Why Institutions Invest In GBTC?

I co-wrote this post with my good friend Anand Gomes. 

The other day I wrote about Greyscale investment funds and the $250MM they have raised YTD. I believed many institutions were investing in GBTC (Greyscale's Bitcoin fund) because of CYA. They wanted to outsource risk, so if the investment went awry, they had someone to blame. My friend Anand, founder of RiskEx, who previously traded rates and commodities and now is in the cryptocurrency space, offered an alternative view.

He believed that there are several reasons why institutions invest don't / won’t directly invest in Bitcoin / digital assets:

Regulatory risk: Traditional investment houses don’t want to deal with the optics of investing in an asset that still doesn’t have a clear regulatory framework and thereby invite the scrutiny of the regulators so in essence, this is another type of CYA but more external than internal.

Infrastructure: They lack the in-house expertise, support, (mainly traders, middle and back-office and in the case of digital assets a robust storage/custody solution) processes and the necessary integrations with their existing systems required to invest directly in the underlying digital asset. They cost of setting up all of the above must significantly outweigh the premium incurred when purchasing a GBTC.

Liquidity: An ETF / mutual fund type product offers potential liquidity benefits. Slippage is a considerable problem in the crypto markets, and when purchasing a large order of tokens, folks often incur a lot of slippage. By buying shares of GBTC, the risk of cost-effective execution is transferred to Grayscale and its authorized participants versus bearing that yourself. Further, eligible shares of GBTC are quoted on the OTC market which means you could sell these shares and possibly do better than if you had to liquidate a position directly in the asset on an exchange or in the OTC markets, but this may not always hold true.

Mandate Restrictions: Investment companies often have mandate restrictions i.e., their investment mandate prohibits from directly investing in asset classes not defined in their mandate (i.e., commodities et al.). A mutual fund / ETF type product allows them to skirt this rule because the ETF / fund is treated as an equity security/mandate approved instrument although the underlying asset is entirely different. GBTC shares are titled securities which are similar to stocks and bonds. Titled securities can be easily transferred under estate laws and also allowed to be held in IRA/Roth, and other types of tax-advantaged investor account making it accessible to a more significant number of investors.

This phenomenon is common in an ETF markets where investors will pay a premium not to have to buy the underlying asset/basket that the ETF represents due to the challenges mentioned above. Often, the demand for this type of product will cause it to diverge in value from the aggregate amount of the underlying it provides exposure to, leading to an arbitrage opportunity. Simply put, it is easier to invest in an equity type security that has a well-defined regulatory framework and is well integrated with existing investment infrastructure than an entirely new asset class - and for that, an investor should / would pay a premium!

Creating Better dApps

A lot of my focus this week has been following the Augur launch. Besides Crypto Kitties, it's one of the few dApps that have gained some "traction" on the Ethereum blockchain. Launching a dApp is difficult. No matter what blockchain you start on, you have to deal with high fees, slow on-chain transactions, and other issues. However, that still shouldn't prevent the founders from trying to build a good product. When a product is first launched, the idea is to create a minimal viable product. According to Wikipedia:

A minimum viable product (MVP) is a product with just enough features to satisfy early customers, and to provide feedback for future product development.

The MVP process is intended to prove out a product hypothesis with minimal resources. The key word here is minimal resources. If you do an ICO and raise $25MM+, you are expected to launch a good product. EOS raises $4B+, and people in the community think the user experience was acceptable even though multiple accounts were arbitrarily frozen and the founder attempts to change the constitution. 

Does anyone remember Clinkle? They raised $25MM+ and it took 17 months to launch their "MVP". Most of the tech community ridiculed the launch and the product. In the blockchain community, this would've been cheered as a success! 

I hate people that complain and then don't propose a solution. Here are some suggestions for what I expect out of a good dApp:

  1. Have a hosted application either on the web or as a desktop application. I understand there are decentralization tradeoffs, but most people don't know how to run their own node.
  2. The core features should work with little to no bugs. I know there will be bugs, but the core features of the product should work when launched.
  3. If you have a token, make sure the MVP utilizes the token. It'll disappoint token holders if the token doesn't play a prominent role. Token holders should be your most prominent evangelists for your product. (If they aren't, why do an ICO?)
  4. Take into account infrastructure issues such as high gas fees and make sure they interfere with the user experience as little as possible
  5. Lastly, if you raise $25MM+, your product should be above, and beyond the requirements, I laid out above. 

