Token Investing: The Balance Between Liquidity and Longevity

One of the perhaps overreaching promises of token crowdsales is buyer and investor liquidity. It is what separates token sales from other investment types (yes, they likely are investments). From OTC securities to real estate, immediate liquidity is somewhat limited. However, liquidity is not entirely free. The most liquid markets are those with active buyers and sellers. Thanks to the ERC-20 token exchanging between tokens has made liquidity among tokens Ethereum rather seamless. However, valuations of specific tokens depend very much on typical supply-demand economics—something which often plays against the high liquidity promised in token crowdsales and initial coin offerings. In addition, incoming (and existing) regulation is likely to further impact the immediacy of liquidity for token holders.

In short, there is an absolute conflict between investor liquidity and maintaining token longevity.

Longevity is at Odds with Liquidity

A moderate velocity in token crowdsales is a critical component of a token and coin offering. That is, ensuring investors do not immediately dump their tokens even as artificial token value increases are meant to incentivize early purchases, can be a difficult feat. Token sales treated as securities offer an even greater barrier against pump-and-dump by applying SEC Rule 144 selling restrictions to the tokens.

Combining Rule 144 restrictions with structured smart contract investing creates the longer-term longevity and velocity that is so much needed in ensuring token sustainability. However, it is implemented—at least somewhat—at the expense of maintaining investor liquidity for the token in question.

For instance, many individual investors are likely to desire more rapid liquidity in their tokens rather than having to wait a year to see an increase in value that will allow them to sell tokens into the market. While investors may clamor for faster liquidity and a quicker profit, combining securities laws with smart contracts with proper vesting actually does a pretty good job of ensuring token longevity and sustainability.

Investors are at Odds with Themselves

Long-term sustainability of the blockchain ecosystem requires a long-term view as it relates to profiting from artificial valuation spikes in a given token or coin offering. If every deal ignored sustainability at the expense of liquidity, the market for tokens would shrivel over time and the industry would have more than a black eye. On the flip side, if investors were willing to play the long game (which is typically more indicative of accredited investors than run-of-the-mill retail investors) then token incentives can often be greater, especially as a true network and market for a particular token or coin emerges.

If not for regulation, token and coin offerings represent a major shift in the liquidity preference theory, especially as it relates to startups. Traditionally, startup investing has been a very illiquid genre, appealing mostly to larger institutional players and investors. Tokenization and blockchain have disrupted the way in which investments are treated. Sourcing, investing and exiting investments will likely never be the same again, but until solid rules and even safe harbors are put into place, investors and issuers will have to balance their own expectations on longevity vs. liquidity.

About the Author

Nate Nead is an investment banker with a focus on token crowdsales and initial coin offerings. His work is spread across buy and sell-side mergers and acquisitions and raising capital for private companies. He has worked in real estate, oil & gas, software & technology and business services. He lives in Seattle, Washington with his family.