Excess returns from cryptocurrency equity crowdfunding

Original title:

Excess returns from cryptocurrency equity crowdfunding: looking at investment logic through the cases of BitShares, Ethereum and Ant

20,000% return on investment in one year, 1,500% return on investment in eight months, 600% return on investment in one year, it sounds like a Ponzi scheme, and many readers probably just closed this browser window, but this is indeed a real case of digital currency equity crowdfunding, namely the BBQ crowdfunding in 2012, the BitShares AGS crowdfunding in January 2014, and the Ethereum crowdfunding in July 2014.

Cryptocurrency crowdfunding with shocking ROI

Crowdfunding in the digital currency industry can be traced back to the crowdfunding of烤猫股票in August 2012. A person in Shenzhen who called himself Friedcat issued 400,000 Friedcat shares at a price of 0.1 bitcoin per share. He held 59% (i.e. 236,038 shares) through Shenzhen Bitquan Company, and sold the remaining 163,962 shares to investors who participated in the crowdfunding at a price of 0.1 bitcoin per share, raising more than $100,000 worth of bitcoin. Friedcat used this money to successfully develop and produce a new generation of Bitcoin mining machine ASIC Miner, which once occupied more than 10% of the computing power of the global Bitcoin mining machine market. Friedcat generously gave a quarterly dividend of 24% to 36%. Friedcat's early crowdfunding investors have already recovered their investment from dividends in the past year alone. Friedcat's stock price is on the famous digital asset exchange in Canada (now moved to Panama)   www.havelockinvestments.com also climbed to a staggering 5.0 bitcoins per share. Coupled with the rapid rise in the price of bitcoin itself, the total market value of BBQ Cat’s stock exceeded 130 million US dollars, bringing an amazing annualized return of 200 times to the early investors who participated in the crowdfunding at that time.

In February 2013, the so-called first equity crowdfunding in China “美微传媒” more than half a year later than Kaomao. It can be said that in terms of time, equity crowdfunding denominated in digital currency is obviously ahead of equity crowdfunding denominated in RMB and US dollars, and it is also larger in scale and has a higher rate of return.

Another classic crowdfunding case in the digital currency industry is比特股（Bitshares） crowdfunding. In January 2014, 3I (Invictus Innovation Incorporated) started a 200-day crowdfunding campaign. During these 200 days, 3I sold 10,000 3I angel shares AGS to investors every day, for a total of 2 million angel shares AGS. 3I promised that the owners of angel shares AGS would receive the benefits of the later-developed Bitshares (BTS) and other products developed on the Bitshares platform (as of the writing of this article, products on the Bitshares platform already include Bitshares BTS, DNS, Music, and Play, etc.).

Danniel Larimer, founder of BitShares, at the product launch event in Miami

Just half a year later, the BitShares BTS product was launched. On July 14, 2014, BTS opened at the BitTimes exchange at a price of RMB 0.149 per coin, bringing a 7.5-fold return to early crowdfunding participants whose average cost was less than RMB 0.02. On August 26, the price of BTS reached a high of RMB 0.341, and there were 15 trading days after that with a closing price of more than RMB 0.2. If investors sold at RMB 0.2, they would have made a 1000% return in eight months. Combined with the rights and interests of DNS, Music, Play and other products launched later and the value of AGS itself, the eight-month return rate stood firmly above 1500%.

以太坊may be the most famous crowdfunding in the digital currency industry. Vitalik Buterin, a 20-year-old Russian-Canadian who speaks fluent Mandarin and wears the aura of a young genius in the digital currency industry, is well-known in the global digital currency circle. The Ethereum project he initiated has become the most eye-catching project in the digital currency circle. On July 22, 2014, Ethereum started a 42-day crowdfunding. In the first week, each Bitcoin could buy 2,000 Ethers, each Ether was about 1.9 yuan. In the second week, each Bitcoin could buy 1,900 Ethers, and the price decreased by 5% every week, and so on. In the last 6 weeks, a total of 31,591 Bitcoins were raised. According to the market price at the time, it was worth 18 million US dollars, far exceeding the expectations of many experts. It can be said to be the largest crowdfunding event in the digital currency industry. Even outside the digital currency circle, 18 million US dollars is very rare. With such a high valuation, is there still room for growth after listing? Many experts expressed doubts. In August 2015, Ethereum was listed on major digital asset exchanges around the world, once again refreshing investors' perception of the valuation of digital currency projects. Ethereum opened at 17 RMB per coin, and the price stabilized at 9 RMB before reaching 12 RMB again. This was a resounding slap in the face to experts who doubted that crowdfunding valuations were too high, and gave the frightened early investors a 600% return on investment.

