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In the links below, you’ll find a handful of useful quarterly and semester retrospectives, valuation approaches and sector overviews, as well as a long list of market developments (even though it’s summer, things seem to be happening fast).
In THE BRIEFING, I reflect on the anniversary of Bretton Woods and how it hints at bitcoin’s potential role in the evolution of monetary systems.
If you’re relatively new to the sector, or if you enjoy a good read, our report “Crypto in Context” (free download HERE) introduces the new asset class and aims to explain why it’s worth looking at.
Read on…
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Bitcoin, Bretton Woods and a new toolbox
Celebrating the 75th anniversary of the Bretton Woods conference is probably not high on the list of priorities for cryptocurrency enthusiasts this month. This is an understandable oversight – the price swings, Senate hearings and whereabouts of Justin Sun are perhaps more compelling. But the birth of international economic cooperation and interoperability should be recognized as the beginning of a process of economic reconstruction that has contributed to the global imbalances worrying the markets today. It could also have set the scene for the solution.
The bulk of the U.S. stock market may be overvalued, and yields look set to go even lower – but a large part of the current strain lurks under the surface of the currency market. A combination of monetary easing, trade tensions and the threat of military action in the Middle East is a noxious cocktail for currency holders and hedgers as international conversions get risky and costly.
Perhaps because of this, as well as the disquieting brandishing of financial muscle by the U.S. administration, the chorus of questions about the role of the U.S. dollar as a global reserve currency is getting louder.
What’s more, it has held its leadership role for almost 100 years; the average global reserve currency lifespan over the past five centuries is 95 years. Shifting balances are hinting that the dollar’s reign may soon be up: its share of foreign exchange reserves is over 60%, while the weight of the U.S. economy in global output has fallen to less than 25% and is likely to continue trending lower. Encroaching currency competition could well gather momentum as politics starts to trump economics.
Some have posited that there is a “non-zero chance” that bitcoin would make a great reserve currency. I disagree, I believe that there is exactly zero chance that could happen. I do think, however, that the global reserve system will radically change over the next couple of decades. Bitcoin could be a part of what emerges.
What gives?
First, some background on the significance of Bretton Woods and why we should be paying attention. In 1944, an agreement was drawn up between delegates from 44 nations that established the U.S. dollar as the world’s reserve currency, which would be pegged to gold. The other member nations would peg their currencies to the U.S. dollar, and the resulting relative stability between denominations would smooth world trade and boost the post-war recovery.
The agreement also created the institutions of the International Monetary Fund (IMF) and the World Bank to coordinate global currency movements and channel loans to developing nations.
The U.S. dollar stopped “officially” being the global reserve currency when President Nixon took the country off the gold standard in 1971. It remained the de facto global reserve currency, however, by dint of being the world’s largest economy and trading nation. Countries tended to hold more dollar reserves than all other foreign currencies combined, for the ease of transacting and for their relative stability.
Being the global reserve currency is a mixed blessing. While it makes it easy to borrow in international markets, it takes away power to influence the domestic economy. If foreign debt holders start to believe that President Trump might encourage a devaluation of the U.S. dollar (as he has often hinted he wants to do), they would start to unload, as a devaluation would make their bonds worth less. Foreign holdings of U.S. debt currently amount to over $6 trillion, almost 30% of the outstanding total, so even a small unloading would be a shock to the market and would weaken the dollar’s credibility for some time to come.
As well as not being able to devalue when convenient, the additional global demand for U.S. dollars stemming from its reserve currency status is keeping the dollar’s value high relative to other currencies, exacerbating the current account deficit, now the largest in the world. And, whatever your views on Modern Monetary Theory (which posits, among other things, that debt levels don’t matter), the vulnerability of the U.S. markets to foreign investment strategies is disquieting. So much for “America First.”
A new reserve currency?
Given the growing doubts over the need for and advisability of a fiat-based, single-issuer global reserve currency, you can see why the bitcoin narrative would pop up. Surely a sovereign-free, algorithm-based alternative would be more stable and trustworthy?
Perhaps, but it won’t be bitcoin*.
