SEATTLE, NEW YORK, SAN FRANCISCO, LONDON – February 12, 2018 – PitchBook, the premier data provider for the private and public equity markets, today released a proprietary framework designed to help retail and institutional investors assess the long-term value proposition of blockchain protocols. Until now, no other reputable institution has successfully defined the standard factors driving long-term value creation for blockchain protocols. Thus, investors are left with a limited understanding of how to evaluate the viability of a crypto-asset investment – an asset class plagued by high levels of price volatility and uncertainty. As the authoritative source of private capital market data, PitchBook believes the crypto-asset class has the same risk profile as early stage venture investments and should be evaluated in a similar nature. PitchBook’s framework examines five factors impacting a protocols’ long-term potential including, the incentive structure, token distribution, market opportunity, founding development team and network strength.
PitchBook’s Crypto-Asset Framework can be downloaded here.
“VC’s clearly recognize the transformational potential of crypto-assets and blockchain technology, with many of the prominent investors already altering their LPs agreements (LPAs) to invest in this new market. However, the lack of understanding and high volatility often drowns out larger discussions of the long-term value proposition.” said Nico Cordeiro, PitchBook analyst. “If developed and implemented successfully, the technology creates an entirely new asset class that could significantly impact the broader investment ecosystem.”
In the current environment, crypto-assets are viewed through the lens of more traditional stocks or ETFs, when in reality the asset class is most akin to early stage venture investing. These protocols, or products, are typically in the proof-of-concept phase and carry a high-level of risk due to the extreme uncertainty over the long-term outcome. For this reason, both asset classes are likely to share similar return distributions, whereby investors should expect many crypto-assets to fail, and a small proportion to deliver outsized returns. However, unlike venture capital, with a centralized ecosystem, standardized benchmarks and regulatory oversight, crypto is decentralized and lacks the same type of industry-wide standards and protocols. To help address this issue, PitchBook developed a clear framework that provides investors with a roadmap for evaluating a crypto project’s long-term value. Over the course of 2018, PitchBook analysts will apply this framework when evaluating various crypto-assets. The goal is to help investors understand the potential value proposition of specific protocols and how they can affect the traditional ecosystem, by focusing on the variables that matter, including:
- The Incentive Structure – Crypto-assets are not attached real-world assets or authorities, making it imperative for protocols to develop an inherent incentive structure that promotes positive contribution, and as a result, returns. To evaluate the validity of an incentive structure, PitchBook examines detailed information on network participants, purpose, economics & safeguards and consensus mechanisms.
- Token Distribution – The lack of regulatory oversight promotes illegal forms of trading, which makes understanding a protocol’s token release schedule vital to mitigating fraudulent activity, like pump-and-dumps, cornered markets and insider trading. PitchBook inspects what percentage of tokens were released and held by founding members at the time of ICO, additional release schedules, lock-up periods and token holder concentration.
- Market Opportunity – Protocols should exist to address a specific issue or market need to create long-term value. PitchBook’s evaluation framework helps investors assess market opportunity by defining the target end-user, total addressable market, competitive advantages, market awareness, budget capacity & restraints and potential value.
- Founding Development Team – Analyzing the strengths and weaknesses of the development team is vitally important to delivering on a crypto project’s vision and long-term value. PitchBook’s framework examines founder backgrounds and development team’s roadmap to effectively evaluate the project’s promise and longevity.
- Network Strength (if applicable) – The lack of common metrics and standards can make analysis of network strength near impossible, yet its critically important to understand how the network has changed over time. To evaluate this variable, Pitchbook takes a historical look at developer commitments and miner/node analysis, which analyzes participants, geographic dispersion and concentration of nodes.
To view more PitchBook research on cryptocurrency or to view PitchBook’s Crypto Framework, click here.
PitchBook is a financial data and software company that provides transparency into the capital markets to help professionals discover and execute opportunities with confidence and efficiency. PitchBook collects and analyzes detailed data on the entire venture capital, private equity and M&A landscape—including public and private companies, investors, funds, investments, exits and people. The company’s data and analysis are available through the PitchBook Platform, industry news and in-depth reports. Founded in 2007, PitchBook has offices in Seattle, San Francisco, New York and London and serves more than 14,000 professionals around the world. In 2016, Morningstar acquired PitchBook, which now operates as an independent subsidiary.