First Mover: Anything-Goes Token Market Repudiates Rich-Only Venture Capital Club

Venture capital is no longer just for the rich, as crypto markets let traders bet on early-stage digital-asset startups, risks included.

AccessTimeIconAug 24, 2020 at 12:59 p.m. UTC
Updated Sep 14, 2021 at 9:46 a.m. UTC

Price point

Bitcoin was up slightly at about $11,776 early Monday, rising along with European equities, stock futures, gold, copper and oil amid optimism over a coronavirus vaccine and treatments. The dollar weakened. 

The largest cryptocurrency is coming off a 2.2% decline in the seven days through Aug. 23, breaking a four-week string of gains.

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On the positive side, prices have now spent 27 straight days above $10,000, the third-longest period in the five-digit zone in bitcoin's 11-year history. According to Cryptoslate, the streak suggests "$10,000 as strong support, which typically is a positive medium-term sign." 

Market moves

A week after First Mover wrote that cryptocurrency markets are now looking more capitalist than Wall Street, a new report suggests they also might be more democratic. 

Mason Nystrom, an analyst at the digital-asset data firm Messari, wrote last week that digital tokens are giving "anyone with access to a smartphone or computer" the opportunity to bet on early-stage tech startups previously restricted to investors who were already rich.    

"The open nature of crypto networks has largely removed barriers that restricted early-stage investing to hedge funds or venture capitalists," Nystrom wrote. "Hopefully, this will result in better capital allocation over time and democratize an industry that has for too long been limited to the wealthy few."

The business of betting on the next Facebook, Google or Amazon can be risky but lucrative: According to VC News Daily, there's at least 14 venture capitalists with fortunes of at least $1 billion

Because of investor-protection rules imposed by the Securities and Exchange Commission, clubby venture-capital funds have mostly been restricted to "accredited" individuals – those with a net worth of at least $1 million or annual income of $200,000.  

Now, quick-to-market digital tokens like Compound's COMP and Spaghetti's PASTA are allowing anyone to bet on the fast-growing realm of decentralized finance, or DeFi. According to Token Daily, some of the projects come with "frothy DeFi token valuations." 

But check out the demand from investors: No fewer than seven DeFi projects have market valuations of $500 million or more. That's 10 times the size of the Series C funding round that the centralized crypto lender BlockFi announced last week.

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Top DeFi projects by market capitalization.

It's unclear why the SEC has allowed this culture of unfettered tokenholder democracy to proliferate, with its potential for fast riches alongside the risk of steep losses due to poor execution, scams or fraud.

This month witnessed the meme-worthy spectacle of YAM, whose market value plunged to $0 from $60 million within a span of 35 minute because of a programming bug in the unaudited protocol.

Perhaps the SEC is taking a wait-and-see approach. Perhaps the market is too small, young and irrelevant in the midst of a global pandemic to allocate precious agency resources. Perhaps "governance tokens" in "decentralized autonomous organizations" are just too complicated. Maybe they're even structured in such a way that they don't run afoul of the rules. 

"Accredited investor regulations are designed in theory to protect average investors from losing a bunch of their money, but they also prevent people from investing in startups, or in certain crypto assets where some people might actually have a decent amount of knowledge," Messari's Nystrom said in a Zoom interview.

There's a lot of similarities between crypto markets and Wall Street, such as fear and greed, leverage and luck. But at least for now, the playing field in crypto might be more level.

– Bradley Keoun, Editor, First Mover

Bitcoin watch

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Bitcoin CME commitment of traders report

Bearish bets in bitcoin futures from leveraged funds recently rose to record highs on the Chicago Mercantile Exchange (CME) – though that doesn’t necessarily imply a fresh sell-off is coming.

  • In the week ended Aug. 18, leveraged funds – hedge funds and various types of money managers that, in effect, borrow money to trade – increased their short positions by 110% to a record high of 14,100 contracts.
  • The data comes from a Commitment of Traders (COT) report published by the U.S. Commodity Futures Trading Commission (CFTC) on Friday.
  • Institutional investors held 1,400 short contracts last week too, per the COT; a number that has also more than doubled.

Spot prices:

  • Having put in lows below $11,400 over the weekend, bitcoin has rebounded to over $11,790 at press time, according to CoinDesk’s Bitcoin Price Index.
  • A series of higher lows (marked with arrows) seen on the daily chart suggest the path of least resistance is to the higher side.
  • The low of $11,367 registered on Saturday is the level to beat for the bears.

– Omkar Godbole, Markets Reporter

Token watch

0x (ZRX): Efforts to reduce congestion on the Ethereum blockchain are reviving speculation in 0x and other decentralized-exchange tokens.  

Ethereum Classic (ETC): Frequently-targeted blockchain plans "defensive mining" strategy to help thwart more 51% attacks

Aave (LEND) - Protocol ratchets up DeFi returns (and risks) with unsecured lending.

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Price chart for Polkadot's "new" DOT token.


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