Christopher Brookins is the founder of Valiendero Digital Assets, a quantitative crypto fund founded out of Carnegie Mellon.
2019 has not only seen a resurgence of the crypto bull, but also capital raising.
In particular, IEOs or “Initial Exchange Offerings” have been highly visible for both good and bad reasons. Positively, IEOs have produced large returns to-date. Negatively, to quote Jeff Dorman at Arca, “Many argue (correctly) that IEOs are illegal (in the US) since the tokens are clearly securities, & unregulated exchanges are acting as broker/dealers.
Thus, U.S. investors can’t participate.” However, despite legality issues for US investors, many global participants are still actively investing in these offerings due to their return potential. So, what is driving prices?
New and small-cap (less than $100M in market cap) digital assets are highly reflexive and driven by two key variables, exchange volume (ExVol) and market cap (MCAP). The logic being that the greater the buying volume in relation to the asset’s overall market cap, the greater the potency of its reflexivity cycle (see below).
The aforementioned speculative demand can be quantified by the ratio of ExVol to MCAP, which may offer investors a better tool to gauge risk and reward in these speculative assets.
The chart below displays the correlation of the speculative demand ratio (ExVol to MCAP) to in price of several IEOs. The chart is broken down into distinct time periods, which shows the efficacy of the ratio as the asset matures, e.g. first 60 days, first 180 days, first 360 days, and historical (since inception).
Please note, reliable MCAP data for newer IEOs like MATIC, FET, and CELR does not span 60 days, thus only historical is calculated.
This time, the chart below displays the correlation of the speculative demand ratio (ExVol to MCAP) to in price of several small-cap assets as a way to generalize the ratio to all new issuances, not just IEOs in 2019.
*blocktap.io, coinmetrics.io, and coinmarketcap.com
As the aforementioned charts illustrate, the speculative demand ratio is a highly valuable signal for investors looking at IEOs or new digital assets, especially during the first 180 days of existence. Post-180 days, the ratio is still useful for price prediction, but its signal diminishes. Presumably, as an asset matures, fundamentals influence price more, e.g. bitcoin’s historical correlation to in price is only 0.02.
However, for newer IEOs like MATIC, CELR, and FET, the correlation of the speculative demand ratio is likely to rise over the coming months. Thus, current or potential investors should closely monitor the ratio’s trend as a directional gauge of risk and reward.
Disclaimer: this article is for educational purposes only and should not be considered investment or trading advice.
The author holds bitcoin and ether at the time of writing.