Tuesday, February 1, 2022

List And Dump Schemes

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In Alternatives To Proof-of-Work I wrote:
The Chia "price" chart suggests that it might have been a "list-and-dump" scheme, in which A16Z and the other VCs incentivized the miners to mine and the exchanges to list the new cryptocurrency so that the VCs could dump their HODL-ings on the muppets seduced by the hype and escape with a profit.
Now, in "You Don't Own Web3": A Coinbase Curse and How VCs Sell Crypto to Retail, Fais Khan takes the idea of "list and dump" and runs with it:
If coins, especially VC-backed coins, consistently underperformed Bitcoin/Ethereum after listing on Coinbase, that says to me that insiders were waiting for a big, dollar-based exchange to list so they could sell - VCs taking profits at the expense of retail. Those insiders include venture capital firms like a16z and, incredibly, Coinbase’s own venture arm, which has a number of investments listed on Coinbase. Other exchanges like Kraken, FTX, and Gemini are also all active in venture, and have listed their own investments.
Below the fold I comment on Khan's excellent analysis.

Three issues motivate Khan's analysis:
First, Coinbase is like the New York Stock Exchange of crypto - a listing there is a huge deal, and usually leads to massive profits for everyone involved. But unlike the NYSE or NASDAQ, Coinbase gets to choose whatever assets they want, using their own process.

Second, a16z and Coinbase’s own returns are particularly interesting, given a16z is supposedly the best investor in this space, and there’s a potential for conflict of interest. Is the game rigged?

Third, Coinbase pivoted its strategy last year to go from being cautious to listing as many coins as they can. That raises the ante even higher for them and their users.
Khan's fundmental point is that, because the performance of cryptocurrencies is highly correlated, assessing the performance of an individual coin in dollar terms is meaningless, they have to be assessed against BTC and ETH. Khan discovered:
most coins underperformed, returns got worse over time, and VC-backed coins did worst of all.

But I was able to do one better - for the last few years, Coinbase put out the names of coins they were thinking to list, but never did. I analyzed those coins - and found they did even better than the ones that made it, and the VC-backed ones didn’t show any of the same underperformance.
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Khan uses Filecoin as an example:
investors who chose to buy Filecoin instead of Bitcoin at Coinbase’s listing on December 10th actually did poorly on relative terms, with a rapid decline (yellow line) in the first month.


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Filecoin isn't an outlier. Khan looks at the returns in terms of BTC and ETH against how long the coins have been on Coinbase:
the reality shows that most of the return comes very early after the listing - the 2021 coins are doing great, but everything from 2020 and earlier is underperforming! The 2021 return is also below the 91% pop cited by Messari, which suggests after the pop they all lose value.

Once a coin has been on Coinbase for a year, it appears to lag Bitcoin and Ethereum pretty soundly.
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He shows that the coins backed by Andreesen Horowitz fare even worse than the average:
A16z’s returns are much worse than Coinbase’s listings overall! This to me smells of insider selling. These should be the best coins there are, given a16z’s access, but instead 100% of those older than 12 months and 90% older than 6 months lag Ethereum
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Presumably because the coins that Coinbase didn't list faced much less insider selling, Khan observes:
This negative effect seems so strong enough that in 2019 and 2020 your odds of beating BTC or ETH were significantly higher if you picked what Coinbase didn’t list - for 2020, as much as five times higher against ETH (94% of Coinbase’s 2020 coins underperformed, vs 69% of the Coinbase rejects).
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Khan summarizes his observations thus:
We can basically tell our story in 3 coins from the “DeFi summer” of 2020:

