FUQINTRD 697: Innovation and Cryptoventures

Evaluating ICOs

Campbell R. Harvey Duke University and NBER

Campbell R. Harvey 2020 1 Campbell R. Harvey 2020 2 The Bandwagon Investors

Daily BTC =BTSP 6/12/2016 - 7/19/2018 (GMT) BarOHLC, BTC=BTSP, Trade Price Price 6/11/2018, 6,781.17, 6,835.22, 6,634.86, 6,730.89, -50.28, (-0.74%) 18,000

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Auto J A S O N D J F M A M J J A S O N D J F M A M J J Q3 16 Q4 16 Q1 17 Q2Campbell 17 R. HarveyQ3 17 2020 Q4 17 Q1 18 Q2 18 3 The Bandwagon Investors

• …the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”

https://ssrn.com/abstract=2078535 Campbell R. Harvey 2020 4 The Bandwagon Investors

• …the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.” Buffett not talking about – he was talking about gold in 2012

https://ssrn.com/abstract=2078535 Campbell R. Harvey 2020 5 The Bandwagon Investors

Gold

Campbell R. Harvey 2020 6 The Bandwagon Investors

Gold

Campbell R. Harvey 2020 7 The Bandwagon Investors

Daily BTC =BTSP 6/12/2016 - 7/19/2018 (GMT) BarOHLC, BTC=BTSP, Trade Price Price 6/11/2018, 6,781.17, 6,835.22, 6,634.86, 6,730.89, -50.28, (-0.74%) 18,000 BTC

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Auto J A S O N D J F M A M J J A S O N D J F M A M J J Q3 16 Q4 16 Q1 17 Q2Campbell 17 R. HarveyQ3 17 2020 Q4 17 Q1 18 Q2 18 8 The Bandwagon Investors

BTC

Campbell R. Harvey 2020 9 The Bandwagon of Coins and Tokens

Most investors and many in the business don’t know the difference between a coin and a token! • It is like the Wild West

Campbell R. Harvey 2020 10 Almost anything can be tokenized

1. First Gen/Gold 2.0: Bitcoin (BTC), (LTC) 2. Distributed Computation Tokens: (ETH), (XTZ), EOS, and DFinity 3. Utility Tokens: Programmable assets: Storj, Golem (GNT), Sia (SC),

Campbell R. Harvey 2020 11 Almost anything can be tokenized

4. Security Tokens: Represent stocks, bonds, other assets, ASX initiative • STO=Security Token Offering; ETO=Equity Token Offering 5. Fungible Tokens: ERC-20, Decentraland (MANA), REP 6. Non-fungible Tokens: ERC-721, Dharma debt agreements, Decentraland (LAND), Cryptokitties

Campbell R. Harvey 2020 12 Almost anything can be tokenized

7. : • Fiat Colleralized: USDT, TUSD, LBXPeg, Candy, USDC, PAX, GUSD • National Cryptofiat: Fedcoin, , Eurocoin, CADCoin,… • Natural Asset Collateralized: Digix Gold (DGX), Tiberius Coin (TCX), Swiss Real Coin (SRC), D1 Coin • Non-Collateralized: Basecoin

Campbell R. Harvey 2020 13 Storm of ICOs

Campbell R. Harvey 2020 14 https://www2.deloitte.com/us/en/pages/consulting/articles/initial-coin-offering-a-new-paradigm.html Danger

https://www.wsj.com/articles/buyer-beware-hundreds-of-bitcoin-wannabes-show-hallmarks-of-fraud-1526573115

Campbell R. Harvey 2020 15 Danger

• 121 projects did not name a single employee • 24 promised financial rewards without risk • Freelancers writing “white papers” for as little as $100 • Even if employee names are listed, they may be fake

https://www.wsj.com/articles/buyer-beware-hundreds-of-bitcoin-wannabes-show-hallmarks-of-fraud-1526573115

Campbell R. Harvey 2020 16 Danger

Campbell R. Harvey 2020 17 Danger

• Idan Cohen does not exist • It is a picture of Eduardo Carillo

https://www.wsj.com/articles/buyer-beware-hundreds-of-bitcoin-wannabes-show- hallmarks-of-fraud-1526573115 Campbell R. Harvey 2020 18 Danger

• Idan Cohen does not exist • It is a picture of Eduardo Carillo

Campbell R. Harvey 2020 19 Danger

https://web.archive.org/web/20180228123858/https://www.gizadevice.com/ Campbell R. Harvey 2020 20 Danger

https://web.archive.org/web/20180228123858/https://www.gizadevice.com/ Campbell R. Harvey 2020 21 Danger

https://web.archive.org/web/20180228123858/https://www.gizadevice.com/ Campbell R. Harvey 2020 22 Danger

https://www.linkedin.com/in/marcofike/ Campbell R. Harvey 2020 23 Danger

https://icobench.com/u/marco Campbell R. Harvey 2020 24 Danger

https://www.cnbc.com/2018/03/09/cryptocurrency-scammers-of-giza-make-off-with-2-million-after-ico.html Campbell R. Harvey 2020 25 Danger

https://www.cnbc.com/2018/03/09/cryptocurrency-scammers-of-giza-make-off-with-2-million-after-ico.html Campbell R. Harvey 2020 26 ICO Value Raise (millions) 6,000