First, a global currency needs to have a flexible supply. The limits on the amount of gold banks could hold was one of the main reasons the gold standard didn’t work – economic growth outstripped the supply of gold-backed money, and the inevitable scramble to overcome this limitation led to destabilization.
Second, bitcoin will not become a universal settlement token for trading contracts. It’s too volatile. While this should soften in line with greater liquidity, it’s unlikely that businesses and sovereign powers will give up their preference for fiat, which they have some control over.
So, if not bitcoin, then what? What could an international trading currency that embodies both trustworthiness and flexibility look like?
Drawing table
One such model is Facebook’s Libra: a basket of currencies and government debt that is periodically rebalanced and used to peg a digital token that can be used for settlement. But the whirlwind of debate around the coin’s purpose and backing has highlighted the strong distrust of corporate motives with global ambitions, and the simmering anti-trust scrutiny will make it difficult for any large enterprise to create a universal solution.
Another such model, much more likely, is a revamped Special Drawing Right (SDR). This basket of currencies was created by the IMF in 1969 to act as a private transaction token and a “store of value” for members. Its value moves in line with that of the underlying currencies: the U.S. dollar, Japanese yen, euro, British pound and Chinese renminbi.
Several economists have proposed the expansion of the SDR’s scope for purposes of international trade, positioning it as a global reserve currency that does not depend on any one issuer and can be managed by a neutral, supra-national organization with economic stability as its main objective.
The problem is, even a liquid SDR in its current configuration would be subject to national priorities and vulnerabilities. A sharp depreciation in the U.S. dollar as central banks switch to the SDR as a reserve holding could destabilize the basket. The euro is almost as significant as a global payment currency but carries an existential risk, however remote. The Chinese renminbi is still largely controlled by its government, and the British pound’s future is uncertain.
If only the SDR in its new liquid form could be pegged to a non-sovereign token of exchange that is totally free from political manipulation. You see where I’m going with this?
Other currencies would also form part of the basket, to reflect economic activity and allow flexibility in the supply. But a robust apolitical anchor could add a layer of trust, difficult to come by in an increasingly fractious trade environment.
Time to talk
How this mechanism would work, I don’t know – it would no doubt be complex and fraught with controversy, and anyone who studies currencies is aware of the colossal complications of maintaining a peg. But the building conviction that the current system is flawed and the increasingly apparent politicization of currencies will eventually shift the conversation from “it’s too difficult to attempt” to “let’s start talking about this.”
The biggest risk to the world economy right now is not trade tensions, overvalued assets or negative yields. It’s complacency in assuming that the status quo will hold. Profound change always costs a massive amount of political and economic capital, but it happens regardless. None of us can be sure what the next step of financial evolution will look like – but we’ll soon find out. As economist Tyler Cowen reminds us in a recent article: “Every era’s monetary institutions are virtually unimaginable until they are created.”
Unfortunately, even getting the main participants to the table to discuss this will be a mammoth task. The Bretton Woods’ anniversary celebrations have given voice to papers and panels questioning the current reserve system, the role of the IMF and how to weather the economic storms ahead. Ideas and discussions are a start. But we shouldn’t forget that in 1944, just after the bloodiest war in history, what brought the participants to the table in a collaborative frame of mind was fear.
We can all fervently hope that it doesn’t take that level of fear to get everyone to the table again. What is different this time around is that the need for a reform is becoming startlingly apparent. The discussions are involving a much broader set of participants. And bitcoin is adding a new tool to the box of potential solutions.
On its own, it won’t solve the most pressing issues. But combined with other tools, and aided by diplomacy, academic rigor and patience, it could well form an integral part of a new type of reserve currency, which could help smooth or even avoid the shocks to come.
– Noelle Acheson
(*Disclosure: I hold a modest amount of bitcoin with no short positions.)
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*there's a lot to get through, so I've indicated six items you should read if you just can't get to everything
BIG IDEAS
*When it Comes to Crypto-Assets, Asking the Right Questions is More Important than Finding Answers (Jesus Rodriguez) – The hard thing is to know what to look for.
