DAO was by far the biggest crowdfunder in history, raising over $170M in capital by locking up 14% of the entire ether supply into a smart contract. DAO stands for “decentralized autonomous organization” and is a pool of funds controlled through community consensus.
As we’ve seen with LISK, some ICOs can provide traders with returns well over 100%. DAO failed to provide immediate returns and the markets appear to be range bound.
In previous articles I had mentioned that the fundamentals around DAO seemed like a poor investment.
In my opinion the current cost of DAO is overpriced, making it highly unlikely that it will retain this value upon release. Although the price is fixed to the market rate of ether, the supply is undergoing hyper-inflation.
Although the DAO fundraiser was impressive, it had all the hallmarks of a pre-market bubble. In the traditional IPO model, the supply of pre-market shares that are available tend to be limited. This means that not everyone can participate which creates buying demand on the open markets.
Generally speaking, the more participants who buy into an ICO the less chances you have of making a return on investment. For DAO I suspect that most participants were priced in pre-market, which left very little demand on the exchanges.
The pre-market emotional hype around DAO was throttled to the point of irrational exuberance. Any time the markets get exaggerated with too much emotion you may want to consider taking a contrarian position.
Investors were purchasing DAO tokens even up to the last minute when the price of ether was at a double top and the cost per DAO was at its highest.
DAO Seems Range Bound
One important factor with DAO that needs to be taken into consideration is that it’s pegged to a supply of ether. This likely has the effect of tying DAO to the price movements of ether.
Usually during price discovery new coins start off with really high valuations and come crashing down. The price of DAO never deviated above its prior pre-market highs during the opening day.
At certain points DAO also traded for lower than its equivalent value of ether. The reason is likely due to a 7 week delay of splitting from the fund. Some traders sold at a loss to receive immediate cash as oppose to waiting 7 weeks.
Looking at the charts, it does appear that DAO is tracking the price movements of ether.
Short Term Gains vs Long Term Investments
The DAO model is like operating a decentralized corporation. All the hype about making quick gains on DAO made me suspect of its success. Most companies start off by operating at a loss in order to grow. Successful companies are longer term investments that tend to be very resource intensive in the beginning.
It appears that many investors in the crypto space are only interested in short term gains. The idea of losing money within the first few years to receive future returns may be more than what most DAO investors can handle.
Any release of the ether funds would likely increase selling pressure on the markets as developers convert into fiat to pay for expenses. This may also have the effect of driving down the price of DAO. Markets that are driven by raw emotions may respond with panic selling and capitulation.
Given all the drama over Bitcoin’s blocksize debate I have little faith that a group of internet strangers will agree on how to spend $170M in capital. Ethereum is a new platform and its possible that something like this could lead to similar dramas that have plagued Bitcoin.
In the event that DAO does succeed, it can completely revolutionize our economy from the ground up. I’m open to that possibility but remain skeptical. If ethereum has another bull trend then it’s likely that it will take DAO along for the ride.