TRX, XRP Premines Create Problems For Index Funds
Morgan Creek Capital Management has excluded XRP, Tron, XLM, NEO and more from its new Digital Asset Index Fund. Any coin that had a bigger than 30% premine has been excluded: but what’s the issue?
Big Business Frowning On Big Premines?
Morgan Creek Capital Management has more than $1.5 billion in assets, so its Digital Asset Management Fund is significant. As is the decision to exclude any cryptocurrency with more than a 30% premine.
That’s bad news for Ripple, which essentially premined all 100 billion XRP tokens. That’s a problem for the likes of Morgan Creek.
Tron took the same approach and premined 100 billion TRX coins. Founder and CEO Justin Sun is rumored to hold billions of coins.
NEO issued 100 million tokens at the start and there will be no mining process, which is a simpler version of the same issue as far as the Digital Asset Index Fund is concerned.
Pump and Dump Could Rock The Market
It doesn’t take a huge leap of logic to see that 62 billion XRP or TRX coins hitting the exchanges could massacre the price. While it might seem counter-productive for a company to sabotage its own product, it could happen. If the coins are at an all-time high and major holders simply want to cash out, that could have a real impact on the coin’s price and progress. This kind of dump could also come from the outside.
The risk, for the Morgan Creek analysts, clearly outweighs any potential rewards.
The long and overwrought story of Jed McCaleb, Ripple, and Stellar (which is essentially a fork of the Ripple technology) involved more than one occasion on which the ownership of XRP was debated, the participants made statements that were considered inflammatory, tokens were frozen, and there were even suggestions that McCaleb would simply sell – which caused a crash in the price of XRP.
This presents two issues:
- A rival token, and warring founders, have the potential to affect XRP’s market price.
- Free trade is a real concern if Ripple can and will freeze XRP to avoid what they perceive to be market manipulation.
Tron has been embroiled in its own scandals, although an independent investigation did exonerate Sun after he was accused of selling 6 billion TRX coins at the height of the cryptocurrency feeding frenzy.
Bitwise Asset Management will manage the index for Morgan Creek, and co-founder Hunter Horsley said, in what might be considered a masterpiece of understatement:
“With decentralization being a cornerstone of most blockchain designs, having a large portion of assets held centrally runs counter to that and could create complexities that differ from what we would expect from public blockchains. That’s not sure, it’s just a potential risk.”
What is a Premine?
Premining is the process of creating coins before the cryptocurrency is released to the general public. This allows developers to assign coins to themselves and investors. In essence, it’s not a million miles away from the stock options that were always a part and parcel of start-up businesses.
But in the hyper-inflated ICO market that preceded the current, more considered, cryptocurrency sphere, this led to founders like Chris Larsen of Ripple Labs suddenly being richer – on paper – than all but a handful of people on the planet. And this before Ripple even had a product with major adoption.
The outsized problem becomes even more disproportionately damaging when we try to integrate that bubble mindset with an open market.
Morgan Creek believes that this creates conflicts of interest and leaves the market open to manipulation.
So, it has excluded any coin with a 30% premine or larger due to the additional risks, which leaves XRP in the cold. The fund will also exclude the Lumen, NEO and EOS. Thanks to a 17% premine, Ethereum slips under the radar and will be included.
XRP In The Wars
It will be a bitter pill for XRP in particular, as Ripple Labs aimed firmly at the financial sector with its blockchain technology. XRP was largely considered the ‘banking coin’ and for a long time it was seen as the currency that would legitimize crypto.
Although today’s decision doesn’t, on the face of it, have anything to do with potential classifications as a security or otherwise by the SEC, it’s more bad news for a token which is attracting more than its share.
Ripple Labs has even been accused of securities violations after allegedly promoting XRP as an investment vehicle. Even though Ripple has taken significant steps to distance itself from XRP, it faces a series of lawsuits and they could have a serious impact on the cryptocurrency ecosystem as a whole.
At a time when cryptocurrency and blockchain technology approaches the tipping point towards mass adoption, Ripple Labs and other XRP holders have found themselves watching from the sidelines. They are now joined, in Morgan Creek’s eyes anyway, by the likes of Tron, NEO and EOS.
Is this a disaster for the coins? Maybe not, but it’s certainly a warning shot to other start-ups that are contemplating big premines. It simply doesn’t send the right message to the financial world and could cost them dear in the end.
The author is not currently invested in digital assets.