*I’m Not a Raccoon! I’m the Lone Ranger! (Epsilon Theory) – An interesting and unexpected take on bitcoin valuation methods – network effects and transaction volumes are useless, it’s narrative that matters.
*2Q19 Crypto Retrospective (Circle) – A sweeping overview of markets and trends for Q2, with a focus on the maturation of institutional infrastructure and the growing institutional interest.
H1 2019 Crypto Report (CoinShares) – A summary of institutional developments and crypto asset evolution over the past six months.
5 Steps For Building The Ultimate Cryptocurrency Investment Strategy In 2019 (Altcoin Magazine) – Understand the market, develop a diversified portfolio, use your resources, choose the best platforms and be consistent.
Bitcoin 2019 Investor Study (Grayscale) – A recent survey of 1,100 U.S.-based investors shows that more than 30% are interested in bitcoin.
Facebook’s Libra and the scourge of hot money (Financial Times, paywall) – Demand for Libra is more likely to be driven by speculation than by payments.
Facebook Libra Might Never Launch, Concedes Firm (CoinDesk) – In its latest quarterly report to the SEC, the social media giant acknowledged that the regulatory barriers may delay, perhaps even indefinitely, the token’s launch.
Lawyer Nelson Rosario (@NelsonMRosario) doesn’t agree – he believes regulators will prefer that people use Libra rather than bitcoin or privacy coins.
People in US Trust Bitcoin More Than Facebook’s Libra: Report (CoinDesk) – A poll of almost 1,800 U.S. adults carried out by consumer insights provider CivicScience, 40% said that they trust bitcoin more than Libra; almost 20% said they trust both the same.
In a thought-provoking thread, Meltem Demirors (@Melt_Dem) pokes at the paradigm shifts of digitization and disintermediation.
VIDEO: Preethi Kasireddy (@iam_preethi) interviewed investor Ari Paul about the structures and motives that influence investor behavior – a sweeping and informative introduction to institutional interest in crypto investing.
'Get out quick': A strategist at $1 trillion Edward Jones explains why bitcoin's 300% rally is not to be trusted (Business Insider, paywall) – Kate Warne said to "never be a long-term investor" in cryptocurrency, and attributed recent price movements to “irrational investor behavior.”
*Debunking the Laziest Argument Against Crypto (Arca) – Jeff Dorman pushes back on the “too speculative” excuse, pointing out that most investment decisions are based on speculation.
Seven reasons why Ethereum is no longer an altcoin (Decrypt) – The case for broadening crypto asset allocations beyond bitcoin to also include ethereum.
Crypto Exchanges Are Benefiting from Algorithmic Trading: Here’s How (CoinDesk) – Matt Trudeau of ErisX explains how high-frequency trading works in crypto markets.
Derivatives Are The Tail That Wags The Cryptocurrency Dog (Altcoin) – The hidden risks in the growing market for structured crypto derivatives.
Rise of the New Crypto Mafia (Ash Egan) – Experience and networks…
A recording of a webinar hosted by fund manager Arca in which Cambridge Associate’s Marco Veremis talks about institutional investor sentiment towards crypto assets.
MARKETS
On Crypto Exchanges, the Trades Don’t Always Add Up (Bloomberg, paywall) – Exchange integrity is improving, but is still a major concern for investors and regulators.
TD Ameritrade CEO: We’re Taking ‘Crawl, Walk, Run’ Approach to Crypto (CoinDesk) – Outgoing CEO Tim Hockey confirmed that the retail broker is receiving a lot of inbound interest in cryptocurrencies.
Bakkt is eyeing a launch in Q3, but part of its plan is risky, sources say (The Block) – While the Intercontinental Exchange-backed project waits for approval from the New York Department of Financial Services, questions are being raised about the relatively small size of its proposed guarantee fund.
How US Investors Are Buying Bitfinex’s Blocked LEO Cryptocurrency (CoinDesk) – Seattle-based Arrington XRP Capital and Los Angeles-based Arca were able to invest in LEO tokens, despite Bitfinex’s stated policy of refusing to sell them to U.S. residents or entities, by legally purchasing them from third parties.