It should be noted here that: this article only discusses crowdfunding. In the later stage, many investors blindly chased high prices in二级市场of the exchange and bought shares of the above-mentioned projects at high prices, resulting in huge losses. This is not within the scope of discussion of this article.

Why is the return on investment for cryptocurrency crowdfunding equity so high?

The answer is:价值被低估during crowdfunding.

Most investors do not know the difference between cryptocurrency crowdfunding and common equity crowdfunding, and naturally use the valuation model of common equity crowdfunding to estimate the value of cryptocurrency crowdfunding projects.

What is the difference between cryptocurrency crowdfunding and ordinary crowdfunding? Answer:  流动性,  流动性,  流动性, this is an important thing to say three times.

Imagine if investor Wang participated in the angel round equity crowdfunding of a high-tech Internet company and invested 100,000 yuan. How can Wang earn back the principal and profit? Wang can wait for the company's next round of financing and sell it to the A-round investors, but the problem is that the next round of investors often prohibit existing shareholders from selling their equity in the investment agreement.

Lao Wang can also discuss the transfer of shares with relatives and friends, but it is not a very easy thing, and the valuation will not be very good; or Lao Wang can wait until the company goes public and sell his shares in the secondary market. However, not every company can be listed on the Shanghai Stock Exchange, Shenzhen Stock Exchange or the New Third Board. Even if Lao Wang is lucky and the stock is successfully listed, it will often take three to five years or even longer.

We often see that when new stocks are listed on the Shanghai Stock Exchange and the Shenzhen Stock Exchange, their share prices often increase several times. This is not because listed companies are generously giving profits to shareholders, but because the liquidity premium of stocks is realized after listing. The price of liquid assets should have a liquidity premium over illiquid assets.

Looking back at digital currency crowdfunding, these projects are often listed on major digital asset exchanges around the world in a very short period of time, with excellent liquidity. The liquidity premium of these projects is released instantly at the moment of trading, giving crowdfunding participants several times the return, just like the first day of trading of new stocks in Shanghai and Shenzhen A-shares. Jokingly speaking, digital currency project crowdfunding is like the subscription of new stocks in the Shanghai and Shenzhen stock markets, except that the winning rate is 100%, and there is basically no subscription limit.

This is the main reason why cryptocurrency crowdfunding often brings huge surprises to investors. The liquidity premium is realized instantly when the token is listed for trading. Even if the crowdfunding of Ethereum exceeds the target by more than double, it can still give crowdfunding investors 6 times the return on the first day of listing.

Is the currently crowdfunding project Ant Group also underestimated?

The answer is yes. In the 30-day crowdfunding of the Ant Group project, 20% was snatched up in the first 30 minutes. In just 48 hours, nearly half of the total amount was raised. But to explain this issue in detail, let us first look at the crowdfunding of BitShares and Ethereum respectively.

The crowdfunding design of BitShares : quantitative but not price , that is, the total number of shares of BitShares crowdfunding is fixed (10,000 AGS per day, a total of 200 days of crowdfunding), but the price of crowdfunding is determined by the market. The fewer people participate, the more shares you get for each Bitcoin you invest; the more people participate, the fewer shares you can get for each Bitcoin. The figure below is a detailed table of my participation in the BitShares crowdfunding. You can see that on January 31, 2014, I invested 0.5 Bitcoins to get 104,725.75 BTS, and the same investment of 0.5 Bitcoins on February 17, 38,086.35 BTS, two-thirds less, because on that day, there were 109.4 Bitcoins to share 5,000 AGS, and on January 31, I only had to share 39.79 Bitcoins.

As can be seen from the figure below, starting from February 15, the daily investment amount began to increase significantly. The fewer Bitcoins can be converted into BitShares, the higher the cost, so the author stopped participating in the BitShares crowdfunding from the 18th.

