Sport is one of the largest bill boards globally for those seeking wider brand recognition or indeed corporate, sector, or even State acceptance, rehabilitation or re-positioning. The Saudi takeover of Newcastle United has caught many headlines as the most audacious example. However, one of most invasive moves into sport is by the crypto-currency sector. Initial activity focused on “traditional” sponsorships of shirt fronts, sleeve badges and perimeter advertising. But in recent months more innovative partnerships have been established around the concept of tokenisation or even gamification of the relationship and engagement between sports, clubs and their supporters.
One of the earliest movers into this space is the Socios platform, backed by the creators of the Chiliz crypto-currency. Formed in 2018, and with significant initial investors such as Binance and Ceyuan Ventures, Chiliz created its own Etherium based crypto-currency, a trading platform and an “engagement and influence” fan token platform called Socios.
The business model is quite simple. Alexandre Dreyfus (CEO of Socios) and his team are selling the idea of sport engaging with existing fans in a new way but also hoping to draw in a new form of fan through the use of crypto-currency and the engagement tools available on the Socios platform.
Fans and backers of the Chiliz crypto-currency buy tokens. Newcomers exchange fiat currency for Chiliz in order to acquire tokens. The clubs/partners share in the funds raised. Typically the amounts raised are split between Socios and the football club. The tokens are then available for trading on the Chiliz and other crypto platforms and the fans can engage and influence (in Socios’ words) on the Socios platform.
The business model, the use of crypto-currencies and the idea of charging fans for engagement all need much further examination in my opinion, an examination which I believe many of the participating sporting organisations now committed to this scheme have not fully undertaken.
Let’s break it down, looking at the choice of crypto-currency (having already taken a great leap of faith in accepting that crypto is a necessary component to this business), the impact that the business model has on that choice and then the reasons for fans to be interested initially and for the future?
How to value a crypto-currency?
The number of crypto-currencies is astonishing: (source Statista)
At first glance valuing crypro-currencies seems an impossible task, how is it possible to value something so esoteric and indeed abstract? It turns out that there are a number of factors that might determine value.
Utility is a key factor, in other words demand. Does the cryptocurrency have sufficient demand to create, maintain and increase its value? How widely used and accepted is it?
If the coin is related to a particular platform or use then the viability of the project impacts the value of the currency. Similarly, what partnerships can the project attract which will improve the visibility of the crypto-currency and thereby its usage and adoption by others?
Scarcity is another factor. How many particular coins exist, what is the maximum (if any) number that can be created and how expensive are they to create (mint)?
Other more technical factors affect the price of a crypto-currency. This includes market capitalisation, i.e. what is the total value of that particular currency. In this market size matters. In addition to market capitalisation how many “wallets” hold the crypto-currency? A larger number should support the value of the crypto-currency suggesting wider acceptance and utility. It also reduces the risk of being dependent upon the support of one huge holder.
Finally internal governance and regulations. Not all crypto-currencies are equal in terms of how they’ve been set up and how secure they are in terms of internal governance and regulation. Alongside that an element of the value of a currency will be determined by its initiators.
So in the case of Socios how does Chiliz stack up regarding theses factors?
Utility; clearly the selling of fan tokens and the on-going trading of the tokens (denominated in Chiliz $CHZ) is a key element. As we can see from above, demand for the currency and then the volume of use is a key component in the value of the currency. Thus, the continued and constant demand for new sectors, new sports and new clubs, plus future fan token offerings to be added should see a corresponding increase in value?
Business model of Socios (or any other such platform)
So on one side of the equation we have demand – demand created by new partners, new issues of tokens and the drawing in of crypto-investors to trade the tokens thereby creating use, demand and volume.
However, whilst the selling of fan tokens to crypto investors and fans creates demand, what impact does the model have?
All of these platforms have liabilities that need paying for in fiat currencies (£, $, € etc) – the normal day to day operating costs of running a business, wages, premises, IT, platform hosting, development costs, advertising, travel, entertainment etc. Additionally there is the requirement to pay their partnering clubs, sporting bodies, and other new partners a significant percentage of the capital raised in the fan token offerings..
