Valuing Cryptocurrencies Christine A. Parlour
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A new investible instrument
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The last 5 years have seen a rapid rise of coins/tokens as a way to raise risk capital. Native digital assets have no natural “country of residence,� investor base or regulator. I
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Unique challenges.
As a prelude to both investing and regulating, it is important to understand basic financial properties
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A few stylized facts
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Based on joint work with Al Hu and U. Rajan 1. ICO or ITS performance 2. Secondary market trading charateristics
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Important caveat: no centralized data source or reporting requirements, so data are much less reliable than that for most traded securities.
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Initial Coin Offerings
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We searched for information on ICOs issued between 2013-2017. Used the white papers to determine the offer price and mechanism I I
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Most are fixed price or take-it-or-leave-it offers Most require a transfer of BitCoin or Ether to a pre-specified wallet in exchange of the crypto
After issuances (sometimes during), various exchanges trade crypto either for USD/Euro/Yen/“realcoins� or other crypto I
We use historical data from coin market cap to convert to USD
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ICO data I
ICO data from white papers we could find as of August 2017, and have the largest market capitalization
Figure: Number of ICOs in data, by year
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ICO Summary Statistics No. Obs.
Mean
Std. Dev.
Min
p25
p50
p75
Funds Raised ($ m) 64 ICO Returns (%) : First Day 51 First Week 50 First Month 51 Secondary Mkt Returns (%): First Week 64 First Month 64
Max
16.36
31.81
0.006
2.45
6.39
15.41
185.0
4,746 2,815 19,999
31,652 18,319 140,818
-46.5 -54.6 -78.4
32.3 17.7 7.06
115 94.8 144
375 277 368
226,300 129,733 1,005,917
1.75 46.3
58.4 191
-94.3 -94
-31.4 -57.8
-10.3 -16.1
28 49.6
274 1,091
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ICO returns calculated as tokens purchased at the average offering price in the ICO and sold in the secondary market.
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Secondary market returns are based on purchase and sale in the secondary market.
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Differences between IPOs and ICOs
1. ICOs (in our data) are not necessarily selling securities. I
Howell Test?
2. ICO size is much smaller than IPOs: I
The median amount raised in an IPO in the U.S. in 2016 was $94.5 million, compared to the $6.4 million we report for ICOs.
3. Tokens can be issued over many months I
Market Mechanism is quite different.
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What surprised me about ICOs
1. Sizable market value due to “legitimate� issues I
Yet, market is unregulated (during this time period).
2. Conditional on succeeding, ICO initial returns are very high. I
IPO initial returns may be too low.
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Data: Secondary Market Trading
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Source: historical data from coinmarketcap.com 2013-2017 I
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Report weighted average of daily prices on the various exchanges.
1,324 cryptocurrencies Keep a crypto if 1. We have at least 1 years worth of data as of Nov. 23, 2017 2. Crypto has a market cap of at least $1 million
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=⇒ 222 cryptocurrencies.
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Total market cap of approx $250 billion.
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Secondary Market Trading: Summary Statistics
Mean Daily Return (%) St. Dev of Daily Returns (%) Daily Turnover Market Capitalization ($ m) Observations
Mean
SD
Min
p25
p50
p75
Max
2.53 17.9 0.0358 951.0
2.65 11.1 0.0474 9,553.5
-0.276 0.77 0.0004 1.0
1.18 11 0.0072 3.3
1.8 14.6 0.0236 8.7
2.7 20.3 0.0482 36.8
19.7 69.9 0.479 137,444.0
222
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Turnover is defined as the Market Cap on Nov 23, 2017/ mean daily dollar volume.
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Statistics calculated over a year ending on Nov 23, 2017
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Cross-Sectional Distribution across 222 Cryptos
(a) Mean daily returns.
(b) Log variance of daily returns
(c) Log volume
(d) Log market capitalization 11 / 22
Investing $100 in an equally-weighted portfolio and a market-capitalization weighted portfolio on November 23, 2014.
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Clear benefit to forming an optimal portfolio
This plot considers 50 portfolios on an efficient frontier of the top 50 cryptocurrencies by turnover, as of November 23, 2015, with market capitalizations of at least $1 million. Portfolio weights are weakly positive.
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Prudent Investing
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In any investment portfolio important to identify the risk source.