I hope the community begins to hold dApp creators to higher standards. Take pride in what's built! It could be the next Google.

Thanks to Eric Pelnik for reviewing drafts of this!

Are Token Holders Owed a Fidicuary Duty?

As I've seen more and more companies exploring ICOs, I sigh. I think tokens are great technological innovation, but executives are using them as a money grab rather than maximizing the utility of a token. I see many existing companies that have launched tokens recently such as Kik (KIN) and Telegram (TON) where the incentives aren't aligned. When you buy equity in a company, executives and board holders are legally required to execute a fiduciary duty. Fiduciary duty requires three elements (under Delaware Law):

  1. Duty of Care: the responsibility one person or business has to be reasonably careful (or to use “reasonable care”) when dealing with others.
  2. Duty of Loyalty: to act in good faith and a manner, it reasonably believes to be in the best interests of the corporation and its stockholders and to avoid engaging in acts of self-dealing.
  3. Duty of Good Faith: requires control persons to exercise care and prudence in making business decisions

If you purchase a token, these governance laws aren't in effect. It's entirely legal for Kik to stop working on Kin, but to take the token investor's money. This situation is problematic because regulations don't protect investors and companies can take advantage of poorly educated investors.

How do you solve this problem? It's tough to answer because a company could launch an ICO and pivot if they aren't succeeding. Think about a company like Slack; they pivoted from a video game to a messaging application. If a token was issued for the video game, the value would currently be 0, but the equity portion would be worth billions. 

PROPS, issued their ICO via a Public Benefits Corporation. I am skeptical that this model works primarily because token holders cannot bring legal action. Even if token holders, believe PROPS is violating their mission, there is no way to resolve this. 

The only token model that is logical at the moment is using a model that doesn't involve any equity holders. This would require a non-profit model or a purely open-source model. The reason why this model works the best is that it ensures maximum effort is put into increasing the token's value. If you don't have an equity component, you can't have diverging incentives. 

If you are a company looking to launch a token, you need to ask yourself if a token makes sense and if you can ensure the equity component of your company aligns with the token element.

You want to read more about token economy models. Check out the articles below.

Thanks to Jake Micham, Andrew Steinwold, and Phil Glazer for reading drafts of this.

Cryptocurrency Investor Survey

On May 2nd, the Medici Conference was held in Los Angeles. The Medici Conference was the first cryptocurrency conference held exclusively for the institutional investment community. Before the conference, fund managers and capital allocators filled out a survey sharing their thoughts on the industry. I would like to share the results of that. I'll start with fund managers. Fund managers (20 funds were Interviewed) were asked about 4 areas:

  • About the survey respondents
  • Current activities
  • Institutional capital predictions
  • Digital currency market predictions

About the survey respondents

The majority of funds interviewed managed less than $50MM, but ~10% of funds managed more than $500MM. I expect the AUM numbers to be skewed because some of the funds interviewed were described as "venture funds". I don't know if this means they invest in cryptocurrencies for the long term or if they are set up as traditional venture funds. If this is the latter, then they can raise money from traditional LPs who aren't restricted by investment committee mandates and are comfortable with the traditional venture model. More than 50% of the funds interviewed had a majority of non-institutional LPs, but ~15% of the funds had more than 50% of their LP base as institutional investors. Lastly, ~50% of the funds listed considered their investment style as venture while ~30% were quant-based, and ~20% were discretionary trading. 

Current activities

~65% of fund managers raised less than $25MM over the past 6 months while ~25% raised more than $50MM. This supports my theory that the biggest increase in AUM by cryptocurrency fund managers wasn't because of fundraising, but past results. ~75% of fund managers believe that the fundraising environment will improve over the next 6 months. ~50% of fund managers had the majority of their funds made up of Top 25 tokens. My favorite statistic was that one fund reported owning 60 tokens in their portfolio. More than ~40% of fund managers said valuation metrics are useless while ~50% said we look at them, but they aren't great. Fund managers were spilt on their sources of alpha. ~45% voted proprietary research and valuation metrics, ~25% industry relationships, ~20% internal technology platform, and the rest voted superior data. Lastly, ~70% believed that the correlation between stocks and cryptocurrency is less than 25%. 