A Better, Marketwide Stop-Loss Order for Volatile Crypto Markets (SFOX) – The new stop-loss algorithm takes into account price discrepancies across exchanges.
Bitcoin’s newest trading product offers direct exposure to its volatility, and BlockTower Capital is the first to dive in (The Block) – The new product, created by Hong Kong-based trading firm GSR offers a more direct exposure to bitcoin’s volatility than standard derivatives.
LGO receives Big Four audit, with similar crypto examinations on the rise (The Block) – Institutional crypto exchange LGO’s audit by PwC brings to light the difficulties of auditing crypto businesses.
Bitcoin Cash-Futures Arbitrage (TabbFORUM) – A breakdown of the profit and cost of a futures-based arbitrage trade.
PROFILES
A blockchain startup now enables custodians to bypass clearinghouses and settle trades directly (The Block) – San Francisco-based OTCXN is testing a new service that will allow cross-custodian settlement by tokenizing custodied assets so they can be traded and settled on the platform.
CRUNCHING NUMBERS
*The Elephant in the Crypto-Analysis Room: Counterparty Intelligence (Jesus Rodriguez) – It’s not just data on the assets that can be useful; blockchain-based information about the counterparty in a trade can give some insight into trading behaviors, risk profiles and investment philosophies.
The Evolution of the Digital Asset Market in 2019 — Q2 Update (Blockchain at Berkeley) – The second quarter was the best for crypto investors since 2017; bitcoin outperformed smaller cryptocurrencies, and the U.S. global market share continued to grow.
Chris Burniske (@cburniske) presents a new valuation metric: the Network Value to Token Value ratio, which divides the network value of a smart contract platform by the value of all the assets that run on that platform.
The TIE (@TheTIEIO) responded by resurfacing its NVTweet ratio: market cap divided by average tweet volume.
New Correlation Data Reveal BTC — and ETH — Dominance (SFOX) – Charts that demonstrate bitcoin’s growing market dominance, and its increasing correlation with ether.
The Vision Hill Active Crypto Indices (Vision Hill) – The crypto asset management and solutions firm has launched a series of benchmarks to measure the relative performance of crypto funds, distinguishing fundamental, quantitative and opportunistic approaches.
REGULATORS AT WORK
US Treasury Secretary Mnuchin Thinks Outlook for Bitcoin Is Bleak (CoinDesk) – It’s all that criminal activity, obviously.
New Crypto Rules Likely Coming From U.S. Agencies, Mnuchin Says (Bloomberg, paywall) – The U.S. Treasury Secretary promises a “unified approach.”
In First, SEC Clears Blockchain Gaming Startup to Sell Ethereum Tokens (CoinDesk) – According to the no-action letter, Pocketful of Quarters may now legally sell its Quarters tokens to consumers without registering them as securities, making them the first ERC-20 token to receive official approval.
FINRA grants underwriter license to Galaxy Digital’s broker-dealer arm (The Block) – Galaxy Digital Advisors will now be permitted to act as an underwriter to registered public offerings of equity, debt or other corporate securities in the U.S.
NY Financial Watchdog Makes New Division for Crypto Licensing (Financial Magnates) – The New York Department of Financial Services has created a division for the supervision and licensing of cryptocurrency businesses, which will take over all crypto-related tasks from the department’s in-house teams.
SECURITY TOKENS
MIT DCI Working Group on Tokenized Securities (MIT) – Tokenization of real estate will not broaden access to retail investors in the short term, due mainly to regulatory issues but also to incentives.
Asset Focus: Venture Capital (Openfinance) – Digitizing venture capital could broaden access to investment opportunities and financing, provide more transparency for investors and facilitate more flexible payouts.
Security Token Networks Are Coming! And They Will Make The Market More Expensive For Startups (Altcoin Magazine) – As funding pivots to focus more on security token infrastructure than applications, the capital needs will get greater which will result in larger rounds and/or sector consolidation.
