Token Buybacks: Design or Despair?

Friday, November 9, 2018

Similar to stock buybacks, token buybacks involve a cryptocurrency project buying back its tokens from existing holders. We’ve come across a number of examples and have divided the token buybacks into three categories:

Buybacks Instead of Dividends

Some projects have explicitly mentioned buybacks as a core feature of their business and token economics. The best examples are the successful Asian crypto exchanges (Binance, Huobi, Kucoin) and their respective exchange tokens (BNB, HT, KCS).

These exchange tokens have three functions:

  1. Medium of Exchange / Trading Fee
    Token holders can choose to pay their trading fees in tokens.
  2. Discount Mechanism*
    If token holders pay the trading fees in tokens, they receive a discount on the fees.
  3. Buyback Rights / Periodic Payouts
    The exchanges pledge to use a percentage of revenues/profits for buybacks on a regular basis.

Given the large volumes and revenues generated by these exchanges, the token buybacks have been substantial with Binance and Huobi returning more than $30M back to token holders.

Projects with pledged buybacks

ExchangeQuarterly20% of profitsBurn~ $30M
ExchangeQuarterly20% of RevenuesLocked in Reserve~ $35M
ExchangeQuarterly10% of ProfitsBurn~ $1M
Asset mgmtContinuousVariesBurnN/A

After the buyback, the tokens are burned by a smart contract and/or deposited into a wallet with no private key. As a result, the profits used for the buyback should – theoretically speaking – be fully captured by token holders. In the words of Vitalik – the token’s value is “backed by the future expected value of upcoming fees spent inside the system”.

Or, put simply: the tokens are similar to “traditional” equity because the buybacks ensure that token holders receive (part) of the profits created by the project – just like dividends paid to shareholders**.

Buybacks to Correct Token Allocation

One of the biggest challenges of cryptocurrency projects and ICOs is the initial token allocation. Many projects reserve a fixed amount of tokens to incentivize future partnerships, developers etc. A potential outcome of this “one shot allocation” challenge is that there aren’t enough tokens to hand out a few months/years down the line.

That’s why a handful of projects have started buying back tokens in the secondary market to mitigate this issue. Some examples:

Aragon: The well known DAO project Aragon has been buying its token on a regular basis and has published quarterly reports and guidelines.

Pundi X: The crypto payments and point of sale project Pundi X reported buying ~2000 ETH worth of tokens in June to be put into a partnership reserve.


ICOs are dead – long live the ICO

Wednesday, November 7, 2018

Token and ICO fundraising continued a steep decline in July 2018. 40 ICOs and (private) token sales raised a total of $417M – down from $585 Million in June and $2 Billion in May. This is the lowest monthly amount we’ve measured since May 2017.

A closer look at the data reveals the following:

  1. No “mega” ICOs: While the summer of 2017 was characterized by the first “mega” ICOs (Tezos, Status, Bancor), the summer of 2018 is characterized by their absence. There have not been any sales that have verifiably raised more than $100 million in June or July 2018.
  2. U.S. teams are absent in public sales: Only a handful of cryptocurrency teams in the U.S. are still raising funds through public ICOs. Most – if not all – activity has shifted to private sales and traditional equity rounds. We’re not seeing this shift in Europe…yet..
  3. Tokens underperform: Token prices have cratered in the past months – some dropping more than 80% (more on that below). As shown in the table below, the median return of all ICO issued tokens is now -20% (0.8x). Moreover, ICO-issued tokens not only underperform relative to their ICO sale price but also to Bitcoin and Ether.

The “worst cohort” of tokens are those issued in the first half of 2018 – especially those issued by ICOs that took place at the peak of the cryptocurrency boom. For the 100 tokens issued in Q1 2018 the median return is -60% (0.40x), compared to “just” -30% (or 0.7x) for a portfolio consisting of Bitcoin.

Median Returns by ICO Date

2017 Q168.9 x33.6 x6.9 x
2017 Q2421.8 x1.8 x3.0 x
2017 Q3611.0 x1.8 x2.0 x
2017 Q4841.1 x1.3 x0.9 x
2018 Q11000.4 x0.5 x0.7 x
2018 Q2340.6 x0.8 x0.9 x
_3270.8 x1.1 x1.0 x

It’s safe to say that the correction in cryptocurrency prices and increased regulatory attention have finally had an effect on the ICO market. Although we’re hesitant to pronounce “the death of the ICO” we believe that the corrections in both new capital and trading activity are well-needed and long overdue.

The Decay of Token Prices

In addition to calculating the returns by ICO date, we’ve done a full historical analysis of more than 300 ICOs that have taken place since January 2017. As shown in the graph above, the individual tokens (in red, left axis) traded as high as 200-250 times their original ICO price during December 2017 and January 2018.

But – as cryptocurrency markets have corrected – the combined value of these 300 tokens has dropped by more than 80% since the peak in Q1 2018. A hypothetical cryptocurrency portfolio consisting of all 300 tokens would now be worth ~$600 versus $3500 at the peak (in purple and right axis). While this $600 is still double the original investment of $300 (black line), we highly doubt that we’ll see the levels of Q1 2018 soon or ever again…

*If you have questions about this analysis or any data-related queries, reach out to our research team (!

**Methodology is as follows

  • ICO Selection: Select all ICOs which raised at least $1 million and calculate the token price during the ICO
  • Token Selection: Select only tokens which are publicly traded and have daily trading data available
  • Individual Token Values: (red lines) Rebase all tokens to $1 investments at the ICO end-date and calculate return multiples
  • Cumulative Token Value (purple line): Calculate the sum of all Individual Token Values Investment (black line): Calculate the sum of all $1 investments into ICOs over time.