Institutional capital predictions

The mean percentage of institutional ownership in cryptocurrency in 12 months will be ~15% while ~90% of respondents believe that will take at least more than two years before the mean percentage of institutional ownership in cryptocurrency is above 70%. ~60% of fund managers believe that custody is the biggest hurdle for institutional investing while ~20% believe it's regulation. I used to be in the custody camp, but I now believe the biggest issue is "headline risk". Custody is only an issue because the media makes such a huge deal about hacking and reports negatively on the space. If custody was such an issue then why aren't institutions investing in BTC futures? The exposure will be nearly identical to BTC, but without the custody issues. 

Digital currency market predictions

The mean price prediction for BTC in one year was ~$30,000 while the mean price prediction for ETH was ~$1,500. I am not a fan of price predictions especially due to the lack of tools and formulas around valuing cryptocurrencies. Many people are most likely making predictions rooted in emotions rather than fundamentals. ~65% of respondents believed that the most promising geographic area of cryptocurrency would be North America. I didn't like this question because Europe wasn't listed as a choice. Respondents could only choose North America, Asia, or other. Many cryptocurrencies are in Zug, Switzerland and until regulations become clearer in the United States, I expect Switzerland to remain a haven for cryptocurrency companies.

Fund allocators (20 fund allocators) were interviewed about 3 areas:

  • About the survey respondents
  • Current activities
  • Digital currency plans
  • Digital currency market predictions

About the survey respondents

More than 50% of the respondents managed over $1B while ~20% managed over $20B. ~40% of funds interviewed allocated more than 50% of their capital to alternatives while ~20% allocated 30-50% of their AUM to alternatives. ~70% of the allocators interviewed focused on private illiquid investments. 55% of respondents were family offices while ~15% were pension funds or endowments. 

Current activities

~70% rated their knowledge of cryptocurrency to be either advanced or intermediate. ~45% of respondents rated potential for high returns as what was most attractive about crypto assets while ~45% rated investing in disruptive technology as their primary reason. ~75% of respondents invested $1-$25MM in crypto assets while the rest have no allocation to the space. 

Digital currency plans

~31% plan to allocate to active strategies, while ~37% plan to allocate to passive strategy and the rest plan to invest in-house. ~75% of respondents plan to increase their allocation in cryptocurrency over the next 12 months.

Digital currency market predictions

The institutional share of cryptocurrency ownership over the next 12 months had mean ownership to be 15% while respondent thought the # would be as high as ~25%. Similar to the fund manager survey, most respondents thought North America would be the primary geography of the crypto economy.

Overall Thoughts on the Survey

It was unclear what fund managers and capital allocators considered institutional investors. I don't consider family offices to be institutional investors, but it's unclear if survey respondents shared the same sentiment as myself. I would guess that they do not. I would love to see this same survey conducted exclusively among pensions, endowments, and asset management firms. My prediction would be that maybe a small percentage (x<5%) of those allocators have exposure to the space. This is the first survey conducted among institutional investors in the space so I am glad to see their thoughts. If they follow through on their sentiments then I expect a really bullish 12 months, but if they don't then I expect the same flat-lining that we've seen over the past 4 months. 

Thanks to Adam Winnick and Alex Daifotis for putting together the survey. If you want to learn more about Medici, check out their site: https://www.themedici.org/ 

Funding Blockchain Ecosystems

I recently had a Twitter interaction with Jake Brukhman of Coinfund where we discussed the best method for blockchains to grow their ecosystems. Blockchains are launching ICOs and raising hundreds of millions of dollars, but what is the best use of their funds. I present an overview of different blockchains and how they are funding and developing their ecosystems. I then write my thoughts on what is the best method for increasing blockchain ecosystems.

