Cryptocurrency presales and the law of diminishing returns
By Daniel M. Ryan
web posted June 6, 2016
Times are good in the cryptocurrency frontier. After bottoming at below $200 in January 2015, Bitcoin reversed course and spent the next nine months trying to lumber upwards. Back then, its new bull market was throttled by a very acrimonious debate over its block size. The core team originally said that it should stay at its current 1 megabyte in size, a size that's normally good enough to hold between 500 and 2500 transactions depending on those transactions' payloads. They wanted a "fee market" to develop, in which Bitcoin users pay higher transactions fees to insure that their transactions get added to a block as soon as possible. Some old heavyweights, including Mike Hearn and Gavin Andresen, tried no less than twice to move Bitcoin to a new network with bigger block sizes. The hostility and infighting which this debate ignited and flamed kept Bitcoin below $300 (except briefly) for months. It finally took off in November. The core team has reassured the market somewhat by going along with a more modest de facto block expansion using an add-on called Segregated Witnesses. But the controversy rolls on.
Shortly after Bitcoin left $300 in its exhaust, the ravenous bear beleaguering the altcoin market finally called it a season and went into its cave to hibernate. Near the day when 2015 turned into 2016, a new altcoin bull market began.
Unlike the last one, which primarily featured altcoins clearly derived from Bitcoin or one of its offshoots, this bull market has focused on more innovative alternate cryptocurrenies. Back in 2013-14, the star of the altcoin world was Litecoin – an alt which differed little from Bitcoin except for block time and hashing algorithm for its Proof-of-Work. Nowadays, the star is Ethereum – a coded-from-scratch alt with smart-contract functionality baked in.
Ethereum is profoundly different from Bitcoin in another way. Although it does have Proof-of-Work mining, it ethers were not distributed through block rewards from the get-go. Instead, its first 60 million ethers were pre-sold in a crowdfunding that was the biggest in cryptocurrency history until The DAO came along. In its wake have been several pre-sales that have gathered alot of Bitcoin. The latest and biggest, WAVES, gathered more than 29.600 Bitcoins when its pre-sale ended June 1st. It hauled in almost twice the Bitcoins that the white-hot Lisk had gotten. It came close to matching Ethereum's 31,591.
WAVES promises to be a cryptocurrency that makes crowdfunding feasible by hooking up with fiat gateways in several major currencies. Since it will also offer ordinary users the ability to create tokens on its blockchain that represent assets, its value proposition consists of a cryptocurrency crowdfunding platform. Its own pre-sale was like Lisk's, in that the pre-sold WAVES were to be split amongst pre-buyers in a floating price scheme. Leaving out early-bird bonuses, more Bitcoins meant a higher implied price at the end. Since the number of WAVES in each pre-sale account was calculated on the fly, each new confirmed send meant the number of WAVES per Bitcoin shrank. Inevitably, this meant a lot of questioners on its official announcement thread asking "Why did my WAVES balance decrease?" As the thread grew more rapidly and the excitement heated up, the answers to those questions became brusque. In this way, it also resembled Lisk.
Its pre-sale resembled Lisk's in yet another way. The devs set aside some WAVES for a signature campaign, in which your humble keyboard jockey did participate. (If you care, I'm in slot #11.) Unsurprisingly, the result was a flood of WAVES sigs all over threads in Bitcointalk. One of the humorous aspects of this flooding was Liskers complaining about folks with WAVES sigs posting in the Lisk thread. Given that Lisk itself used a viral sig campaign which itself flooded the boards, those complaints were a wee bit rich.
WAVES' official thread grew less rapidly than Lisk's, and there was a time when it looked like it was going to get less Bitcoin. Even though the April-13th first-day buys (induced by a first-day 20% bonus) did reach an eye-popping 4,626 Bitcoins, the rest of April saw the daily sends descend to a relative trickle. No day's total exceeded 260 Bitcoins until May 7th, even though the bonus from April 14th to May 1st was 10%. Even after May 8th‘s then-record day of 918 Bitcoins, the daily totals sunk back. Again there were days when less than 100 Bitcoins were sent in.
The overall total did not double from the first day's haul until five weeks later, at which point the pre-sale had only two weeks to go. It didn't break 10,000 Bitcoins until eight days before the end. Even the good news posted on May 13th announcing a partnership with heavyweight Bitcoin wallet supplier Mycelium, winner of a Blockchain.info "Best Mobile App" award in 2014 for its mobile wallet, didn't perk up the day's pre-sales all that much.
One week before closing and six weeks after opening, the slow-flow changed abruptly. The river of Bitcoin started turning into a flood. On May 27th, WAVES received a single pre-buy in the amount of one thousand Bitcoins. That single send was more than each day's totals except for the first's. Naturally, the pre-buyers who habituate Bitcointalk – including yours truly – speculated that the six-figure pre-buy had come from a Mycelium bigwig.
That whale-sized send kicked off a week in which more-than-1,000-Bitcoin days became normal. But the last day, that June 1st, made even the rapids' days in May look like a lazy crick.