These coins have all been through the same “macro” environment. The never listed coin is the best; the listed, non-VC coin is better; and the listed, VC-backed coin is the worst.
The reason isn't hard to figure out. VCs have vast amounts of money to hype their fleet of coins before they are listed, a thoroughly corrupted cryptocurrency media to amplify their hype, at least in A16Z's case they are in cahoots with Coinbase to list them, and they have no reason to HODL them after listing, preferring the certainty of the quick post-listing dump to the risks of HODL-ing. The question that needs to be asked is "what value does the incremental alt-coin bring to the market?" The answer is simply FOMO, which isn't a good basis for long-term HODL-ing. Khan agrees:
I think this is a microcosm of how bad the incentives are in crypto - VCs and private investors that used to have to wait ten years for liquidity can now get it within one. The last time that happened was 1999, and we know how that ended. It’s a recipe for risk taking that is then quickly passed on to the public.
Khan puts forward two conclusions:
  • A counterpoint to the “Balaji” thesis. Balaji likes to repeatedly make the point that a major value proposition for “web3” is to help the “little guy”: letting users participate in value creation (e.g., have some ownership in a project). However, the vast majority of users are buying on Coinbase and so are simply underperforming Bitcoin.
  • Support for the “Jack” thesis. Jack’s contention is that most tokens are owned by VCs, and that they are ruining Bitcoin by using the “web3” narrative to siphon off liquidity created by the demand for deflationary assets. Jack is something of a Bitcoin maxi, so this is self-serving, but so far it looks like he might be onto something.
The problem for VCs is that the opportunity to profit from Bitcoin has come and gone. A16Z profited from Coinbase, which has filled the niche for a USD-based exchange. VCs aren't in a good position to make money from trading cryptocurrencies and their deriviatives, that is the playing field for Wall St. So they need to create something different from BTC and ETH, that they can fund, list and dump on gullible retail investors. The history Khan analyzes suggests that these retail investors would do best to ignore all the froth and the VC hype, and stick to the major coins. Investors should remember that VCs expect the majority of their investments to lose money, that is why they invest in many ventures hoping that a few of them will be big enough hits to cover the losses and leave them with a big profit.

Retail investors don't have the resources to copy this strategy. If they choose a few VC-backed coins, the odds are they'll all be among VCs' losers. They are much less diversified so are much more vulnerable to the failures.

2 comments:

David. said...

David Gerard's Web3: a VC-funded gig economy of securities fraud deserves a comment here. It is a clear explanation of how A16Z exploits retail investors by evading the securities regulations designed to protect them:

"The entire venture capital push for Web3 is so that Andreesen Horowitz (a16z) and friends can dump ill-regulated tokens on retail as fast as possible. This gives the VCs very fast liquidity events — much faster than they get from investing in actual companies.

The VCs try not to commit the securities fraud themselves. Their business model here is to incentivise it.

Cashing out from a startup can take years — but dumping a minor altcoin DAO governance token on retail can be completed in just a few months."

And:

"So the other part of the business is to put so many of these schemes into play that the SEC can’t keep up. There’s a reason why SEC chair Gary Gensler is asking for new regulation.
...
This is a fabulous hack on SEC rules, which protect investors against issuers. In the DeFi, DAO and NFT space, the investors drive scam offerings — and the issuers are the disposable suckers, lured in by the promise of VC cash.

If the SEC doesn’t step in, the VCs win; if the SEC does step in, the VCs don’t lose."

Gerard links to a wonderful post by Ed Zitron, Crypto, Web3, And The Big Nothing that is a much longer piece on the same theme:

"it’s just a system through which venture capital can quickly see ridiculous returns while promising (and letting down!) those who are simply buying a token because they believe it’ll be worth more because of its presence on Coinbase."

David. said...

Fais Khan is on a roll with his must-read The Unstoppable Grift: How Coinbase and Binance Helped Turned Web3 into Venture3:

"That’s one reason all these exchanges have started VCs - they want to fund the “ecosystem” so that there are more coins to trade. Now we have another race to the bottom - to get into the most crypto rounds as early as possible.

They’re collectively shoveling what will probably amount to $10B this year into the crypto startup market - enough for 300 $30m Series A’s. Honestly, I had to laugh writing that. Like a poor French goose, whatever half-decent startups might be out there in crypto land are probably being hounded by hungry investors, while the market gets drowned in a flood of new coins.

With hundreds of millions in liquidity available less than one year from investment, that creates a snowball effect. Trading revenues turn into VC rounds that turn into more trading revenues. How else has a16z gone from a $300M fund to $2.5B to $4.5B in less than four years? If these VCs are serious about the “web3” ethos of full transparency, they should be doing far more to disclose their holdings.

Brian Armstrong says Coinbase wants to be the Amazon of assets, which I guess would make him the Jeff Bezos. But to me these exchanges are more like Travis Kalanick at Uber - racing ahead of regulators, hoping to make enough money to pay whatever fines will inevitably come their way.

Frankly, I wouldn’t call investing and then exiting low quality projects within a year by selling to retail “VC” at all - it’s GC, Grift Capitalism, with insiders and exchanges as judge and jury. And I doubt anything will stop it until someone is in handcuffs."