Venture Fund


Other Funding


A variety of companies building on Ethereum created a $100MM Ventue Fund.
It's goal is to create a permanent financial endowment to support and
aid projects in building crucial open-source infrastructure, tooling, and applications.

Ethereum has so far offered $2.8MM in grants for startups and developers focused on
projects that are doing great work across scalability, usefulness and security.

Consensys, a venture production studio, is focused on
funding and supporting the Ethereum ecosystem.


Ripple created a corporate arm called Xpring to invest in startups that
use XRP and the XRP ledger to solve their customer’s problems




Block.one, EOS's foundation, has committed $1B to invest
into funds focused on growing the EOS ecosystem. It's essentially a fund of fund.




Tezos launched a $50MM venture fund to startup and
developers building on the Tezos's platform.





Stellar awards grants of up to $2MM for exceptional organizations
who develop and operate products and services that are
crucially important to the Stellar Network.




Monero has a program where a proposal is proposed via its forum.
If approved, the community
will fund a grant to support the project. The money is
held in escrow until milestones are met.





Dash Masternodes fund the ecosystem via a system called Decentralized Governance by Blockchain.
Masternodes vote on proposals by the public and decide if they want to fund them.


As you can see many blockchains are electing to create venture funds. A venture fund is an obvious use of proceeds. If you have hundreds of millions of dollars, deploying money via a venture fund could have a lot of immediate benefits. One of the few things that EOS is doing right is outsourcing its corporate venture program. It's allocating the funds to people who have experience in early-stage technology investment and should know how to maximize the ROI both in $$$ and for the ecosystem itself. These blockchains should be focused on encouraging people to build on their platforms. Grants, venture funds and innovative methods like master nodes are a great way to support people developing on your platform.

tZero Token Sale Analysis

Overstock is launching a token sale for its regulated token trading system called tZero. The token sale is targeting a $250MM raise with the option to go to $300MM. Currently, $100MM has already raised from various individual and institutional investors. The token is an ERC-20 token and pays a quarterly dividend of 10% of adjusted gross revenue to token holders. The token is a Regulation D offering in the United States and a Regulation S offering for offshore investors. Overstock is accepting investment in Bitcoin, Ethereum, and USD.

Characteristics of the tZero Token

The tZero token will be sold following security laws of the United States and other jurisdictions in which they are selling but will be exempt from the Securities Act of 1993. The token is sold under Rule 506 of Regulation D. As such; the offering is restricted to accredited investors only. This makes the potential investment pool significantly smaller than traditional ICOs. The investment will also take place in the form of a SAFE (Security Agreements for Future Equity). There is no guarantee that investors will receive the tZero token. Even if they do receive it, there is no guarantee the token will possess any value. The token is solely a fundraising mechanism. It’s unclear what utility benefit the token will provide. The PPM states that Overstock could offer benefits such as complimentary membership on Overstock.com, but no guarantee it will. The only apparent benefit written in the PPM is token holders being eligible to receive dividends of 10% of revenue quarterly. Token holders will receive little to no liquidity in secondary markets. A regulation D offering requires that a transfer of a security only goes to an accredited investor. Additionally, there will be no exchanges (at least in the short term) that offer the tZero token meaning a seller would need to find a buyer and then receive approval from the company. Immediate liquidity is the most prominent benefit of an ICO, but the structure of the sale makes that benefit render moot.

Current Status of Fundraising and Use of Proceeds

tZero plans to raise $250MM for the tZero token with the option to raise up to $300MM if they choose. As of March 1, 2017, tZero has entered into SAFE agreements with 1,100 buyers for tokens worth $114.6MM. ~88% of the tokens have been paid for in advance while the rest are still awaiting payment. There were a variety of discounts for the first $99.99MM worth of tokens sold. tZero lists seven uses of proceeds from the fundraising:

  1. the repayment of amounts payable to Overstock
  2. the Equity Investments
  3. the future development of the Tokens and the Token Trading System
  4. the development of functional utility features that tZERO may offer to holders of the Tokens
  5. general corporate purposes, which may include capital expenditures, acquisitions, debt repayments, cybersecurity upgrades, augmenting technology, infrastructure and personnel, development of products and services, and short-term investments, among other things
  6. lobbying lawmakers and regulatory authorities for the purpose of bringing about changes to laws and regulations related to blockchain technologies, particularly in regards to securities tokens,
  7. offering , legal and accounting expenses.

