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CoinFund: 2016 Year In Review

It’s fair to say that 2016 has been “one hell of a year” for crypto. Earlier in the year, we’ve seen Ether produce 20x returns and recently Bitcoin produced highs not seen since the winter of 2013. In the middle of the year, we became acquainted with the dangers of DAOs, hackings, DoS attacks, and the Ethereum Classic hard fork. Meanwhile, financial industry R&D on blockchain is in full swing, over a billion dollars came into the space via venture capital, and Steemit has emerged as one of the few projects in blockchain to attract a small but impressive base of mainstream users. Decentralized insurance, social, and asset management verticals are seeing great interest.

While we are a private portfolio, our core mission always remains the same: “the best way to invest in a community is to be a part of it”. Over the course of 2016, CoinFund has worked tirelessly (and often under the radar) to monitor, document, and advise on events happening in the blockchain space. We have met countless teams, made countless introductions, and offered our consulting services in order to help the blockchain space grow.

In this end-of-year retrospective, I’d like to thank our team at CoinFund, our company advisors, our legal advisor Chris Padovano, our incredibly intelligent Slack community members, and to call out some of the work we’ve done this year.

Notable Initiatives

• CoinFund Slack. Since early 2016, we’ve built up the CoinFund Slack, an open community of blockchain founders, financial analysts, tech investors, attorneys, and enthusiasts which covers the gamut of public blockchain and related decentralization technologies. Our community is now over 430 members, 10–12% of whom are perpetually online, with nearly 80 research channels covering blockchain projects and verticals. Our community is one of the most dedicated and impressive collections of men and women from a variety of backgrounds — thank you for supporting us.
• Networking. This year we’ve met amazing founders, investors, and other players of the blockchain space. We’ve connected numerous startups to resources and to each other, and we have tried to bring attention to interesting verticals and teams. We attended Devcon2 in Shanghai, Blockchain World Congress in New York, and Rustat Conference on Blockchain in London to listen and to present our viewpoint on blockchain technologies. In August, we spoke on a panel about the lessons learned from The DAO.
• Consulting. This year we worked with several well-known client companies to bring our low-level and high-level blockchain expertise to the service of the space. Crowdsale structures, token economics, financial analyses, and decentralized feasibility studies have been some of the most intellectually-stimulating work we’ve ever done. If you’d like to talk to us about consulting for your project, please reach out to us.
• Forums and Due Diligence. We did a number of awesome CoinFund Q&A Google Hangouts, culminating in MakerDAO’s 2017 Roadmap and Jason Granger and Charlie Shrem’s IntelliSys Q&A, live from Union Square. Thanks to all the teams for Google-hanging with us!
• Technology. Jake Brukhman participated in the hack.ether.camp Virtual Accelerator, co-authoring the Etherisc Whitepaper and advising on credit risk models, token economics, and insurance simulations. The Etherisc team finished as the most funded project at the EtherCamp hackathon — congratulations to Stephan, Christoph, and the rest of the team. In December, CoinFund’s Alex Bulkin joined the Casper Standup to discuss Distributed Cooperative Consensus. Finally, we put in considerable work and development into understanding and tracking U.S. taxation in a cryptofund context.
• Advocacy. We wrote extensively about ethics issues in decentralized systems, predicted that Ethereum would split into two currencies, and were one of the first to report the DAO hack on Twitter in June. In light of the recent events with the Synereo project, we advocated for RChain token holders in order to call for equitable treatment of public investors and project equity, including writing open letters to the company’s board.
• Meetups and Education. In November, we held a meetup focused on public blockchains and recently partnered with Byte Academy to bring public blockchain education to a wider audience. We’re also having a CoinFund Happy Hour in NYC in early January — please join us!
• Publications and Press. We published about 10 in-depth articles ranging in topic from asset price modeling to futuristic models of money. We made contributions to Jeremy Epstein’s ebook about blockchain adoption, some of which were reviewed — and called out — by Fred Wilson on the AVC blog. We also publicly reviewed some articles and several whitepapers in the space.

CoinFund Portfolio

We hope the following notes shed some light on our performance in 2016, our first full year of operation, and on our outlook for 2017.

• Contributions. From January 1st, 2016 to today, our base capital contributions grew 925.34% across eight stakeholders, reflecting an interest expressed by our investors in exposure to uncorrelated cryptomarkets and early stage technology projects.
• Annual Return. CoinFund instituted an open-ended fund structure on January 24th, 2016. Our stakeholders could have purchased 1 Unit of CoinFund for $1.9374 at that time — and many of them did. Today, 1 Unit of CoinFund is priced at $4.7322, which represents an annual excess return of 144.26%, net of expenses, but before taxes. (In the same time period, Bitcoin holding would have returned 138.82%.) Having a tax-savvy accounting system has been great for trading decisions, and we expect to have less than $10,000 of taxable gains this year for the whole company.
• Volatility. The volatility of the CoinFund Portfolio is substantial and, in our estimation, not palatable to institutional investors. As measured against CoinFund price per share, daily returns had an average volatility of 4.68%, which is comparable to Bitcoin, but extreme by the standards of traditional funds. The maximum daily loss was -16.57% and the maximum daily gain was 40.58%.
• Liquidity. On a daily basis, the CoinFund Portfolio maintains an extremely high level of liquidity. Today, 80.59% of the portfolio is highly liquid on centralized exchanges, 6.38% trades on low liquidity or “OTC” markets, and 13.03% is fully illiquid. These are typical numbers: CoinFund can liquidate the vast majority of its stakeholders’ investments with SLAs of hours, not days.

