So its come to this:
In a video released on December 14th, 2018, by the Substratum team’s official YouTube account, Justin Tabb announces that the team will be speculatively trading their allocation of Ethereum in order to acquire more funds that they would presumably use for development.
Specifically, one can find Justin Tabb beginning to speak about this around the 6:50 mark of the video.
Below is a direct quote from the video:
“ So, we’re taking full advantage of the trader that we have, uh, in full time and we are going to be actively trading a portion of the Ethereum, uh, so that we can trade up basically. So that we can sell at the top of the bands and buy at the bottom of the bands. And actually, we’re not doing anything any different than what’s in our whitepaper because we’re not, uh, doing anything but trading it off to USDT Tether.”
What Did He Just Say?
Yes, you read that quote correctly. Essentially, what Justin Tabb was saying in that latter portion of the video was that the price of Substratum had depreciated significantly from its ICO price. Therefore, the team will be utilizing their ‘trader’ in order to flip the Ethereum on the open markets.
Now, some may listen to this portion of the video and say to themselves, ‘This isn’t that bad. After all, they aren’t really actively trading, they’re just swapping back and forth between Ethereum and USDT’.
Unfortunately, in these markets this is just as dangerous (and even more so) for a number of reasons:
- One must have superb knowledge as a trader in order to pull off something like this. While the overall trajectory of crypto has been downward throughout the entirety of 2018, there have been numerous whipsaw periods. Therefore, it would be extremely easy for one to make the mistake of holding Ethereum at the wrong time (while the price is depreciating), or cashing out into Tether at the wrong time (while the price of Ethereum is appreciating).
- Justin Tabb failed to provide any concrete information about this ‘trader’ that they will be using in ‘full time’. There’s no way of discerning whether this is someone with actual financial expertise specifically tailored to the crypto markets or not. Chances are, if the trader was that good, then they would not be dedicating their time to simply flipping Ethereum for the Substratum team. They would probably be running their own fund or utilizing their talents in some other way.
- The company, Tether Ltd., is currently under investigation by numerous federal agencies in the United States. Regardless of whether you believe this to merely be ‘FUD’ or not, this represents a very distinct counterparty risk for all those that are holding (essentially purchasing) Tether. Thus, investor funds are in serious jeopardy.
- The price of Tether itself is not always pegged to $1.00, which means that placing money into Tether itself could still result in losses, even as Ethereum depreciates. For example, on October 15th, 2018, the price of Tether dropped to as low as 87 cents on Kraken. That represents an immediate and comparative loss of 13%, notwithstanding any appreciation or depreciation in the price of Ethereum.
Additional Problems With Substratum’s Proposed Plan
You probably noticed the part where Justin Tabb specifically stated that Substratum isn’t technically doing anything outside of what they mentioned in their whitepaper by trading investor funds on the open market. However, this is not 100% true.
We pulled up the whitepaper and searched specifically for the portion that mentions how Substratum will handle investor funds, and here is what we found:
Source: Substratum Whitepaper
The color of the font is a bit faded in the image above, so here is this portion of the whitepaper, restated for your convenience:
“To ensure the development fund is not subject to big market fluctuations, we’re hedging it four ways. By doing this we ensure we have the capital needed to finish each phase of the project budgeted for the Initial Coin Offering (ICO).
USD Fiat (25%)”
So, in an ideal world, this money would be hedged 50/50 Ethereum and Bitcoin to dollars (assuming that Tether maintains parity).
There are a few issues here, but we’ll address the most relevant one.
Substratum essentially told their investors in the whitepaper that they would be placing the proceeds from their ICO(s) into an evenly weighted index fund that they created which evenly weighted the constituent assets of Bitcoin, Ethereum, USDT, and USD (fiat).
This is materially different from what Justin Tabb described, which would be the active trading of these funds back and forth between Tether and Ethereum specifically. In this new model that Justin Tabb has introduced, there is no hedging via Bitcoin, no mention of direct investment into USD fiat, and no fixed, weighted fund that the ICO proceeds would be placed in.
So, investors are essentially at the mercy of Substratum’s competency in the open markets.
This is not good, especially given the fact that:
A) Substratum’s team is not known for trading and, as far as public knowledge goes, there are no trading/finance experts on their team.
B) Substratum appears to be grossly mismanaging their ICO funds and what’s even worse is the fact that the investors appear to have had no say/input in this decision.
C) Substratum has essentially reneged on their pledge to partition the proceeds from their ICO(s) into a pseudo-index fund in order to ‘hedge’ against the market, opting instead to actively trade these funds.
D) There is no record of their success/failure on the open market.
E) Cryptocurrency is extremely volatile and a significant number of crypto hedge funds and asset management firms have lost a substantial amount of money trading on the open markets in 2018.
Let’s Do the Math
We know that Substratum was able to raise (at least) $13.8 million in their first ICO.
Recently, at the beginning of September, Substratum held their second ICO. However, there is no concrete information on just how much they raised during that time period.
For argument’s sake though, let’s assume that Substratum raised $5 million in their second ICO (not unreasonable given the fact they raised $13.8 million in the first one).
The price of Ethereum, Bitcoin, USDT, and USD, respectively, were as follows on September 1st:
Bitcoin = $7,044
Ethereum = $283.50
USDT = $1.00
Fiat = $1.00
Assuming that $5 million was split up proportionately among these 4 assets at the prices listed above, Substratum would have $3,442,500 (3.4 million) remaining at the current prices. This would represent a total loss of $1,557,500 (1.5 million).
That’s a depreciation of 31% in a little over three months.
Now, the team (Justin Tabb; founder of $SUB) stated as recently as yesterday that they are instead choosing to trade back and forth between Ethereum and Tether.
Specifically, Ethereum has depreciated by 70% over that same time span, making it perhaps the worst investment among all T10 cryptocurrencies, surpassed only by Bitcoin Cash.
The Primary Issue at Hand
There are a few issues, but the primary one is the lack of transparency. Without any concrete track record of posting successful trades, there is simply no way for the casual investor to assess whether this strategy will or has been successful.
The stakes are fairly massive here as well. It appears that Substratum is running out of options in terms of funding (they have an ongoing ICO and they’re currently trading on the markets), so if their endeavors do not end in success, they are more than likely screwed.
Major Question of Sustainability
It appears that $SUB is lightyears away from erecting a viable ecosystem that even has a remote potential to facilitate their project’s vision. So this begs the question of how the team will sustain itself in the long-term until that happens. It also begs the question of how the project will be able to sustain itself if there is not an immediate boom in business.
With no apparent alternative sources of funding and money being continuously bled out of the project’s coffers for reasons unrelated to development on the project itself, it is hard not to consider $SUB to be akin to a sinking ship at this point.
This is doubly true if the project’s future funding is contingent upon the team’s ability to make substantial profit in a bear market that has produced negative deltas for a wide range of traders, from institutional to novice.