The majority of investors are not the stereotypical “crypto bros” often portrayed in the media. They’re using common performance metrics to make investment decisions, according to Broadridge's Crypto Asset Disclosure Study, rather than some of the “tokenomics” that could play just as big a role in performance.
There are several significant differences in crypto versus traditional assets, however. Conveying these unique factors to investors is essential, and can help rebuild confidence in crypto assets. To do this means token issuers should agree to a standardized disclosure framework.
The (overlooked) role of tokenomics
Experienced crypto traders typically use specific metrics to evaluate the potential and attractiveness of crypto assets. These variables include the initial supply of a cryptocurrency, its network performance, and other tokenomics that influence its value. Without considering these crypto-specific metrics, it becomes challenging — if not impossible — to gauge the value of a crypto asset.
The majority of investors rely on conventional financial metrics such as risk and security, return on investment, and financial overviews to make crypto investment decisions, however. This even means attempting to apply cash flow analysis to cryptocurrencies1 — a measurement that doesn’t even apply for this asset class since asset holders own tokens rather than shares of the underlying crypto project. By contrast, only 28% take network performance into account, and a mere 16% examine tokenomics when making a decision.
These findings may indicate that many investors do not fully appreciate the importance of crypto-native factors essential for understanding crypto assets. More troubling is the possibility that some investors are making decisions based on incomplete assessments of the risk-return profiles of particular crypto assets. There’s an urgent need for a crypto disclosure framework that provides investors with a clearer understanding of what they are investing in.
The need for “fit-for-purpose” disclosures
The unique characteristics of cryptocurrencies, such as network performance (speed of the supporting blockchain) and tokenomics (supply and utility that affect value), demand a disclosure framework that considers these crypto-native metrics.Regulators should consider adopting a flexible approach to disclosure, acknowledging that this asset class doesn't fit existing models. This means designing a fit-for-purpose disclosure framework. Regulators and the industry can begin by adapting existing disclosure requirements to crypto-appropriate versions while identifying gaps and unanswered questions.
Even the most basic information, such as describing an asset, differs significantly in the crypto space. In this case, issuers should provide detailed breakdowns of tokens, the protocol or app it resides on, and its supporting blockchain.Investors should also be informed about elements of crypto they may not understand, given how much these factors determine investment performance. With the right information, disclosures can complement the current slate of sources investors use, such as the cryptocurrency’s website and brokerages, offering more specific details every investor needs to be able to access. These include the following.
CONSENSUS MECHANISM
The consensus mechanism of a cryptocurrency determines how transactions are validated and secured.
- Proof-of-Work (POW) relies on miners solving complex puzzles, ensuring decentralization but consuming significant energy.
- Proof-of-Stake (POS) selects validators based on their stake, offering potential scalability advantages but with concerns about wealth concentration.
A cryptocurrency’s consensus mechanism directly affects the security, scalability, and long-term viability of the project. This allows investors to make informed decisions, align their investments with their values, and gauge the crypto project's ability to adapt and thrive in the competitive landscape.
RELATED REWARDS
In the crypto realm, participants are incentivized for their contributions to the network. These include:
- Mining Rewards: With POW, miners are rewarded with newly created cryptocurrency coins for their efforts in solving complex puzzles and validating transactions. These rewards motivate miners to contribute computational power, ensuring the security and integrity of the blockchain.
- Validation Rewards: With POS, validators help secure the network by receiving rewards in the form of transaction fees and, in some cases, newly generated tokens for their work in validating and verifying transactions.
The rewards miners and validators get can impact the overall return on investment a participant gets. This can incentivize participants, which can in turn make the coin more alluring. That may give investors more of a reason to choose one cryptocurrency over another.
TOKEN GOVERNANCE
Governance encompasses the set of rules and decision-making processes that determine how a cryptocurrency operates. It involves making decisions about protocol upgrades, voting on network changes, and resolving disputes.
Understanding how a token is governed provides perspective into how decisions are made within the cryptocurrency network. This helps ensure transparency, that a project aligns with an investor’s values, and demonstrates how they can actively participate in shaping the future of the cryptocurrency project.
AUDIT PROCESS FOR RELEVANT CODE
Before investing in a cryptocurrency, it's important to know that the underlying code is secure, functional, and free from vulnerabilities. Auditing involves a thorough review of the code to ensure it meets these criteria, building trust in the cryptocurrency's reliability and security. Understanding how code audits occur demonstrates to investors how thorough and reliable the process is, which can create additional trust that the project’s principals are doing a thorough job.
DESIGNING COMPREHENSIVE CRYPTO DISCLOSURES
Creating a comprehensive disclosure regime for crypto assets involves standardization and accessibility. It is crucial that crypto disclosures are made in a clear, standardized manner to educate investors effectively and protect them from potential fraud.
A fit-for-purpose crypto disclosure framework should encompass:
- Standardized Forms: Regulators should introduce standardized disclosure forms that issuers must complete, ensuring consistency in information presented to investors.
- Standardized Distribution: Disclosures should be disseminated through standardized channels to ensure easy access for all investors. Regulators and industry participants should leverage technology to push vital information directly to investors through new channels, such as digital wallets.
- Educational Initiatives: To ensure investors are well-equipped to understand disclosures, regulatory bodies can introduce educational initiatives and resources. These initiatives can help investors navigate the complexities of crypto assets, tokenomics, and network performance, ultimately promoting a more informed investment community.
Determining the entity responsible for crypto disclosures depends on the asset's characteristics. It could be the issuer, decentralized networks (DAOs), service providers, or exchanges. As a baseline, each of these entities must consider:
- Frequency of Disclosures: Crypto disclosures should be dynamic and adaptable. They should include initial disclosures, material updates, and periodic reports.
- Means of Distribution: Information can be distributed through digital wallets, crypto exchanges, regulatory databases, email notifications, and blockchain explorers. These channels should align with modern investors' preferences for real-time and convenient access.
In the ever-evolving landscape of crypto assets, progress should not be confined to replicating traditional practices.
The crypto industry holds the potential to revolutionize how investors and the public access essential information. As regulators work toward shaping a new framework, they should remain open to innovation. The future of crypto disclosures lies in adapting to a digital era where information can seamlessly flow through new channels.
Imagine a world where investors receive real-time insights directly through their digital wallets, side by side with regulators. Such possibilities are on the horizon, offering a glimpse into a more informed and dynamic crypto ecosystem.
1 Crypto Engineer. (2022, June 7). How To Analyze Cryptocurrency Cash Flow? HackerNoon. https://hackernoon.com/how-to-analyze-cryptocurrency-cash-flow