Hi all! And Seasons Greetings…
This will be the last Institutional Crypto newsletter of 2019. I want to take this opportunity to say THANK you for reading, for wanting to keep on learning along with the rest of us, and for bringing your unique perspective to this evolving space.
We’re back on the 7th of January with a new format. And I, for one, am more than excited to see what 2020 brings.
Don’t forget that we have a WEBINAR tomorrow, Dec. 18, at 12pmET – Galen Moore will talk to Kyle Samani of Multicoin Capital and Jordan Clifford of Scalar Capital about yields, lending and more. You can sign up here.
In THE BRIEFING below, Galen unpacks the differences in reported trading volumes from three major data aggregators. And, as usual, you’ll find a long list of worthwhile links that aim to keep you up to date with the sector’s progress, setbacks and struggle to make sense of the changes that surround us.
With that, I wish you all a happy holiday season, wherever you are. See you in 2020!
|
 |
We Still Don't Know Bitcoin's Real Volume
Fake volume became one of crypto assets' leading narratives of 2019, as a US regulatory application for an exchange traded product (ETP) followed the work of earlier researchers in showing how as much as 95 percent of lit markets' reported bitcoin trading volume might be fake. That's resulted in conservative estimates of bitcoin volume that are probably far too low, and a condition of uncertainty as to how much bitcoin is actually being traded.
You could think of fake volume as a natural feature of crypto's novel market structure, in which:
• liquidity is divided among many competing exchange venues
• trading fees are high relative to other asset categories
• exchanges provide data for free
In crypto markets, data is a marketing tool instead of a revenue source, and some exchanges have been shown to use it that way, exaggerating volumes in order to enhance their perceived liquidity.
These realities and the data presented by researchers like BitWise in its March 2019 ETP application have led market data aggregators to adjust their volume representations. The chart below compares adjusted daily bitcoin volume figures for the month of November offered by two such aggregators, Messari and Nomics, against the unadjusted reported daily volume figures offered by CoinMarketCap, historically the best-known market data provider.
The discrepancy between the two examples of adjusted bitcoin volume shown stems from the list of exchanges each data aggregator includes. Messari limits its "real" bitcoin volume number to the 10 exchanges identified in BitWise's ETP application. Nomics rates 32 exchanges high enough on its "transparency rating" metric to include them in its "transparent volume" aggregate.
In its October response to an application for ETP approval by BitWise, a San Francisco-based fund manager, the US Securities and Exchange Commission (SEC) noted exchanges that BitWise excluded as fake are likely supporting some volume of real trading activity, a "gray area" that BitWise conceded in a reply to comments on the application.
The SEC's response specifically mentioned HitBTC, Huobi, OKEx and a handful of exchanges based in South Korea, which were excluded due to capital controls there. Nomics' adjusted bitcoin volume number includes HitBTC, but not Huobi, OKEx or any of the larger South Korean venues.
Anecdotally, traders say excluding liquid markets wholesale doesn't make sense –especially Huobi and OKEx. "I’ve traded on OK since 2013, and it’s executable," said Dan Matuszewski, former head of trading at Circle, a Boston-based developer of financial products in crypto. "That liquidity is there. Those markets are actionable. Do I think the number is 100 percent true? Absolutely not."
The chart above shows that, at least on Huobi, some bitcoin-base pairs are nearly as liquid as they are on Coinbase, according to order book data provided by Kaiko. Real daily bitcoin volume in November was probably somewhere between the $1.97 billion "transparent" volume that Nomics reported and CoinMarketCap's unadjusted average daily volume figure of $22.56 billion – and even though Nomics' number excludes some major exchanges, it probably gets closer to the truth than the unfiltered data on CoinMarketCap.
To some extent, it doesn't matter. Aggregate bitcoin volume is a general data point, unlikely to inform a specific investment decision. In crypto's fragmented markets, volume at specific venues, selected for their relevance to geographies or categories of investor, may be better signals. For example:
• Coinbase's cash market volumes as an indicator of new retail participation
• Activity on localbitcoins or regionally dominant exchanges
• CME and Bakkt bitcoin futures activity as an indicator of US fiduciary institutions' participation
However, a reliable figure for bitcoin's aggregate volume is important when establishing market infrastructure such as volume-weighted indexes. The crypto asset category's inability so far to settle on such a number is an indicator of its immaturity. When media organizations emerged on the internet, their new approaches to revenue also brought new questions as to which information could be trusted. The same thing is happening in crypto.
– Galen Moore
|
* we're all about saving you time, so here are six especially compelling links – but do check out the rest when you can!
