P.Two, Turning illiquid billion dollar industries into tradable new asset classes.
2. From bitcoin to security token : securitize Apps revenues flows.
2.1 –2009 : Decentralization, bitcoin and blockchain
Two months after the Lehman Brothers bankruptcy, a new resilience took shape with the publication of the Bitcoin protocol by Satoshi Nakamoto, who describes it as follows:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.“
The idea behind bitcoin was to create an electronic currency that aims to redistribute wealth without interference and/or manipulation of value by external intermediaries, such as banks. Bitcoin is to all intents the result of a transformation linked to the process of digitization which involves society, starting from industries, passing through personal relations (social networks) to reach the current concept of currency and evolve it into a new concept which is completely digital.
In regulated financial systems banks are the backbone of the infrastructure, verifying and guaranteeing transactions, while with the blockchain the intermediary is replaced by a communication protocol able to certify, approve and archive the transactions that take place within the “chain”: nodes participate in the certification of transactions through the resolution of a mathematical calculation. When 50% + 1 of the nodes obtain the same result, the block containing the transactions is approved and stored in a sort of public register.
Bitcoin and its technologies are not only a technological response to the crisis, but also represent a cultural movement that promotes to all effects an evolution of the approach to finance, highlighting how we must necessarily make a transition from a system based on trust to one based on mathematics and cryptography. The bitcoin extends the concept of freedom by offering a currency that can free itself from governments and central banks that today control and print, introducing what we could defineas the “freedom of money”.
In 2014 there was a further evolutionary leap with the birth of what has been called the blockchain 2.0. Vitalik Buterin, a young Russian programmer, launched online fundraising that allowed him to collect over 20 million dollars and launch Ethereum, a decentralized platform for creating and publishing peer-to-peer smart contracts.
From the point of view of the participants, if Bitcoin is nothing more than a payment system, Ethereum goes beyond this scheme, giving users the ability to write wallet-based programs. The Smart Contract in all respects is a code that contains both the agreed clauses and the operating conditions necessary for the operation of a product or service. Basically the object of the contract “goes into operation” when the real situations correspond to the predefined clauses and conditions. The innovation is obviously the total absence of human intervention or any intermediary, widening the range of action of blockchain coins with a peak of 500,000 transactions a day.
2.2–2012 : Democratization, the phenomenon of CrowdFunding
In this new context, dominated by the production of digital content, startups are struggling to connect to the banking system that on one hand does not have the adequate tools to quantify the risk and on the other it must respond to increasingly stringent regulations, failing to provide the resources necessary to support the growth of this new industry.
Startups, without collaterals, are therefore excluded from the debt market and find in Venture their only chance to receive capital to support their initiatives.
The increase in risk capital does not meet the growing demand and around 70% remains unfunded.
In 2012, thanks to the approval of the Jobs Act (USA), the restrictions on accredited investors were removed, giving birth to the first equity crowdfunding platforms such as Fundable, AngelList and FundraisingScript. These led to a new horizon characterized by the democratization of investments, which sees the “supporters” on the front line to finance projects which they believe in, in an increasingly competitive market, where the ability to promote communication on a global level and a continuous evolution of the product, is often the key element in acquiring new users and consequently generating revenues. The participation of supporters in crowdfunding projects had already found a successful pioneer in KickStarter (2009).
The model starts showing relevant numbers, with total fundraising of about $34B in 2017. The possible reasons couldbe attributed primarily to the disillusion with financial institutions whose perturbations have generated significant losses and whose effects are still tangible in the policies of individual governments and in second place, to the decay of bond market yields close to 0%.
Crowdfunding also plays a fundamental role in changing the perception of finance itself, assigning it an “ethical” face. Specifically, in addition to the economic return and tax incentives, supporters have the opportunity to actively participate in a project, developing a community and satisfying needs alternative to the purely financial nature.
2.3 — Digital intercepts the Crowd
The process of digitization, which through the apps, has created and developed a new highly profitable industry, meets the process of democratization, offering a context in which to develop a new financial instrument.
If the idea of securitizing a revenue stream is certainly not recent and in the US is widely used, the”Revenues-Base Financing”(RBF) applied to an app or to a digital content in general gives it a substantially different connotation.
The”RBF” allows a company to be financed producing a revenue stream,estimatingthe future flow and then discounting a part, usually 1/3. Once the company has raised the capital, it can invest it according to its own expansion plans and the investors will be repaid monthly with a quantifiable benefit of 2% to 10% on an annual basis. The temporary horizon is normally between 3 and 5 years.
