The Coin, the Token and the birth of the Ponzi²

First published on my blog last week

I recently was made aware that not only were there many new digital currencies since the rise of Bitcoins but there is a new kind of stuff called Initial Coin Offering whereby one sells the initial stack of ones new Digital Currency in exchange for a stack of another pre-existing digital currency like Bitcoins.

Ok, you can buy JPY paper using USD paper, why not buy Ether digital coins using Bitcoins?...

The matter here is that the new Digital Coins you are buying in those ICOs are not exchangeable on several exchanges driven by offer and demand like BTC or Ether (or USD or JPY). Therefore they are not a currency.

The New Coins are in fact tokens, the same kind you would buy at the gate of a Fun Fair to be able to pay for rides inside the Fun Fair. Those Fun Fair token are useless outside of the Fun Fair, but you don't care, you're here for the ride.

One key difference here though, is that the Fun Fair doesn't exist yet, so the sales pitch is that you are buying tokens at a discount for a Fun Fair that will maybe exist in the future if all goes well. And when I say at a discount, this is based on the assumption that the Fun Fair will be hugely popular and that you will be able to sell back your tokens at a huge premium to new entrants to the Fun Fair.

So the bottom line is that you are buying virtual plastic tokens that may or may not let you pay for some virtual service that may or may not be valuable in the future...

If that sounds appealing to you, you're not alone... there has been a few hundred millions of dollars (you know the American peso) invested in those ICO since the beginning of the year.

But that's not the end of the story, far from it.

Among all those funny ICOs selling access to a future de-centralized architecture that promises to be anything between a game platform, an enterprise management service or a completely new internet (the aforementioned Fun Fair), I tumbled upon one of the most successful ICOs of the recent months, and of History since that phenomenon is months old anyway: the Bancor Network Token ICO, which raised in the region of 140M USD in the form of ~ 400 000 Ether coins in exchange for ~ 40 000 000 BNTs.

Let me try to translate in simple terms how this works: the initial exchange(ICO) was 100 BNT for 1 ETH, after the ICO is settled, you can buy or sell you BNTs via Bancor, which sets the exchange price of BNTs based off a "reserve currency" formula.

Basically Bancor cashed in ~ 90% of the ETH it received, setting aside the remaining 10% as a "reserve currency" to "guarantee" some value to the BNT. Therefore the next guy to buy a BNT will pay a bit more than 1 ETH to get 100 BNT, and the next guy to sell 100 BNTs will get a bit less ETH than the previous guy paid. This also means that if all the BNTs holders were to go to Bancor and sell their BNTs in exchange for ETH, as a group, they would only receive 10% of the initial value they invested, losing instantly 90% of the money spent. This is the very definition of a Ponzi scheme payoff. Actually it is even better as it is a mathematically predefined Ponzi payoff. You reimburse the first investors to get out at a higher rate than the last investors requesting to get out.

So, why would anyone buy this, as Bancor explained clearly in their white paper what the formula was and what the intention was?

Does the BNT holder benefit from dividends from Bancor activity? no.

Does the BNT holder benefit from a specific service to be provided at a later stage ? Still no.

The selling point is that BNT's are going to be used and promoted by Bancor as the "reserve currency" for other new tokens in the future!... By holding BNTs you get to benefit from other Ponzi schemes that will feed the artificially inflated bubble of the BNTs.

And here is born the Ponzi² : Ponzi in a Ponzi, by reference to the infamous CDO² which had a significant role in the 2009 Credit Crisis.

It's amazing what we can do by recycling old concepts

Update: the BNT rose to up to 140% of it's ICO value and has n0w dropped back to near parity, how long until it dies?...

2nd Update: I see questions online about valuations and about whether BNT will spike again one day, the answer is in the formula: For all subscribers of the ICO to get their money back(in average) you need for another ~340 000 ETH to be invested in it, ie approximately as much as was invested in the first place ~ 140 MUSD. Obviously that would mean that these new investors end up in the same situation as the old ones... not a good one.

3rd update: Actually the Bancor team has implemented a floor at 0.01 (the ICO price) for up to 120 000 ETH, that means that for All the inital investors to sell and get in average the amount they paid, you "only" need 200 000 additional ETH to be invested (~ 70MUSD)

4th update: Ooops, either the floor reserve has been consumed or it's not working but price is now 92% of ICO price and falling

5th and last, Floor is working, is independent from main exchange which explains the slight drop.

Over and out