shifted from SAFT’s (Simple Agreements for Future Tokens) to pure equity deals or equity deals with warrants attached (for potential token distributions at a later time). However, the recent perceived “wins” over the SEC (vs Ripple, vs Grayscale, and the Bitcoin ETF approvals in late 2023) have led to the token issuance market resurgence. 
Source: New issue screener from Messari
Running a screen on Messari for tokens that began trading at the start of the year yields over 2,000 tokens. Most had little fanfare; however, there were hotly anticipated token launches from projects such as Wormhole, EtherFi, Ondo Finance, Jupiter, Ethena and more. These projects were well funded by the venture community and, therefore had the firepower to hire exceptional developers and business development professionals to create sustainable and innovative pieces to the overarching stack of digital assets. 
Some projects like Wormhole raised $225M as of last year, but there were also projects with smaller capital raises like Altlayer, which recently raised more than $14M. There was positive sentiment surrounding well-funded projects launching tokens because they had the time, experienced talent, capital, and resources to come out of the gates strong.  
However, many of the 2024 token launches thus far have performed quite poorly. Many in the community, including investors and founders, are trying to pinpoint the exact cause of the performance issues.
Regan Bozman from Lattice Capital sums it up well, and doubled down with a follow-up  thread
He wasn’t alone. The crypto community is fed up with these awful token launches.
As Hayden Adams, founder of Uniswap tweeted out this past weekend
“Not aimed at any specific project, but have seen a ton of discourse recently on the topic so figured I’d share my take on good token distributions:
1) tokens, not points
2) don’t farm the farmers - teasing and creating ambiguity around a token distribution to grow your numbers is bad behavior. If you don’t know yet, don’t speculate publicly. If you do know but are not ready to share full details, don’t tease them out. Just share real details when ready
3) real liquidity day 1 - low float tokens are malicious and my biggest pet peeve. You don’t need to work with exchanges or market makers. It’s so easy. Just distribute enough tokens publicly that real price discovery happens on DEX. People should start thinking in FDV not mcap when valuing these things 
4) don’t create absurdly high token supply to farm people with unit bias, this is also bad behavior
#3 from Hayden reminds me of the backlash Worldcoin received when it launched its token in the summer of 2023, being criticized for those exact issues. From TheBlock:
“Roughly 95% of circulating tokens were in the hands of market makers, which have much shorter term incentives than team members, venture capitalists and other stakeholders.” Critics have focused on the “low float” structure of the token launch, which they worry creates an artificially high price at launch that may later crash when insiders’ tokens — given to team members and investors — unlock.”
Worldcoin performance one month after it began trading on July 24, 2023: 
And WorldCoin is not alone.  Last week, we touched on how all new token issues are underperforming, and Arca CIO, Jeff Dorman, did not hold back:
How Did We Get Here? 
Why do we have 10% unlocks at token generation events (TGEs), cliffs/vesting schedules, and all this jiggering of token supply/low float early on? Simple. Some in the industry who claim to be venture investors have acted quite contradictory in recent years.
From 2018-2019, several funds, upon receiving their token allocation following a TGE would sell quickly, or in market parlance, “nuke tokens”, to mark a return in hopes of helping them with future fundraises. One example would be from the project 0x Protocol, which had a fund sell its tokens in such a fashion. Though this is a single historical example, there are more just like this from other funds in the industry (see “ICP”). While the fund stated its fiduciary responsibility was to de-risk and lock in gains, the seeling began an unspoken battle of alignment between founders in the industry and their investors. Founders sought mechanisms to protect against immediate downside pressure when their tokens became publicly traded.
Again, investors, specifically those who self-categorize as venture capitalists, are supposed to be more durational-focused than hedge fund investors. VC’s have typically been with the founder and project from its earliest days, typically sitting on boards or having direct insight into compensation, hiring, etc. Research from Bassat, Pukthuanthong, Turtle & Walker in 2021 states
“Outsiders may consider VC sales as a negative signal because of the adverse selection problem caused by the high information asymmetry between VCs (insiders) and outside investors and by the moral hazard problems caused by a misalignment of interests between exiting VCs and incoming shareholders.”
VC’s are typically the first money in, taking the majority of the risk in the earliest days of project development. With the structure of digital assets and the liquidity they offer, the issue centers around the timing of token sale events. These events need to change from immediacy to more like traditional IPO lock-up periods. More on that later. 
The Supply/Demand Imbalance
Since Q2-Q3 of 2022, funds in the industry shifted quickly to the SAFE plus token warrant investment model. This means that those in the market who marked their books up quickly during the fast and furious times of the SAFT/ICO in the 2018-2020 period could no longer do this because liquidity in the instruments wasn’t there. The warrant was attached in case market conditions improved for decentralization in token issuance, but as mentioned, many barriers stood in the way for years. Then, Q3 2023 and the events discussed above happened, and all those deals with warrants began calling tokenomic design firms to prepare for 2024 launches. 
What happens when there is oversupply and not enough demand for a product? The price deteriorates. Well, that’s what’s happening here with new token issuance. 