Ethereum 's crowdfunding design is the opposite of BitShares, with an unfixed price . That is, the number of ethers that can be purchased for each bitcoin in the same period is constant, but there is no limit on the total amount. Therefore, in theory, there is no upper limit on the number of ethers that participants can purchase, resulting in oversubscription. Ethereum's 42-day crowdfunding finally raised 31,591 bitcoins, which was worth $18 million at the market price at the time, far exceeding many people's expectations. However, this is not necessarily good news for investors who participated in the crowdfunding. It is a good thing that the project has raised more money, but the proportion of each investor's shares has dropped significantly, which means that the valuation is too high and the expected return is low.

It can be found that whether participating in the crowdfunding of BitShares or Ethereum, the returns of investors are very considerable, and the returns of BitShares are significantly higher than that of Ethereum. However, if you ask senior people who are familiar with these two projects, you will know that Ethereum is actually much more reliable than the BitShares project. Ethereum has a huge community around the world, and the project team is well organized from project managers to developers to marketing. The project progress is on schedule. On the contrary, BitShares has delayed its products many times since the beginning, and products such as Keyhotee have failed. Why does BitShares have a higher return on investment?

Because the total amount of BitShares is limited, 10,000 Bitcoins are crowdfunded every day, and a total of 2 million Bitcoins are issued in 200 days. Although the daily investment of Bitcoins has increased significantly, the overall valuation of BitShares has not deviated too much; while Ethereum crowdfunding was seriously oversubscribed. Although investors who participated in Ethereum crowdfunding on the first day knew that each of their Bitcoins was exchanged for 2,000 Ethereums, they did not know the proportion of these 2,000 Ethereums to the entire project because the total amount of Ethereum crowdfunded was unknown. In fact, the final result was that one Bitcoin, which was worth 3,800 RMB at the time, represented only 0.3% of the total crowdfunding share. The number of BitShares crowdfunding is limited to 10,000 per day, and half of them, that is, 5,000, are distributed to participants who invest in Bitcoin. Based on the average daily investment of 43 Bitcoins in early February 2014, each Bitcoin can get 120 BitShares AGS, accounting for 0.6% of the 2 million BitShares AGS. Ethereum is twice as expensive as BitShares.

Antminer 's crowdfunding is different from BitShares and Ethereum. BitShares has a fixed quantity but not a fixed price . A total of 2 million units are issued, and the price of each unit is determined by the market. Ethereum has a fixed price but not a fixed quantity. Each Bitcoin is priced at 2,000 Ethereum, but there is no upper limit on the issuance volume, and the total amount is determined by the market. Both methods leave the possibility of over-raising Bitcoin, but Ethereum over-raises more. In contrast, Antminer's crowdfunding has both fixed prices and fixed quantities . Each unit is equal to 1,000 Antminers, and the price is 0.14 Bitcoins. There are a total of 15,000 units, 2,100 Bitcoins, and the funds will be raised until all are raised, leaving no chance for over-raising. Investors participating in the crowdfunding knew from the beginning that the investment price was 7,157.2 Antminers per Bitcoin, accounting for 48/100,000 of the total 2,100 Bitcoins raised this time. The entire valuation is only slightly more than two times higher than the 10 million RMB in the seed round, which is far lower than the 4-10 times valuation increase from the seed round to the angel round in the industry. This crowdfunding scheme design completely abandons the opportunity of over-subscription. It can only be said that either the crowdfunding designer has a grudge against money or the project is not short of money (or has a grudge against money). Therefore, for participants, the price is known, the proportion is known, and the valuation is not high, the risk is much more controllable than BitShares and Ethereum crowdfunding.

The risk of small ants

After reading this, everyone may be eager to invest in the Ant Financial project. However, I would like to remind everyone of the risks of the Ant Financial project. The probability of failure of any start-up project is very high, and past successful cases do not guarantee future investment returns.

If you still want to participate in the Antshares project, please go to https://www.weangel.com/antshares to participate and please fill in the author's name "Chuxiahu" in the referral column, so that I can get the referral reward, thank you.

(Disclaimer: The yields mentioned in this article are all in RMB. The author has participated in the crowdfunding of BitShares, Ethereum and Antminer, and participated in the seed round investment of Antminer. He currently holds no more than 0.5% of Antminer’s equity. This article does not constitute investment advice. Investment is risky and investors should be cautious when entering the market.)

Author: Early Summer Tiger
Editor: Meng Dada
Source: Babbitt Information