The digitization process makes it possible to change this scenario by creating a “synthetic derivative” very similar to the RBF but with substantial differences. The derivative would operate at a higher level of abstraction, going to encapsulate the object itself, isolating it from the juridical context in which it was formed. A meaningful example of a new asset could be represented bya software house that has 2 lines of games in one store. The derivative would make it possible for the producer to isolate the revenue stream of the first game to offer the opportunity to third parties, to acquire a percentage of the flow placed on the market. The producer would receive the funds to accelerate development and the underwriters would receive the % of the flow generated quarterly. The fragmentation of the derivative, would lead to the creation of a secondary market in which the “unit”, representing a percentage of the derivative, can be exchanged in real time. The value of the units would be nothing other than the result of the sum of the value of the underlying and expected flow. In the event that the value of the flow increases by 10% in a month, this would be reflected in the value of the units, offering the opportunity to generate profit even in the short term.
This new investment instrument finds its limits mainly in the cost of regulation that would weigh on every operation, going to limit its use to a smaller number of digital assets, with more consistent flows.
2.4 — Crowdfunding embraces blockchain
Ethereum’s blockchain, through smart contracts, enables the creation of”tokens”or”toissue money”.
The ICOs(initialcoin offering) fueled by the success of cryptocurrencies, further emphasize the need of the market to find alternative forms of investment, in which investors can interact with various instruments, in order to allocate in the most appropriate way, part of the liquidity removed from regulated markets.
In a few years the crypto market has attracted millions of users, the number of blockchains has increased considerably and ICOs have become the new phenomenon to ride. Between the end of 2017 and the beginning of 2018 the capitalization exceeded 750 billion dollars, in a race that seems to have no end.
The correction, however, is important, overwhelming all, with a fall that leaves on the field 2/3 of the total capitalization.
The ICO in the following months continued to collect billions of dollars, but the focus shifts from the project to technology, creating a level of complexity that investors can no longer understand.
The ecosystem, which has already happened in other crises, tends to self reference, creating an information asymmetry that obliges less experienced investors to invest in those operations that seem better advertised, thus abandoning the analysis based on numbers to embrace a choice which is based on trust.
In such a complex context, many operations show dubious authenticity and the number of ICOs that successfully completed the fundraising droppeddrastically.
2.5 — Funding Types & Technologies
Despite the fact that the ICO has represented an evolutionary attempt not perfectly accomplished, there is a growing need to introduce regulations to facilitate the adoption of more structured instruments, the Security Token.
Before introducing the benefits of the security token it is appropriate to report the various forms of financing currently available from the point of view of an app developer that alreadyhassome revenues and which faces the need of a capital increase to grow its business.
“Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture”
In this case, the developer presents their pitch to an audience asking for small investments. It is important to consider that with crowdfunding the developer shareshis idea to a large number of people without any way of ensuring non-disclosure. Nowadays there are some different entities on the web where the business idea can be shared to start crowdfunding such as Kickstarter, the leader in the space. Indiegogo offers both flexible funding and fixed funding options or app-specific crowdfunding platforms can be identified inAppsFunder, startups.co, Gust34, AppSplit35 etc.
Angel investors is defined as “a group of individuals who pool their research and resources to provide capital for a business start-up usually in exchange for convertible debt or ownership equity”.
Investments usually range from $50,000 to $500,000 after the investor has evaluated the business plan with accuracy. The decision of investing in a project is mostly related totheir understanding of the idea. Due to the considerable financing, Angel investors can require ownership in return. Meaning, in line with the value of investment, they can even take 51% of ownership of the app, making managerial and strategic decisions on the developer business idea.
While Angels invest their own personal resources, VCs must raise capital themselves, turning mainly to institutional funds, such as bank foundations, social security institutions, local governments and insurance companies.VCs operate, according to their investment focus, which can imply constraints onthe sectors of interest (ICT, biotech, robotics) or the life phase of the company(seed,early-stage, growth, etc),or any other boundaries specified when incorporated. When investing they acquire shares in the company and, depending on the case, also help the startup at the operational level, providing managerial skills, techniques, relationships leadingto improvements or simply waiting for it to grow to make an exit from the investment. Generally a VC requires a member on the board.
Similar to VCs, private equity operates with well established companies, but it differentiates for the amount invested and usually for the majority share required in the share capital.
Bank loans are hardly a viable path, except through the intervention of special guarantee funds usually offered by local governments. The amounts are unlikely to reach 200k. Usually, access to bank loans is not the route startups go through,because of the complexity of making a subsequent equity round whose financing would repay the debt.