As Thor Hartvigsen from On Chain Times states
“We're 4 months into the year and have already seen a massive increase in the supply of altcoins. Made a list of the ones I can remember from the top of my head. This is ALREADY $8.6b in additional liquid supply injected into the market. And $70.5b in total unlocked over the coming years. Average float (mcap/fdv) of these new tokens at a mere 13.6.” 
And trust me, this is only the tip of the iceberg in terms of new supply/tokens coming this year:
  • Modular infra 
  • Bridges/cross-chain messaging 
  • LRTs 
  • EigenLayer
  • L1's/L2's/L3's 
  • Perp DEXes
Associated performance of a number of the selected above: 
Suggesting a “Way Forward” 
A few things stand out. 
One, the low float, multiple market makers issue, as Hayden Adams points out, is a relatively easy fix. Early investors in projects who are seeking to release their token this year or next can point to the backlash Worldcoin faced and learn from it. Let’s not suppress tokens in the market to create artificial scarcity.  Not to mention, the guy who famously championed all of the low float / high FDV launches on his own exchange is now facing 25 years in prison.  Perhaps he’s not the best role model here. 
Two, we need some capital markets bankers to advise projects on when to launch tokens and the potential demand. We have that in the pre-IPO market with a book runner. Book runners are the lead underwriters involved in different parts of the financial industry, including initial public offerings (IPOs), new debt issues, and LBOs.  With IPOs, the book runner assesses a company's financials and current market conditions to arrive at the initial value and quantity of shares to be sold to private parties, there is a roadshow and independent research opinions, and ultimately, a new issue prices based on weeks of feedback and analysis.  There are smart, innovative people in this industry who could look to replicate much of this using AI and other mechanisms, and someone needs to do it. 
Three, the time for early-stage investors to receive their tokens must change. No more 10% at TGE, no more vesting schedules. Make it 180 days out after a token launch; it’s that simple. Let the market price the asset. 
Four, the exchanges and market makers must stop complicating these launch failures.  Just because a token is marked up in an arbitrary and completely non-arms-length private round transaction, doesn’t mean that is the true and fair price.  It makes no sense to list a token based on the last round “price”, nor does it make sense to artificially inflate the price just because market makers have sweetheart deals with the token issuers where the market maker can’t lose money.   In traditional finance, the traders who trade a new stock or debt listing can’t lose money for a few days, because the sales and trading department is subsidized by the investment banking /syndicate unit, who will eat some of their investment banking profits to support the price of the new deal.  But that only lasts for a few days, and then the traders are on their own and their P&L becomes independent of the investment banking P&L.. Still, it’s all one firm’s P&L, so the trading unit might make money at the expense of the investment banking unit. However, ultimately, the entire firm needs to be profitable… so there is still a lot of thought and research that goes into the listing price to ensure there is demand.  In crypto, the market makers never lose money, the exchanges never lose money, and it’s only the retail investors who buy this crap at artificially high prices that lose money.  It would be much smarter if the exchanges and market markers listed these tokens at prices where there is actual demand, rather than prices where they are being pressured to list it by VCs and token issuers.  There’s no shame in pricing something way below the last private round price, so that new public token investors can participate in the upside too.
Tokens used to be the greatest capital formation and customer bootstrapping mechanism ever created, instantly aligning all stakeholders and turning early users into rich investors, power users and lifetime evangelists.   Now, it’s just a handful of VCs, founders, exchanges and market makers running a show that is destined to fail. The token is meant to represent a better way forward. The Uber driver didn’t get shares of the company pre-IPO even though it’s them, waking up everyday, creating value of the network; the token is meant to fix that broken relationship between participant and network.  The token is also meant to help decentralize the companies of the future, giving those holders the ability to help envision the way forward.  
These elements take time to materialize. Founders having to deal with negative price pressure on their token from those who are their earliest backers does not create long-term sustainability in the industry. The model in traditional ventures has worked for decades; early investors who take the risk can and have received the rewards of their risk, but over a period of time, that lets the company have better footing. 
We need to find ways to encourage early investors to buy more because the project is succeeding, rather than an entire market fearing they will sell because tokens are priced too high and coming to market too early relative to the project's success and lifespan.


And That’s Our Two Satoshis!
Thanks for reading everyone! Questions or comments, just let us know.

The Arca Portfolio Management Team
Jeff Dorman, CFA - Chief Investment Officer
Katie Talati - Director of Research
Sasha Fleyshman - Portfolio Manager
David Nage - Portfolio Manager
Wes Hansen - Director of Trading and Operations
Michal Benedykcinski - Senior Vice President, Research
Nick Hotz, CFA - Vice President, Research
Kyle Doane - Vice President, Trading
Alex Woodard - Associate, Research
Christopher Macpherson - Research Analyst
Andrew Masotti - Associate, Trading and Operations
To learn more or talk to us about investing in digital assets and cryptocurrency
call us now at (424) 289-8068.

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