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Campbell R. Harvey 2020 27 ICO Value Raise (millions) 6,000

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https://www.coinschedule.com/stats.html Campbell R. Harvey 2020 28 ICO Future

• ICOs are not going away – however, there is greater regulatory oversight now • SAFTs • Blockchain ventures have seen no slowdown in interest from venture capitalists • Expect to see in the near future the mix of funding tilt away from ICOs towards more traditional Seed and Series A funding. ICO Future

• No shortage of venture interest

Campbell R. Harvey 2020 30 https://www.bloomberg.com/news/articles/2018-10-05/yale-is-said-to-invest-in-crypto-fund-that-raised-400-million ICO Future

The a16z crypto fund Today we are announcing the launch of a16z crypto, a $300M venture fund that will invest in crypto companies and protocols. Our fund is designed to include the best features of traditional venture capital, updated to the modern crypto world: • We are long-term, patient investors. • We have an “all weather” fund. We provide operational support to entrepreneurs. • We are flexible with respect to stage, asset type, and geography. • We are focused on non-speculative use cases. A framework for assessing ICOs: 1. Idea • What problem is being solved? • Is the problem an economically important problem? • Does the market already exist or does it have to be created? • Is this problem related to a current layer of middle people? If yes, how thick is that layer and what is the probability of strong resistance from the current actors that will be disrupted? • What advantage does the product offer and is it enough of an advantage to be profitable? • Is the idea a social idea (which involves large scale adoption to

work)? Campbell R. Harvey 2020 32 A framework for assessing ICOs: 2. Technology • Is there a white paper? Did the team write the paper? • Is there a better technical solution? • Is blockchain technology necessary (or even efficient) to solve the problem? (alternatively, it might be solved with regular currency or regular database tools) • Is the solution feasible today – or does it rely on future events (e.g., a technological problem must be solved, like Level 2 or sharding, in order for the idea to be successful)

Campbell R. Harvey 2020 33 A framework for assessing ICOs: 3. Blockchain specifics • Is this a coin or a token? Is this choice appropriate? • Could it use ETH, BTC? (does it need it’s own coin?) • What type of blockchain underlies the ICO – public or private? • Is the type of blockchain appropriate to solve the problem? • If a token, what kind of token, e.g., ERC 20, ERC 721; is this a utility token? • If a coin, what is the monetary policy? What are the incentives to run nodes? What will the distribution look like (how much does management/owners keep)?

• If a permissioned, what are Campbellthe R.security Harvey 2020 protocols for the nodes34? A framework for assessing ICOs: 4. Team • What is the experience of the management team? Do they have a track record in launching a business? • Does management understand blockchain technology? • Does management have the technical expertise to design the blockchain technology? • Is the development team in place? • Is there key-person risk? • Are there advisors and who are they? • Are there any red flags arising from marketing materials that may be exaggerated or even deceptive?Campbell R. HarveyAre 2020 they hyping? 35 A framework for assessing ICOs: 5. Execution • Will there be an ICO or a private capital raise (and potentially an )? • Is there legal or regulatory risk associated with the ICO? Is the ICO a security? Can the ICO be launched in the US? • Does the business require a money transfer license? • Has there been a pre-sale? What was the motivation for the pre- sale? • Does the company have initial backing and from whom?

Campbell R. Harvey 2020 36 A framework for assessing ICOs: 6. Upside • Is the idea scalable? What is a realistic share of the market? • Is there positive convexity to apply a similar idea in related applications?

Campbell R. Harvey 2020 37 Blockchain applications

2018 Duke’s Innovation and Cryptoventures course: 231 students • Medical records/hospital transfers • Ticketing/Public transportation • Coffee supply chain/Manuka honey • Employment verification • New global entry system • Scientific data for research • Refugee ID • Art and luxury goods registry • Islamic finance • Vaccinations • Workplace harrassment • Solar power trading • STI certification Campbell R. Harvey 2020 38 Blockchain applications

2017 Duke’s Innovation and Cryptoventures course: 75 students • Entertainment and sports ticketing • Government benefit programs • Humanitarian aid • Identity • Single password for all accounts • Educational and test score records • Agricultural supply chain in India • Aircraft leasing • Digital twins for large medical devices like CT and MRI • Smart guns

Campbell R. Harvey 2020 39