Lowlights

• Both quantitative strategies and Bitcoin P2P lending underperformed and were discontinued. (We are still excited about quantitative strategies, however.)
• LTC, NXT, and NMC underperformed, were downgraded, and then liquidated.
• We liquidated our DAO holdings prior to the Ethereum Classic Fork for nominal USD losses. We also liquidated our ETC in the interest of avoiding a split, but failed, and in retrospect could have taken more profit.
• We made one of our largest investments in RChain, but Synereo AMPs experienced dramatic depreciation due to a schism. We also took a market position in LBRY which subsequently underperformed. We have liquidated both of these positions for tax purposes, but we will review in 2017.
• We failed to secure stake in the Digix and FirstBlood crowdsales, despite our intent to do so.
• We notably passed on Arcade City, Wings, Zcash, Swarm 2.0, and vDice for the time being; we continue to watch these projects.

Highlights

• STEEM, XMR, ETH, BTC, SC, SJCX, REP, and FCT have produced solid returns this year.
• We were lucky enough to participate in time in Urbit’s first crowdsale, as well as Golem’s.
• Interest-bearing accounts, including magnr.com, have faithfully paid interest all year long and we will consider increasing our Bitcoin holdings in these accounts.
• We are excited to work with Tezos, Melonport, and Etherisc toward getting exposure to their digital assets.
• We are also excited to support and collaborate with Zeppelin, Byte Academy, Smith+Crown, RChain, and others.

Outlook

• Social Media. The decentralized social media space has exceeded expectations with Steemit and AKASHA Alpha. There are now at least 8 startups competing in this vertical, and we expect more to come. We also anticipate that issues of scale will manifest in 2017 for these platforms.
• Decentralized Insurance. With multiple startups operating in this space, including Etherisc and BlockSure, insurance seems to have willing institutional investors as well as viable technology stacks; however, regulatory risks are yet to be fully understood.
• Cryptofunds. In light of DAMPs like Melonport and ICONOMI and interoperability systems like Polkadot and Cosmos, we are moving our thinking away from traditionally-structured cryptofunds and focusing on other revenue generation. However, with over 20 funds and due diligence products that we know about in the space, we expect this trend will continue. Institutional investors and technical skills (rather than early access) will be key dimensions for these funds.
• Decentralized Crowdfunding. Wings, Swarm 2.0, EtherCamp, and decentralized crowdfunding seem to be a growing vertical. Equity crowdfunding in general seems to be growing steadily and even competing with VC investments, and we anticipate that this trend will continue in crypto.
• Decentralized Exchanges. We think decentralized exchanges like Maker Market and EtherDelta will play increased roles in 2017 and help sustain both regulatory pressure as well as Ethereum network effects. Especially in light of IRS requests to exchanges, privacy-minded cryptocurrency users will have yet another reason to migrate to decentralized exchanges. Maker’s DAI is poised to be the first fully decentralized stablecoin on Ethereum, driving much utility to apps for which market volatility is an issue.
• Ethereum. Network effects of the Ethereum ecosystem have been very apparent in 2016, as new projects are able to leverage the ease of development, automatic liquidity, and smart contract fundraising that the ecosystem provides. Multiple platforms, including RSK, ETC, and others, are supporting the Ethereum EVM. State channels should ease scalability issues for certain applications. We look forward to seeing some major product launches on Ethereum in 2017.
• Bitcoin. We hope to see unprecedented market cap growth for Bitcoin in 2017, but are still concerned about scalability, the yet unadopted SegWit fork, and the multiple Bitcoin forks operating and threatening destabilization of the ecosystem. The likelihood of BTC (and ETH) ETFs launching in public capital markets continues to increase.
• Prediction Markets. We continue to be bullish on decentrilized preduction market platforms and foresee that the Augur launch will likely be news that goes beyond the blockchain space, and that Gnosis will have a successful token launch — it’s also great to see teams innovating on equitable crowdsale structures.
• Other. Dfinity and Status.im caught our eye with well-designed and articulate offerings. There is also a startup culminating in yet another new vertical. That’s right, the decentralized online dating space.

CoinFund is a blockchain technology research firm and proprietary cryptoasset investment vehicle. CoinFund’s team brings together expertise in high technology, quantitative finance, private equity research, and social innovation research to generate insights into this exciting growth space. CoinFund provides consulting and research services to investors and companies interested in blockchain technology. Follow us on Twitter or join the discussion on our open community Slack.