Thread by @BillAckman

In a recent thread on crypto, I argued that crypto and tokens enabled the formation of businesses that heretofore could not be created. Some responded that cash could be used in place of tokens, and therefore the ‘innovation’ of crypto was not meaningful. I beg to differ.

Others assumed that I was advocating or perhaps even ‘pumping’ specific tokens, but I was doing no such thing. Rather I was trying to make the case that crypto and tokenization were useful technologies for business formation. I will try to make the case clearer here.

Stock options have been a powerful tool for business formation and growth as they enable the recruitment and alignment of incentives of a talented workforce for a startup with limited cash resources. But options have their limitations.

They generally can only be granted to employees, directors, and consultants to an issuer. They cannot be given to a global army of unaffiliated actors to incentivize behavior (see Helium & Dimo examples given in my previous thread). Options may also require an issuer to register

with the SEC, giving up the issuer’s private status, unless the options are non-tradable and the issuer meets other requirements. There are also significant information requirements that must be made to the option holders even if the company remains private.

As a result of the above, options are not a useful tool to recruit a global army of unaffiliated actors to help advance a business. Enter crypto and token-driven business models. Tokens are not equity interests in a company, but rather commodities that are created by miners

who achieve business objectives of a company or project, and for which demand is created as the tokens must be ‘burned’ to purchase goods or services from the company. As such, tokens can be used to incentivize behavior and as a currency to pay for goods and/or services.

Blockchain technology allows token holders to have confidence in their tokens' basic parameters including their total current and eventual supply, and recognition of the holder’s ownership. Unlike stock options where access to corporate records is needed to evidence ownership,

blockchain provides public proof. So the combination of this public record and the less restrictive nature of token distribution allows tokens to be used by businesses to incentivize a global network of participants to achieve specific corporate objectives.

These unique features of blockchain and tokens are what allows for the formation of new crypto-based businesses that could not previously be executed using pre-blockchain business tools. This is the power of crypto and why I believe in its potential for transformational impact.

But there are problems. The ability to issue a speculative tradable currency that is difficult to value creates temptations on the part of the issuer. The higher the token is valued in the market, the more attractive the apparent economics to miners.

In the Helium example I previously used, HNT tokens are mined by Helium hotspot owners and purchased by companies who wish to use its global Wi-Fi network. I was widely criticized for using Helium as an example as it has yet to produce meaningful revenues

or a profitable business model, and according to some press reports has made overstated claims about who is using its network. Nonetheless, it is remarkable how the incentives of HNT mining motivated 1,000s of unaffiliated users to build out a million-node global Wi-Fi network.

High valuations of HNT tokens drove demand for Helium hotspots as the initial payback period for mining was a matter of weeks. In retrospect, HNT was overvalued as the Helium network has not yet generated sufficient demand to justify the high initial HNT valuations.

As a result, thousands of miners have earned minimal returns on their investments in hotspots, which likely explains the blowback I received on @Twitter for using Helium as an example. Crypto projects suffer the same basic laws of economics as other businesses.

Without adequate demand for their products or services, the tokens will have little if any true value. The key to success for miners is to identify the projects that have the greatest probability of long-term success. The analysis to determine outcomes is largely the same as

with conventional businesses. Management, product and service offerings, competitive dynamics (Michael Porter’s Five Forces analysis can help here) must be assessed and will ultimately be determinative of the success or failure of a crypto project.

In the dot com bubble, investors gave pets.com and Webvan massive valuations before they eventually went bankrupt as enthusiasm about internet-based business models drove enormous speculation and fraud. The same is happening now with crypto.

Which of the new crypto-based businesses are Webvan versus Amazon has yet to be determined, but I wouldn’t be so fast to conclude that crypto is a worthless technology simply because of some bad actors and some underperforming businesses. But you need to be careful.

Crypto remains the Wild West as the same protections of registered security offerings don’t exist. Therefore, the character, reputation and track record of the management teams and sponsors of crypto-based businesses are extremely critical in choosing which projects to back.

I invested in Dimo because I like the management team, the data collection service they are offering, and the limited investment required by participants relative to the value they receive. In short, miners purchase a device which collects their car’s data and saves the data

to the cloud. The data are useful to the car owner and to auto suppliers and manufacturers, insurers, municipalities, infrastructure providers etc. But I have no idea whether Dimo will be successful. It is an early-stage bet on a good idea using crypto to collect data.

With respect to regulation, I am not sure we need new rules. Much of the fraud that is taking place is old-fashioned pump and dump schemes, and failures of custodians to protect customer assets. I suspect that existing anti-fraud and other laws already govern these violations.

We just need more enforcement.

Regulators need more resources to police the bad actors. Unfortunately, it will likely take years for the regulators to catch up, and they may never get there. The crypto industry therefore needs to self-police and out the bad actors, or it is at risk of being shut down.