Digital Assets Report 2017 — Pricing Without an Anchor

2017 produced the first large speculative cycle in cryptocurrencies. Prices rose dramatically through the year and fell substantially afterwards.

The cycle's value to an investment archive is not as a judgement on the technology, which is a separate question this report does not address. It is as an unusually clean case study in price formation for assets with no cash flow.

Most financial assets can be valued, at least in principle, by discounting expected future cash flows. A stock has earnings, a bond has coupons, property has rent. The resulting value provides an anchor: a price can deviate from it, sometimes for a long time, but the anchor exists and creates a force pulling the price back.

Cryptocurrencies produce no cash flow. There is no stream to discount and therefore no anchor.

This does not make them worthless. Gold produces no cash flow and has held value for millennia. Currencies produce no cash flow. An asset can have value from scarcity, from utility, or from a shared convention that it has value — and shared conventions can be extremely durable.

But it does mean price formation works differently. With no anchor, there is no level at which a price is objectively too high, and therefore no fundamental force limiting a rise. The same absence means there is no level at which it is objectively too low, so declines can also run further than they would in an anchored asset.

Alongside the price cycle, 2017 produced a wave of token issuance that funded projects on the strength of a document, with minimal disclosure obligations and no established investor protections. The regulatory response to that wave — turning on the question of whether the tokens were securities — shaped the industry over the following years more than any technical development.

What happens when the anchor is removed

Setting this out precisely is the substance of the report, because it generalises.

In an anchored asset, the price can deviate from fundamental value, but two forces operate against it:

• Arbitrage. If a price is far below the value of its cash flows, a buyer can acquire it and collect those cash flows. That buying pushes the price up.
• Comparison. Investors can compute what the asset should be worth and act on the discrepancy, which is what creates the arbitrage in the first place.

Neither force can operate on an asset with no cash flow. There is nothing to collect and nothing to compute. The result is that price is determined entirely by what the next buyer will pay, which has three specific consequences:

• Price becomes the primary evidence. In the absence of fundamentals, a rising price is itself the main argument for owning the asset. Participants observe the rise and infer value from it — which is reflexive, since the inference generates the buying that generates the rise.
• Narrative substitutes for valuation. With no calculation available, the case rests on a story about future adoption. Stories are not falsifiable on any timeline that constrains a price.
• New participants change the price rather than correcting it. In an anchored asset, new buyers who believe the price is too high sell, which corrects it. In an unanchored asset, participants who believe the price is too high can only decline to buy — and a marginal buyer who is enthusiastic sets the price regardless of how many sceptics are watching.

An anchor does not stop a price from moving. It creates a force that eventually pulls it back. Remove it and there is nothing to pull against, in either direction.

The symmetry is the part most often missed. Absence of an anchor is usually cited to explain why prices rise beyond reason. It equally explains why they fall beyond reason — a decline in an unanchored asset has no floor at which value investors step in, because there is no value to compute.

The token issuance wave

2017 saw a large volume of capital raised through token issuance. The structure is worth describing precisely because it is the substance of what regulators subsequently addressed.

The mechanism: a project publishes a document describing what it intends to build and issues digital tokens in exchange for capital. Tokens are typically claimed to have future utility within the system being built. Buyers receive tokens; the project receives capital.

What was absent relative to a conventional securities offering:

• No audited financial statements, because in most cases there was no operating business.
• No prospectus obligation and therefore no legal liability for the completeness or accuracy of the description.
• No requirement that the described product be built, and no defined recourse if it was not.
• No regulated intermediary performing the diligence and gatekeeping functions that underwriters provide.
• No restrictions on who could participate. Conventional private offerings restrict participation to investors meeting defined criteria; token offerings generally did not.

The economic substance was recognisable regardless. Capital was raised from the public to fund a venture, with buyers expecting to profit from the efforts of the people running it. That description matches the legal definition of a security in a number of jurisdictions, and that recognition is what drove the regulatory response.

The consequences for participants were predictable given the absence of disclosure obligations. Without required disclosure, the information available was what the issuer chose to provide. Without liability, there was limited consequence for providing a misleading picture. Without a gatekeeper, no party had performed diligence before the offering reached buyers.

This is what disclosure regulation exists to prevent, and the episode functions as a natural experiment in what happens without it. That is its principal analytical value.

Classification as the decisive question

The regulatory response through 2018 and after turned on a single question: is a given token a security?

The classification matters enormously because it determines the entire applicable framework — registration requirements, disclosure obligations, who may participate, how it may be traded, and what liability attaches to statements made about it.

The analysis that regulators applied focused on economic substance rather than terminology:

• Was capital invested?
• In a common enterprise?
• With an expectation of profit?
• Derived primarily from the efforts of others?

Where the answers were yes, the instrument was treated as a security whatever it was called. The label chosen by the issuer carried no weight.

The practical consequences shaped the industry more than any technical development did:

• Offerings became restricted to frameworks that comply with securities law, sharply reducing the volume and changing who could participate.
• Enforcement followed against offerings determined to have been unregistered securities.
• Exchanges faced classification questions about whether listing a token made them an unregistered securities exchange.
• The industry's geography shifted toward jurisdictions with clearer or more permissive frameworks.

