Crypto Tokens: Does Security Selection Matter? 

And the winner is…

July 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • More than 80% of cryptocurrency tokens trade below their first trading price
  • Tokens are diverse in their functions, but all types have been losing money consistently
  • Token financing seems to be more beneficial for the issuer than investors

INTRODUCTION

A falling stock market is not bad for everyone. Sure, many investors lose out as their portfolios decline in value, but those who are just starting to invest or have underweighted equities can benefit from lower valuations, which tend to deliver higher returns over the long term.

Naturally, equity markets do not fall without reason. As the economic environment changes, so do expectations. The positive feedback loop that sends valuations rising eventually reverses course and turns negative. But at some point, economic and business conditions stabilize and valuations come down enough to attract new investors and lure old ones back in. For instance, companies with anticyclical business models can increase their appeal by raising their dividend payments.

But not all securities markets exhibit the same dynamic as that of equities. For example, the Italian lira consistently lost value against the Deutsche Mark for decades before both currencies were merged into the euro, and currencies can effectively become worthless when hyperinflation sets in.

So, what about cryptocurrency tokens? Critics have long raised concerns about their intrinsic value, or lack thereof, and there doesn’t seem to be a relationship between a token’s price and the product for which it is supposed to serve as a medium of exchange (read Crypto Tokens and Crypto Coins: What Drives Performance?).

But with nearly 10,000 cryptocurrencies available, security selection should matter. So, does it? Can token pickers demonstrate differentiated performance?

PROBABILITY OF MAKING MONEY IN CRYPTOCURRENCIES

One of the more profitable approaches to cryptocurrencies is to invest in the private seed round of a start-up seeking token financing. The early price tends to be heavily discounted relative to the public sale price, which is comparable t