Security Tokens: Open for Business in London (Security Token Academy) – An interview with Matthew Pollard of Archax and Arnoldas Nauseda of Smartlands about how real estate can be securitized and sold on an institutional security token platform.
PODCASTS
LEDGER CAST: A detailed markets discussion with Edward Woodford of SeedCX, including a look at how trading on the platform works and what type of institutions are involved in the market.
UNCHAINED: Laura Shin talked to Dan Morehead and Joey Krug of Pantera Capital about bitcoin’s valuation and price targets, the growth of institutional interest in the ecosystem.
UNCONFIRMED: Laura also chatted to Circle’s CEO Jeremy Allaire on the crypto platform’s decision to move exchange operations to Bermuda, some reflections on the Poloniex purchase and the (in his view) mistaken priorities of the U.S. regulatory agencies when it comes to digital assets.
A-HA!
*The Lesson of Bretton Woods (Bloomberg, paywall) – Tyler Cowen reminds us that, in financial markets, the unimaginable can become real.
Will Crypto Rogues Threaten The Geopolitical Order? (Forbes) – Yaya Fanusie argues that blockchain technology could end up playing an important role in a new geopolitical order. (THE BRIEFING above agrees, focusing more on reserve currencies.)
The Small Handbook to Asia Crypto (Global Coin Research) – A useful and colorful overview of crypto asset communities, development and regulation across Asia.
Learn to love meetings by making them better (Financial Times, paywall) – Don’t groan; with all the fluff there is out there about how to have better meetings, this one is actually funny (and maybe useful).
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FUNDING
Crypto data firm Digital Assets Data has raised a further $3.2 million in a round led by North Island, Glenn Hutchins and his son James Hutchins, with participation from previous investors Morgan Creek Digital, Digital Currency Group and Vestigo Ventures, among others.
Switzerland-based crypto asset exchange Smart Valor has raised $3.25 million from Venture Incubator, Tally Capital and other Asian and U.S. investors.
FIRMS
Crypto OTC firm Genesis Global Trading released Q2 figures which show that lending of fiat and fiat-linked stablecoins doubled vs Q1.
Trading technology provider Caplin has added a cryptocurrency component to its multi-asset platform.
Cryptocurrency exchange BitStamp is partnering with UK-based BCB Group to allow clients to deposit and withdraw funds in GBP by the end of the year.
Nomura Holdings and Nomura Research Institute are developing a blockchain trading platform initially aimed at corporate bonds, for a target launch in summer 2020.
Zug-based Smart Valor has launched a new crypto asset exchange operating from both Switzerland and Liechtenstein that will provide custody, trading and brokerage services for BTC and ETH, each of which can trade against the fiat currencies CHF, EUR, GBP and USD.
Nevada-based Prime Trust has launched a real-time settlement network for asset transfers which gives clients immediate access to funds in custody.
PEOPLE
Andrew Ridenour, product counsel for institutional products at Coinbase, has left the firm to return to his previous employer, the U.S. derivatives regulator CFTC.
Robert A. Cohen, head of the Cyber Unit at the SEC where he led crypto and ICO investigations, is leaving the agency next month after 15 years of service.
Have a tip? Drop me a line at noelle@coindesk.com. |
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| So many crypto introductions start with “what?”. That’s an important question, essential to fully understanding the asset class – but in our first report aimed at institutional investors , we decided to look at “why?”. Our aim is to provide a glimpse of why this asset class is compelling and worth a further look.
In "Crypto in Context", we talk about the value proposition, who is buying bitcoin, and correlations with more traditional assets. We don’t tell you how a blockchain works, what a hash function does or the secret of Schnorr signatures. We look at the opportunities of and the barriers to crypto investing. We don’t try to convince you that bitcoin is what your portfolio needs – that’s up to you.
If you’d like to find out more, the report is free and you can download it here.
And watch this space – there’s more coming!
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Previous newsletters: 32, 33, 34, 35, 36, 37, 38, 39, 40, 41, 42, 43
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CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
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Institutional Crypto - Bitcoin, Bretton Woods and a new toolbox