The Ledger: Who’s the Sucker at the Token Table?

Recall how a year ago, in the crescendo of ICO mania, people could market and sell digital tokens—many of them worthless—to anyone with an Internet connection. Then, after the U.S. Securities and Exchange Commission fired its first warning shot last July, the party slowed down (or at least became more exclusive) but didn’t stop.

Instead, the action shifted to ICO pre-sales where wealthy investors gobbled up tokens, counting on an untested legal theory that a blatantly speculative investment would transform into a “utility token” that could be sold to the public. But in January, the chairman of the SEC, who had clearly seen enough, basically put all ICOs on ice—and chewed out the lawyers for good measure.

The upshot is a lot of wealthy investors are now sitting with bags of tokens, nervously waiting for others to sit down at the ICO poker table. They might have to wait for a while.

“If your tokens look like a security, you’re restricted to holding onto them or finding another sophisticated investor,” says Blake Estes, a securities lawyer at Alston & Bird. “They’re no better off than if they participated in an early venture capital round.”

Estes sees echoes of the mortgage mess of 2007, when banks used financial engineering to create and circulate gimmicky debt investments. He does, though, think the token economy will offer legitimate paths to wealth but it will take time.

“Eventually, we’ll see registered token offerings. But it’ll be a vastly different undertaking than just writing some terms and conditions, building a website and hiring an ICO PR firm.”

So what happens to the ICO poker players in the meantime? According to Preston Byrne, an attorney and well-regarded observer of the ICO economy, some will be left with piles of worthless tokens.

“If you look at some of the ERC 20 ICOs that took in $40 million for a few lines of code, it’s clear some investors had all of the technical sophistication of a drunken beaver,” Byrne said. “It’s a case of invest in haste, repent at leisure.”

But while some amateur investors may feel burned, he added there are also smart players at the table, such as venture capital firms like Andreessen Horowitz and Union Square Ventures. These firms are able to pick quality projects—Byrne cites Filecoin as an example—and can afford to wait to offload their tokens.

“Remember for many of these VCs, these are small bets and they’re playing on a five- or 10-year time horizon. They’re willing tohodl in the medium and long term like they did with Bitcoin,” Byrne says.

Of course, in poker, one way to make money is not by sitting at the table—but by renting out the room for the game and selling the drinks and other comforts to keep the players playing through the night. That could be an analogy for the strategy of Richard Dulude, a co-founder of Underscore VC in Boston, a firm that doesn’t hold tokens but is instead focused on key infrastructure of the cryptocurrency and smart contract economy. “Success in this model is around long-term appreciation,” he says.

The bottom line is that, even though the current ICO chill will expose some suckers, a lot of sophisticated players are still in the game and could be in line for big wins a few years from now.

* * *

For readers in San Francisco tonight, I’ll be hosting the Frontier Innovation Awards where Bee Partners and CalFounders will award a term sheet worth at least $250,000 to a promising blockchain startup. The event, which will feature a keynote by Monero wizard FluffyPony, is a reminder of how the crypto community is thriving on both coasts—and many other places in between. The Ledger team looks forward to meeting more of you in the coming year.

THE LEDGER'S LATEST

Robinhood Aims to Rival Coinbase With $363 Million Funding Roundby Jen Wieczner

Kik Launches Second Blockchain to Boost Its Token Economyby Jeff John Roberts

Kodak's Not Quite ICO to Launch May 21by Lucinda Shen

Blockchain and the Law (Book Review)by Jeff John Roberts

Winkelvoss Tells Gates 'Put Your Money Where Your Mouth Is' on Shorting Bitcoinby Lucinda Shen

Cofounder of Ethereum Backs Atari Cryptoby Chris Morris

DECENTRALIZED NEWS

To the moon...  NYSE dives into the Bitcoin biz. Saudi salivates over U.S. blockchain startups. Hollywood hearts cryptocurrency. Real journalist interviews fictional crypto investor. Golden State star launches a “CurryKitty” — named “Steph Fur Three.” Former Fed governor says bring on the FedCoin. Facebook friends blockchain and plans to create its own FB cryptocurrency(!). 

....Rekt: Tell us how you really feel Mr. Buffett. Oh Lawdy, Ben "BitLicense" Lawsky could be the new AG of NY . Rumbles over Ripple coverage. Drupal gets cryptojacked. Bitcoin prices tumble and The Merkle doesn't know why. Goldman alum Gary Cohn says Blockchain not Bitcoin blah blah. Say so long to Nvidia's Bitcoin boom.

BALANCING THE LEDGER

This week, Bridget van Kralingen, IBM's senior blockchain maven dropped by Balancing the Ledger to talk about the opportunity for blockchain technology to solve Facebook and many other companies' problems.

BUBBLE-O-METER

Percentage of money supply held by the biggest 100 accounts (h/t Peter McCormack):

Bitcoin: 19%
Ethereum: 35%
Ripple: 98%
Bitcoin Cash: 25%
Stellar: 95%

MEMES AND MUMBLES

Business Insider invited Cookie Monster to discuss his new book and asked him about...Bitcoin. Turns out he has the same confident, libertarian-leaning worldview as many crypto investors. To wit:

"Me know about Bitcookie. Me know that me have cookie and me do this. That me bit cookie. Well, me can talk about self-regulation. Me, OK, me do have issues with controlling meself."

FOMO NO MO'

Don't miss out:  Many large Bitcoin holders make the dwarves of Lord of the Rings seem carefree in comparison. Like the dwarves, they like to hoard their treasure in secret mountain caches, but with far more security. Bloomberg has a new look at Xapo's famous custodian vaults, which require two days for a withdrawal:

Behind the guards, the blast doors and down corridors of reinforced concrete, sit the encrypted computer servers -- connected to nothing -- that hold keys to a vast digital fortune. ... Even in the colorful world of crypto the cache is remarkable -- amounting to about 7 percent of the global Bitcoin supply. It would mean Xapo, just 4 years old, has more “deposits” than 98 percent of the roughly 5,670 banks in the U.S.

We hope you enjoyed this edition of The Ledger. Find past editions here, and sign up for other Fortune newsletters here. Question, suggestion, or feedback? Drop us a line.