It is believed that when fan tokens are issued and sold, the partnering club receives 50% of the amount raised. The question is does each FTO (r) draw in sufficient fiat currencies to meet these fiat liabilities? What happens if the amount paid to partners plus ongoing operation costs is greater than the amount of fiat currency raised? In a FTO(r) not all the cash raised comes from new subscribers, tokens are acquired by exchanges and professional investors already invested in $CHZ
If the amount raised in fiat currencies is less than the liabilities created, Socios or any other platform has to sell their crypto-currency to meet their liabilities. If that’s a constant in the business model then effectively the platform will always be shorting their own currency? If the platform and number of future partners is going to grow then future liabilities will also grow unless the currency and the tokens can attract professional investors to buy more tokens.
To attract professional investors as well as fans, what is it that will create future value in the tokens that will create the demand to increase the value of the currency?
Added to this is the fact that whilst there is a definitive limit to the number of tokens that can be issued until all the tokens are issued (a process which might take 10 years based on the planned issue of tokens) there will always be what’s known as an overhang. The current value of the token (and the crypto-currency) is influenced by how many more are yet to be issued.
There is as yet, the unanswered question of whether long term fans and clubs will fully embrace this form of engagement? It’s easy to present a case currently that there is huge demand and a desire by clubs to go down this route, but significant factors are at play. In a post pandemic world clubs are perhaps understandably exploring revenue generating ideas they might not otherwise consider. Secondly, as demonstrated by the number of crypto-currencies now in issue this is a sector that is currently very much in vogue, however no-one knows whether this is a short term trend or the beginnings of something much more sustainable.
Finally, the question for all partners, future partnering clubs and their fans is does the Socios platform and the Chiliz crypto-currency represent the best vehicle to partner with long term? Whilst clearly Socios has first mover advantage, what impact does another competitor or competitors choice of platform and crypto-currency have on its future?
Binance, one of the early investors and backers of Chiliz and Socios have in recent days announced their entry into this market place. They are launching a fan token scheme with the Italian club Lazio, looking to raise an initial $4 million offering fan tokens denominated in Binance’s own crypto-currency BNB
Performance to date
The purpose of this article is just to ask questions, to widen the debate among clubs and particularly fans. Education is important and I’m happy for Socios, the clubs or indeed anyone else to engage further in answering some of the questions and challenges presented. Just saying we need to trust the club or the platform provider is not sufficient in my opinion.
Therefore I thought I’d finish with a few observations on the numbers since Socios, Chiliz et al became much more high profile.
Peak activity to date was the period around mid August when Messi joined PSG. Socios was a fundamental part of the transfer deal with Messi receiving part of his remuneration in fan tokens. In the 7 days around his transfer more than $3 billion of PSG tokens were traded and it was widely reported that PSG and Socios shared $30 million in new revenues.
This coupled with numerous new partners and announcements from Socios about entering new sectors should have fulfilled the utility requirement in terms of pricing and seen significant maintained increases in volumes traded in fan tokens.
I used data from coinmarketcap.com to look at trading volumes and price movements of tokens (to October 5th). Looking at the 17 fan tokens that were listed on 10th August, combined their market capitalisation has fallen by 24% and their daily trading volume (admittedly from an extra-ordinary high) by 94%.
Looking at the performance of Chiliz, I thought it useful to plot against both bitcoin, ethereum and sterling. From August 10th to time of publishing (14th October) Chiliz had declined in value by -23%, -15.9% and -5% respectfully.
There are many unanswered questions surrounding the general use of fan tokens, the use of & choice of crypto-currency, the choice of partners and indeed whether this is something clubs should promote to and encourage their fans to engage in. Additionally there are unanswered questions over the business models, choice of crypto-currencies and their sustainability.
I think it’s right and proper to keep asking the questions.
One question to ask of any cryptocurrency: it is backed by the full faith and credit of what exactly? No government other than El Salvador supports a cryptocurrency, and El Salvador doesn’t even produce enough electricity for its own normal needs, much less the staggering amounts necessary for crypto “mining.”