The legendary Ethereum got an eye-popping 3,700 Bitcoins in its pre-sale's first twelve hours When WAVES' pre-sale hit its last twelve hours at the stroke of midnight Greenwich Mean Time June 1st, it had already collected more than Lisk. The running total as of that stroke was 17,846 Bitcoins.
In the next twelve hours, from midnight GMT to the pre-sale's close, WAVES got a stunning 11,790 Bitcoins. In those final twelve, it got only 2,262 less than Lisk had gotten in four weeks. In that Amazonian delta of a morning, it tripled Ethereum's first half-day.
Then, the thundering mania reached a new level thanks to a usual suspect. One of the big buyers of pre-sale WAVES was none other than the second-tier altcoin exchange Yobit.
As they did with Lisk, the owners of Yobit listed IOU-WAVES before release. In their steamy market, whose supply was restricted to Yobit's own pre-buy, the price of one IOU-WAVES quickly ascended to about the highest price reached by its IOU-Lisk. History was repeating.
Until it abruptly diverged.
The punters' frenzy got so maniacal, Yobit did something unprecedented in altcoin-trading land. Right after WAVES reached the insanely high price of 0.1 Bitcoin – more than fifty dollars for an IOU of a coin with a 100 million total supply – Yobit actually rolled back its IOU market. For the first time in altcoin history, it cancelled each and every one of its IOU-WAVES' trades: the records only survive in screenshots. It also refunded the initial buyers to whom it had sold its IOUs as principal through setting up a buywall at 0.028 BTC. It then re-listed its IOUs and sold-as-principal at only a relatively modest premium over the final pre-sale price: at a price far lower than the one it and its punter-customers had established before its rollback.
It was as if a delirious fever had broken. With the mania gone, Yobit's WAVES IOUs traded at prices ranging "only" three to four times the final pre-sale price. There were complaints, mainly from skilled punters who had flipped their way to a profit. But this unprecedented void-and-restart of an entire market saved Yobit from the public-relations disaster it had endured when its IOU-Lisk had dropped more than 95% after real Lisks hit the markets. As I write, the last-trade price is not much higher than the price offered by pre-buyers in an OTC sale thread. That same thread shows live bids for about 1.5 times the final pre-sale price. The two trades completed as of the time I write went for prices that were 1.5-to-2 times the pre-sale's. Not bad for a wait of less than a week.
Once again, a hot pre-sale gathering millions of dollars has blended with FOMO – Fear of Missing Out – to create a hefty implied gain for those who pre-bought.
Warning: Falling Pyramids Ahead?
More than a few Lisk watchers noted that Lisk was actually falling during the final days of the WAVES pre-sale. That downtrend ended with a double bottom in Lisk's price at Poloniex, right about the same time the WAVES pre-sale ended. Afterwards, it reversed course and headed up. Not much guesswork was needed to figure out that the final gusher of Bitcoin had come largely from Liskers landing three-to-four-baggers to rush into WAVES.
In other words, the final flood came from punters converting gains from their earlier successful speculations into WAVES for another big gain. They're pyramiding.
If you're a market vet, you should now be seeing a red-bordered warning sign in your inner eye. WARNING: FALLING PYRAMIDS AHEAD. As anyone who been through a stock market bubble can sadly attest, punters always build pyramids out of paper-profit cards.
The most astonishing facet of this still-hot ICO frenzy is the fact that the biggest of them all, The DAO, trades at a jarringly sober valuation. Unlike Lisk and WAVES, its pre-sale ran at a fixed price that started off at 0.01 ether and rose to 0.015. The best price for it was 100 DAO per ether. As I write, each DAO is trading at about a 7% discount to that best price. It's actually being valued like a closed-end fund: at a modest discount to its total holdings of Ethereum. In a market that's suffused with pump-and-dumpish manic-depression, The DAO's trading is strikingly sensible. Had Ethereum's US-Dollar value not been pulled up by Bitcoin's recent rocket ride, a lot of DAO pre-buyers would be sitting on losses.
The DAO, by far the biggest presale of them all, is a living sign that the current boom town is very much subject to the law of diminishing returns.
In stock market terms, this presale frenzy is a lot like the technology bubble that expanded majestically at the start of the 1982-2000 bull market. ‘Way back then, the NASDAQ hotties were personal-computer firms and companies in related fields like peripherals and software. It got so frenzied in '83, more than a few folks were worried that the ebullience of the entire market was nothing more than a gigantic sucker rally. For the general market, that proved not to be the case. After stumbling in 1984, the bull got its groove back and went off to the stampedes in 1985. Some of the hotties ended up recovering, but there were many who imploded to their doom.
This long-ago frenzy shows that the old adage about a bubble signalling the end of a bull market is only a partial truth. The relief that's engendered by a hibernating bear can definitely produce enough tinder to ignite the air needed to blow up an early-stage bubble. It remains to be seen how long this "relief bubble" will last in the altcoin Boom Town.
Disclosure: As I write, I own a lot of WAVES and I admittedly did a bit of pyramiding from Lisk. As I hope I've indicated above, I was not prudent by doing so. 
Daniel M. Ryan, as Nxtblg, is shepherding the independently-run Open Audi Initiative Prediction Market Shadowing Project. He has stubbornly assumed all the responsibility and blame for the workings and outcome of the project.