The crash in digital currency values has tossed fuel on the already raging fire of skepticism around many crypto projects, which are suspected as scams masquerading as a technology of tomorrow, reports Brian Dowling for Xconomy (FinTech Futures’ sister publication).
But the price retreat – and the accompanying losses to crypto speculators – are welcome news to Dave Balter, CEO of Flipside Crypto, whose Boston-based digital currency benchmarking start-up has landed new funding from Coinbase Ventures, Digital Currency Group, and others. The capital pushes Flipside’s total amount raised to $4.5 million, the company says, up about $1 million from the $3.4 million it had raised in March.
“The space is getting decimated for all the people who are just speculating, and that is a healthy thing,” Balter tells Xconomy.
The wipeout in digital currency values, to Balter, signals a clearing out of some of the speculation that had led to unrealistic sky-high valuations for some cryptocurrency projects and an opening for meaningful ones to take hold as the sector finds its footing.
Bitcoin prices have just recently poked back above $4,000, down from its highs near $20,000 a year ago, and Ethereum’s coins are trading in the $120 range, a far cry from the $1,400 they went for back in January. Many of the approximately 2,000 other cryptocurrencies out in the wild have been similarly rattled.
It’s unclear what led to the rush for the exit. Theories range from regulatory enforcements (one by the US Securities and Exchange Commission against Boston-based crypto Airfox) to a split in the Bitcoin system in mid-November, or a dip in demand for computer hardware to mine new Bitcoins.
“You’re seeing the market get crushed, and I’d almost say the data we’ve had is the canary in the coal mine,” Balter adds. “Evaluating crypto in an inefficient market makes no sense. All these people investing in crypto assets based on price point and market cap alone is illogical.”
Instead of a currency’s price or market cap, Flipside’s main product, a scoring index for currencies, looks at three metrics to weigh whether a currency can be sustainable. The metrics are developer activity on the open source project tied to the currency, the usefulness of the underlying project, and a host of traditional trading signals like the price volatility of the currency. If the currency ranks high, it’s a strong hint it could be more than just a flash in the pan.
Balter says the strategy behind these latest investments from Coinbase and Digital Currency Group – in addition to pushing Flipside’s total capital raised to $4.5 million – is to help the company get its Flipside Crypto Asset Score to be as “authoritative” and “omnipresent” as possible.
“Coinbase is, arguably, the 800-pound gorilla that delivered crypto to mainstream audiences,” Balter says in a Medium post announcing the investment, “and Digital Currency Group has launched a broad array of industry-defining orgs. including Grayscale Investments, Genesis Trading and Coindesk – in their spare time, they’ve invested in well north of 100 other companies in the space.”
(Coinbase itself is still raising money. The San Francisco-based digital currency exchange raised $300 million last month from Tiger Global Management, Y Combinator Continuity, Wellington Management, Andreessen Horowitz, Polychain, and others. Coinbase says the capital pushes its valuation to over $8 billion.)
Balter says the Flipside fundraising was less important for raising capital, and more about making the right connections.
“We had plenty of capital in the bank. We were not looking, but when partners who can transform your business show up, you pay attention,” Balter says.
Notable fintech investor Jeff Parker joined in the funding, along with existing investors True Ventures, Castle Island, and Boston Seed Capital. Parker is also coming aboard Flipside as an advisor, Balter says.
Flipside was started in 2017 by Balter, Eric Stone, and Jim Myers as a way for wealthy investors to park their cash in cryptocurrencies. Within a year, the company has shifted efforts into developing its FCAS metric to make sense of the mess of cryptocurrency projects popping up everywhere.
Balter says the overall crypto price crash began in January but it unfolded bit-by-bit.
“The funny thing about this crash is it’s a slow release,” Balter says. “What should have happened is, in February we should have lost 85% of value, but because the way this market behaves, it feels like the air is dribbling out.”
Balter says the big players have been slow to come to the market, but he’s not surprised. So far, one of few splashes made has been Boston-based Fidelity Investments, which opened a digital assets arm to help hedge funds, family offices, market trading firms, and other institutional investors with crypto currencies.
Big companies are hesitant to put their entire business at risk in an asset class that lacks basic ground rules, such as regulations against deceptive trading practices, Balter says. “I’m not surprised the institutions wait this out.”
That said, he expects more interest from the financial giants next year, perhaps with a “more substantial way” to work with the assets than another trading platform.
Once that happens, Flipside and its competitors will likely be jockeying to be the crypto currency guide for these institutions as they try to make sense of the sector. For this reason, such crypto ratings companies might become attractive acquisition targets for big financial firms.
“I do think at some point there will be a great need for companies to upgrade their abilities to analyze these assets,” Balter says. “That’s why we are building this business. Is the goal to sell it tomorrow? No. But we are trying to build the best company we can.”