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Efficient diversification can reduce some risk.
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Is there systemic or market-wide risk in the crypto market?
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Is this related to any other known risk source?
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Risk Factors: Daily and Monthly Altcoin Correlations with Other Assets
Bitcoin Correlation Gold Correlation SP500 Excess Return Correlation Observations
Bitcoin Correlation Gold Correlation SP500 Excess Return Correlation Observations
Mean
SD
Min
p25
p50
p75
Max
0.174 0.0193 0.0045
0.113 0.0474 0.0468
-0.123 -0.145 -0.224
0.0926 -0.0081 -0.0184
0.177 0.0146 0.0034
0.251 0.0408 0.03
0.645 0.223 0.152
221 Mean
SD
Min
p25
p50
p75
Max
0.21 0.0611 -0.0166
0.29 0.186 0.189
-0.382 -0.456 -0.671
0.0057 -0.0657 -0.106
0.18 0.047 0.0179
0.363 0.156 0.0863
0.949 0.688 0.527
221
This table shows summary statistics for altcoin correlation coefficients with Bitcoin, Gold, and the S&P500 Excess Return. There are 221 observations as Bitcoin is excluded. The top part of the table shows daily correlations, and the bottom part shows monthly correlations.
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Pairwise Correlation Coefficients....
(e) ... with Daily BtC returns.
(f) ... with Daily Gold returns.
(g) .... with Daily S&P500 excess returns. 16 / 22
Quantifying the importance of BtC as a risk factor
(h) Plot of Daily Bitcoin Returns vs. First Principal Component Scores
(i) Plot of Monthly Bitcoin Returns vs. First Principal Component Scores
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Principal Component Analysis
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The first principal component explains 11.4% of daily return variation
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For daily returns: The correlation of the first principal component with Bitcoin has a magnitude of 0.689.
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The first principal component explains 31.7% of monthly return variation.
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For monthly returns: The correlation of the first principal component with Bitcoin has a magnitude of 0.456.
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2 Year Daily return regressions of altcoin portfolios on BtC returns. (3) Return (Eq. Weight)
(4) Return (Mkt. Weight)
(5) Return (Eq. Weight)
0.747∗∗∗ (0.0832)
0.618∗∗∗ (0.0894)
0.732∗∗∗ (0.0852)
0.611∗∗∗ (0.0905)
Gold Return
0.687 (0.587)
0.359 (0.288)
S&P 500 Excess Ret.
-0.391 (0.362)
-0.0175 (0.268)
Bitcoin Return
(1) Return (Eq. Weight)
(2) Return (Mkt. Weight)
0.790∗∗∗ (0.0609)
0.530∗∗∗ (0.0776)
Bitcoin Weekday Ret.
Constant R-squared N
(6) Return (Mkt. Weig
0.006∗∗ (0.003)
0.006∗∗∗ (0.002)
0.007∗∗∗ (0.003)
0.007∗∗∗ (0.002)
0.007∗∗∗ (0.003)
0.006∗∗∗ (0.002)
0.24 484
0.17 484
0.22 484
0.20 484
0.23 484
0.20 484
Standard errors in parentheses ∗ p < 0.10, ∗∗ p < 0.05, ∗∗∗ p < 0.01
Portfolios include 117 altcoins, exclude BitCoin, were formed on Nov 23, 2015. Weekday returns exclude cryptocurrency prices on Saturday or Sunday. Standard errors adjusted for heteroskedasticity. 19 / 22
Summary
1. Very high returns: 2. Biggest risk source seems to be Bitcoin itself I
Is it a Ponzi scheme?
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What is the source of value?
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Do the returns make sense?
1. Discounted Cash Flow: I
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Because there is a liquid secondary market, any altcoin is similar to any other traded security. Value derives from the capital gain.
2. Use Value: I
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Because many tokens have a use component they are similar to a commodity â&#x20AC;&#x153;convenience yield.â&#x20AC;? In preliminary work, this seems to be consistent with the data.
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Conclusion
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Fascinating changes to financial markets over the last 10 years
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Cryptocurrencies are both a new investible class, but also a potential source of competition to tradition VC.
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Bitcoin returns seem to be driving the Cryptomarket
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Even though crypto returns should differ from standard returns, preliminary tests suggest that there might be bubble on top of present discounted value of use value.
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