tZero owes $50MM to Overstock. It’s unclear if this debt will be repaid back in tokens or from proceeds from the token sale. Overstock has agreed to purchase $30MM of tZero tokens, but has not paid for those tokens yet. It’s also unclear if the $114MM worth of tokens sold already includes the Overstock sale. tZero has purchased Weeden Prime Services for $28.2MM. This acquisition will be paid off using proceeds from the token sale. It’s unclear what functional utility features tZero will build for the tZero token. tZero also anticipates that 15% of proceeds from the token sale will go towards legal, accounting and other miscellaneous expenses related to holding a token sale. The fees seem quite high. A traditional IPO has costs that make-up 6-8% of the proceeds of the deal.

Management & Advisory Team

tZero has a solid management team. The CEO, Patrick Byrne, has over 15 years of management experience which includes taking a company public. He was the first CEO of a publically traded company to accept Bitcoin. A wealth of Wall Street experience surrounds him. The President, Joe Camarata, has run multiple electronic trading firms, one of which sold for $1.4B to TD Ameritrade. The COO, CIO, and Controller each have over 20 years of Wall Street experience. The management team has the skillset and networks to turn there in traditional markets to succeed in the cryptocurrency markets. 

I thought it was important to mention the advisory team. While the team is solid, I found it highly unusual that 4 of the advisors listed don’t have formal agreements with tZero while a 5th advisor, Steven Nerayoff, has fraudulently stated that he is a co-founder of Ethereum when in fact he isn’t. If the tZero token trades at the intended purchase price, advisors will receive $23MM in total compensation. (Advisors will collect 2.3M tokens). Managment is irresponsible to be compensating advisors at such an absurd price. An average Fortune 500 Board of Director receives base pay of $245,000.


Most of tZero’s technology comes from acquisitions. In 2015, tZero acquired Speedroute. Speedroute provides electronic trading services for the equity markets. Overstock would like to leverage that technology for the cryptocurrency space. Another acquisition in 2015 was Pro Securities. Pro Securities is an SEC-registered alternative trading system. Pro Securities would be where security tokens listed on tZero to legally trade. Pro Securities has already handled a small blockchain equity offering on behalf of Overstock.com. In 2017, tZero acquired Blue Ocean. Blue Ocean's technology is focused on electronic trading and provides a marketplace for traders to trade 24/7. tZero has acquired a robo-advisory firm which is being positioned to help new and existing investors purchase cryptocurrency. tZero is also developing a DLR (Digital Locate Receipt) to compete in the stock loan transaction business. tZero's DLR will allow broker-dealers to manage stock inventory in an electronic setting. This will prevent issues such as naked short-selling (a prevalent problem in the equities industry). tZero has announced that Kodak Coin will be using its technology for its ICO and listing, but no official agreement is in place between the companies.

Finances and Valuation

Assuming tZero raises $250MM, it's valuation is 14.7x net sales or 49x gross profit. The company had operating expenses of $8MM, $15MM and $17MM in 2015, 2016, and 2017 respectively. The company lost $6.9MM, $11.5MM and $10.3MM in 2015, 2016, and 2017 respectively. In 2017, 50% of tZero's revenue came from three customers. If tZero transitions purely to cryptocurrency, it becomes questionable if that revenue continues. The majority of their revenue is from their broker-dealer business, Speedroute.

Final Thoughts

tZero is a very ambitious token sale. The management team is one of the strongest we've seen from an ICO in recent months, but that is about the only positive of the sale. tZero has significant debt while continuing to hemorrage money. The token has no clear utility value and seems to exist only as a fundraising mechanism. There is no indication that the techniology it owns will succeed in the cryptocurrency market. It only has one customer (Kodak) which hasn't even signed an official contract with tZero yet. Last, the amount of money raised seems to be excessive. A startup business shouldn't be raising $250MM in it's first round of financiang especially with no clear use of proceeds except to pay off existing debts.