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Op-Ed

Overstock’s been in a tailspin, and even its CEO’s optimism can’t save the firm from a lack of tokenization

Quick Take

  • Overstock shares have hit 52-week lows of $12.35, down 75% from January
  • Interest in tokenized securities has declined leaving the world far less tokenized than many analysts anticipated
  • Overstock has attracted the attention of world-class investors including Soros Fund Management, Passport Capital, and GSR Capital
  • Soros Fund Management, Passport Capital, and GSR Capital have shed their positions this year
  • GSR Capital furnished a letter of intent for up to $404m in investment to tZero but pulled out at the “eleventh hour and fifty-ninth minutes” and asked for an extension

Overstock hit 52-week lows, to $12.35 from the January 1st peak of $86.90. The former retail darling has come a long way from selling discount furniture and is now on its third year of its Grand Blockchain Experiment, with CEO Patrick Byrne first announcing the original t0 “smart-contract trading platform” in a flashy 2015 launch party.

Now branding the initiative tZERO, the company saw renewed interest from investors in 2017’s speculative crypto fervor, doubling down on building the platform to focus specifically on regulated blockchain-based securities issuances. With cryptocurrency prices drawing down and global regulatory uncertainty, interest in tokenized securities has cooled as well, leaving the world far less tokenized than many analysts anticipated.

Despite this, CEO Byrne has remained confident, claiming in a recent WSJ interview that “[he doesn’t] care whether tZERO is losing $2 million a month,” adding that the team has “cold fusion on the blockchain side.” It’s unclear what he meant with the confusing nuclear metaphor, but perhaps nuclear winter is a more apt comparison: Medici Ventures Inc., the subsidiary housing Overstock’s blockchain experiments and tZERO platform, has lost tens of millions of dollars this year.

None of this should be particularly surprising. Overstock’s project was one of many “Blockchain, not Bitcoin” initiatives launched after the 2013-era bitcoin bubble, where global investment banks and fin-tech entrepreneurs pivoted to blockchain in order to manage their credibility. Other enterprise blockchain initiatives and “inter-bank” projects like Digital Asset Holdings, led by weapons of mass destruction credit default swap creator Blythe Masters, are similarly struggling.

In the past, Byrne’s perpetual optimism has attracted the attention of world-class investors including Soros’ Quantum Fund, John Burbank’s Passport Capital, and global investment firm GSR Capital.

In January, Soros’ firm invested $100m, with $80m ear-marked to Medici Ventures. More recently in August, GSR committed a letter of intent for up to $404 million in investment to tZERO, in the form:

  • Up to $270m in tZERO equity (at $1.5b post-money valuation)
  • $30m purchase of tZERO Security Tokens from Overstock.com
  • Up to $104.55m in shares of parent company Overstock.com common stock

In light of recent struggles — both across the industry and with $OSTK’s continued slide, it appears as though investors have grown disillusioned with their initial theses.

Per 13F filings, John Burbank’s Passport Capital appears to have trimmed their ownership to 0 with their share ownership declining from 520,498 shares in a March filing to 425,000 shares in a June filing to 0 in a September-dated filing.

Soros similarly seems to have shed his position with his stake declining from 2,472,188 shares in a December filing to 0 shares in a March filing

Most pressing, GSR’s commitment seems to have stalled, with Byrne noting in a December 16th 8-K filing that the deal has stalled and the amount previously promised may not close:

GSR’s leadership has informed me that GSR still intends to close this deal and is committed to this transaction and our partnership. GSR leadership tells me a key partner from outside of China needed more time to participate in the deal. Given the four-month period from when our initial term sheets were signed with GSR, I am, of course, as disappointed as any shareholder. Although it is uncertain whether the transaction with GSR will close at the same amounts we previously disclosed or at all, we have granted GSR an extension, at its request, until February 28, 2019, to close the transaction. We will continue to work with GSR in good faith during this extension because we value the work they have done and the potential of our partnership.

GSR proceeded to complete due diligence and prepare the strategic work before they finalized their investment. Starting in November, GSR transitioned to developing the definitive documents for the GSR investment. By December 14, all parties have incorporated each other’s concerns in the documents “to a largely satisfactory level”. Then, GSR contacted Overstock and asked for an extension. Byrne said that it frustrating that “the delay came at the eleventh hour and fifty-ninth minute.”

In the meantime, CEO Byrne’s own optimism may be fading, having reported over 774,000 shares sold via a September Form 4 filing, between prices of $25 and $27.

Despite these troubles, the firm proceeds on, most recently working with Bruce Fenton-run Ravencoin to offer a digital securities token and collaborating with GSR, the aforementioned Maybe Investor, to “tokenize the trading of cobalt.”

While securities digitization feels inevitable, it seems clear that we’re far from being able to “tokenize the world.” A lot of the core problems people are having with the institutionalization of crypto: global securities law compliance, custody and trading, etc. are still yet unsolved. The majority of the capital markets infrastructure necessary for them to succeed, e.g. market makers, token-native prime brokerage services, are still in nascent stages of development.

Moreover, tokenized securities seem to suffer from a major investor-market-fit problem. There are a few early experiments (e.g. fractionalized ownership of NYC real-estate), but it remains unclear what class of new securities are a good fit for the new structure. We seem to have taken the wrong lesson from “crypto”: treating equities or real asset titles as bearer assets is undoubtedly regressive. If all digital securities will be held with traditional-looking prime brokers or custodians, it remains unclear what the tactical advantages to using a blockchain are. Capital-b Blockchain remains a semantic wasteland and I remain skeptical-until-proven-wrong about the utility of blockchains as really inefficient databases.

While issuance is potentially faster and cheaper, with benefits like ease of fractionalization, value capture will remain difficult. Despite some Crypto Twitter Bro’s insistence that “securities and derivatives are a $200T market zomg!11!”, a path to generating profits outside of under-writing fees, trading fees, and holding tokenized assets (where holders benefit from a hypothetical illiquidity premium) remains to be seen. Infrastructural companies and brokers like tZERO should be doubly concerned: last year’s hype cycle launched a slew of businesses across every part of the digital securities stack with uninspiring crypto prices making demand a head-scratcher.

It’s unclear what the future of the cash-guzzling enterprise is or whether novel innovation in the trading of cobalt will lift investor sentiment, but with the steady downwards price spiral, perhaps a re-brand of tZERO as “to zero” is more appropriate.

This is an opinion column and the views may not reflect those of The Block.