As a result, with over 6.5M apps available in the four main stores, developers are struggling to find funds to increase their visibility, features and sales.Each financial round is characterized by time,cost increase and losses, in terms of ownership and company governance.
A typical scenario is shown by an app developer that already generates revenue and is looking for new funds to boost itsgrowth. Activities such as PR and Advertising are estimated to reach up to 56% of total revenues.
New technologies make it possible to make additional financing instruments available. Such instruments overlap with the investment horizon covered by crowdfunding and the venture capitalist, but eliminate the dilutive effect.
Smart contracts allow an efficient and economic tool to simplify and automate the operations of collecting revenue streams.
The ”synthetic derivative” therefore finds a way to overcome the constraints of excessive costs, using smart contracts to regulate the creation of tokens representing the flows of future revenues of an asset.
Given $ 100 of revenue stream in N years of digital content(eg App), if the smart contract issues 100 tokens each of these would represent 1% of the underlying flow. The value of the token would then be indexed by the changes in the flow and would reflect its behavior.
Store’s APIs publish data on revenue performances, making the correlation between the value of the underlying asset and the token transparent and easily understandable.The smart contract also assumes the role of “pay agent” redistributing, based on the held tokens, the tokens generated following the increase in revenues.
Smart Contracts are presenting both the technology and the opportunity to develop independent, transparent and decentralized asset backed token models which overcame the limitation of the traditional financial system, making things more cost effective and easily deployable.
This new infrastructure lays the foundation for new business models and the usage of distributed consensus as a medium for issuing, exchanging and storing custom digital assets. Although digital assets is not something new, the use of blockchain technology for their management is a revolutionary concept we can leverage on to bring a more robust, efficient and secure way to trade than traditional finance.
2.6 -Invest in what you understand and believe in
The ICO phenomenon has highlighted the speed with which the market is able to digest alternative forms of investment but also how the complexity of some of these methods makes it fragile, representing in fact an obstacle to take intoconsideration.
The trade-off between complexity and investor typology leads us to the conclusion that as the former grows, the investor base must shrink and tend to be represented by highly specialized people and/or companies.
The object of the investment, in order to attract the attention of the supporters, must therefore be easily identifiable and understandable. Since the digitization of content has found the support of millions of people, why not let this industry and its products be placed at the center of the investment?
People are better off investing in things they know and understand: investingin one’s interests has a powerful meaning. It fosters the possibility to invest both rationally and emotionally andbe an active part in the startup phase and strategically contribute to the development process of our convictions. Assets we invest in this way, incorporate an emotional significance.
The final goal of Infinity Trade is to incapsulate the value arising from emotional assets and transformit into a tradable asset, from which supporters can benefit from. We now have the ability to overcome the limitations of the traditional financial system, setting up a market based on new asset classes, trust, integrity, transparency and efficiency that is guaranteed by blockchain technology.
The “emotional assets” therefore put together the blockchain innovation and the democratization of investments, further simplifying the understanding of the investment itself. The new assets, from a merely economic stand point, allow us to overcome the complexity of reading financial statements such as the income statement and the balance sheet, leading the attention of the supporter to the single revenue line, which then becomes the data with which to measure the results.
2.7 — Why invest in a Crypto Exchange
By march 2018 more than 1,600 between Coins and Tokens were traded daily on global exchanges. Total crypto market cap rounds up to $350B, with Token Market counting for around $52B.
Less than 1% of the world population have currently invested in crypto currency and about 30,000 arethe wallets created every day.
Bitcoin alone reported about 500k registered unique addresses actively used.According toa blockchain.comreport, worldwide exchange daily trade volume, increased froman average of$ 200.000U.S dollars in 2013 to $400 million U.S dollars in 2018.
With an average commision of 0,1% over a 2,000 fold increase trade volume, we can estimate in $400.000 U.S dollars the daily earningsby exchanges. This is not taking into account the listing process, which for the top 10 platforms by volume, can costs up to $1M.
Taking Binance as and example, in just 6 months aftertheir launch, theygrew to become the world’s largest cryptocurrency exchange by volume,with a 24H trading of over $2B. They also achieved an astonishing 240,000 new users in just one hour, after lifting the new member freeze. CEO Changpeng Zhao, further detailed that the company made $7.5M profit in its first Q1.
An interesting element to consider in the Crypto Exchange analysis is the age of the users. Statesman reports how 65% of users are aged between 19 and 44 years.
This finds an important correlation in the video games world where 50% of players are between the ages of 18 and 49, thus highlighting a possible correspondence between those investing in crypto and those who use it to entertain themselves with digital content.
to be continued ;)