The general lesson is one that recurs whenever a novel instrument appears: regulation follows economic substance, not nomenclature. An instrument that functions as a security will eventually be regulated as one, regardless of how it is described. Anyone assessing a novel financial instrument should assume this rather than assume that novelty confers exemption.

Where the lesson generalises

The 2017 cycle's analytical value extends well beyond cryptocurrency, because the underlying condition — an asset priced primarily on expected resale rather than on expected cash flow — appears in many places.

It applies to any asset whose price rests on expected resale:

• Collectibles and art, where value is entirely conventional and price formation works the same way.
• Land held for appreciation rather than for productive use.
• Pre-revenue companies valued on narrative rather than on any financial measure — including a substantial portion of the private valuations the 2015 and 2019 reports discuss.
• Any asset in the terminal phase of a speculative cycle, where cash flow considerations have been abandoned even for assets that have them.

The diagnostic question is simple and worth asking routinely: if this asset never produced any cash and could never be sold to anyone else, what would it be worth?

• If the answer is substantial — the asset produces something, or has use value — there is an anchor.
• If the answer is nothing — the entire value depends on resale — then price formation is unanchored, and the analysis in this report applies.

This is a description of the price formation process, not a judgement about whether the asset is worth owning. Unanchored assets can rise for long periods and can be entirely rational to hold. But the analysis required is different: it is a question about who the future buyers will be and why, rather than about what the asset will earn. Investors who apply cash-flow reasoning to unanchored assets, or resale reasoning to anchored ones, reliably reach the wrong conclusion.

Why the absence of an anchor cuts both ways

The symmetry of the unanchored condition is the part most often missed, and it is worth developing because it changes how a decline in such an asset should be read.

The familiar half. Without a valuation anchor, there is no level at which a price is objectively too high, so nothing constrains a rise. This is the half that gets cited during a boom.

The half that gets forgotten. The same absence means there is no level at which a price is objectively too low. In an anchored asset, a decline eventually meets buyers who compute that the price is below the value of the cash flows and buy for that reason. That computation is unavailable for an asset with no cash flows.

The consequences during a decline:

• No fundamental buyer appears. In an anchored asset, falling prices attract value investors. In an unanchored one, falling prices attract only participants who believe the price will rise — and the falling price is evidence against that belief.
• The reflexivity reverses exactly. If a rising price was the primary argument for owning the asset, a falling price is the primary argument against. The same mechanism that amplified the rise amplifies the fall.
• Declines can overshoot any reasonable estimate of value, because there is no reasonable estimate of value to overshoot relative to. This is not a statement that the asset is worthless — it is a statement that nothing arrests the decline at a computable level.

The practical consequence for position sizing is significant. In an anchored asset, an investor can estimate a downside — the value of the cash flows under adverse assumptions — and size accordingly. In an unanchored asset that estimate is unavailable, which means the downside for sizing purposes should be treated as very large.

The argument that an unanchored asset can rise indefinitely and the argument that it can fall indefinitely are the same argument. Anyone who accepts the first should accept the second, and the position should be sized to whichever they would rather not be wrong about.

This generalises well beyond cryptocurrency, which is why the diagnostic in the previous section is worth applying routinely. Any asset whose entire value depends on resale — collectibles, land held for appreciation, pre-revenue companies valued on narrative — has the same property, and the analysis required is about who the future buyers will be rather than about what the asset will earn.

What an allocator could act on

Run the diagnostic before choosing a framework. If this asset never produced cash and could never be sold, what would it be worth? A substantial answer means there is an anchor and cash-flow analysis applies. Nothing means the analysis is about future buyers, and applying discounted-cash-flow reasoning will produce a confident wrong answer.

Size unanchored positions to a very large downside. The absence of a computable floor is not a technicality. It means the standard method for estimating downside is unavailable, and the honest response is to size as though the downside is total.

Treat an offering without disclosure obligations as carrying the risks disclosure exists to prevent. The 2017 token issuance wave is a natural experiment in what happens when capital is raised from the public without audited financials, prospectus liability, or a gatekeeper performing diligence. The results were what the absence of those protections would predict.

Assume economic substance governs regulatory treatment. An instrument that functions as a security will eventually be regulated as one, regardless of what it is called. Novelty does not confer exemption, and an investment thesis that depends on a regulatory gap remaining open is underwriting a regulator's inaction.

Distinguish the asset from the technology. A view that a technology is significant is not a view about which asset captures its value — the same distinction the 2025 AI report develops at length for a different technology. Both questions are legitimate; conflating them means answering the easy one and acting on the hard one.

What 2017 established for digital assets

• Cash-flow-free price formation was demonstrated at scale, along with the symmetric consequences of an absent anchor.
• Reflexivity was shown clearly — price as its own primary evidence, generating the buying that generates the price.
• The consequences of offering without disclosure were demonstrated in a natural experiment.
• Classification by economic substance was established as the decisive regulatory principle.
• The diagnostic generalises to any asset priced on expected resale rather than on expected cash flow.