***YEAR IN REVIEW***
Towards the close of the year, we like to reach out to the crypto ecosystem’s thinkers and doers for their takes on the evolution and outlook of our sector. Below is a very limited selection of the outstanding contributions published so far, and we’re adding new ones every day. You can see them all here.
*Cryptocurrency Is Most Useful for Breaking Laws and Social Constructs – Crypto entrepreneur and investor Jill Carlson points out that bitcoin hasn’t gone mainstream because it isn’t supposed to; its main role is as an alternative, niche system.
*This Year’s Top 10 Crypto Narratives – Ryan Selkis, CEO of crypto data platform Messari, offers an excerpt of his “120 theses” (link below), a useful introduction if you haven’t got time to read the full thing (it’s long).
What DeFi Needs Next Year: Three Priorities – Haseeb Qureshi, partner at Dragonfly Capital, believes that decentralized finance needs to focus on bringing down collateralization rates, developing a wider range of synthetic assets and developing the functionality for stable, on-chain identity.
How DeFi Goes Mainstream in 2020: Focus on Usability – Alex Mashinsky, CEO of crypto lending startup Celsius, urges DeFi platforms to improve their interfaces.
Even if a Thousand Projects Don’t Make It, Blockchain Is Still a Change Catalyst – Gary Gensler, former CFTC Chairman, urges focus on the big-picture promise of blockchain technology, and more importantly on the changes in traditional finance that it has triggered.
Nic Carter on Quadriga, Libra and Other Suspect Projects – The partner of Castle Island Ventures talks to reporter Daniel Kuhn about the need for regulation, the outlook for decentralization and, of course, Libra.
Lessons From the First Digital Gold Boom – JP Koning points out that Libra is actually a revamped version of a much older payments model, but with a different approach to regulation.
Change Won’t Happen With Chairman Clayton Around – Kristen Smith, director of external affairs for the Blockchain Association, looks back at big moments in 2019, including the announcement of Libra, Kik’s legal fight with the SEC, and other regulatory landmarks.
Bitcoin Has Got Society to Think About the Nature of Money – Daniel Gorfine, founder of fintech advisory firm Gattaca Horizons and former chief innovation officer of the CFTC, highlights five key topics bound to dominate regulatory conversations in 2020.
Security Token Offerings Are (Finally) Set for Takeoff in 2020 – Emma Channing, CEO of Satis Group, looks at the hurdles and progress in STOs over the past year, and argues that the sector needs to find a greater goal than enhanced liquidity.
BIG IDEAS
*Crypto Theses for 2020 (Messari) – An epic opus by Ryan Selkis, bursting with lists, predictions and style.
*Speaking Quant to Crypto: The Six Sources of Alpha in Crypto Assets (Jesus Rodriguez) – On how alpha sources in crypto are different than in traditional markets.
With hashes and hedges, power-hungry crypto miners court investors (Reuters) – Hashrate derivatives will allow miners to price in risk.
Finance 2.0 (Pantera) – The investment firm’s monthly letter points out that bitcoin’s fundamentals are much stronger now than in the 2015-16 winter, and looks at progress on overcoming the main barriers to decentralized finance.
The Four Buckets of Digital Assets (Arca Funds) – Past returns and future outlook for digital assets that represent money, protocols, actual cash flows and existing asset classes.
Compliance, Centralization, and the Travel Rule (Jeff Garzik) – The former bitcoin developer and current Bloq CEO highlights the security vulnerabilities introduced by the FATF anti-money laundering Travel Rule
*The Complete Beginner's Guide to Decentralized Finance (Binance) – Like the title says, an introductory guide to DeFi, from what it is, to the challenges ahead.
Myths and Realities: Sentiment Analysis for Crypto Assets (CoinDesk) – Jesus Rodriguez, CTO of blockchain analysis firm IntoTheBlock and chief scientist at AI firm Invector Labs, looks at the nuances and complications of crypto sentiment analysis.
MARKETS
*New players are reshaping crypto market structure, and that's bad news for exchanges (The Block, paywall) – The emergence of agency brokers is likely to trigger a change in some infrastructure business models, as well as a significant shift in how crypto markets work.
As concerns over crypto credit bubble mount, miners appear to be particularly at risk (The Block, paywall) – Some experts believe the market is too small for a meltdown, but the upcoming halving puts miners, who often use their holdings as collateral for cash loans, in a vulnerable position.
Chainalysis Report on PlusToken ‘Scammers’ Blamed for Monday’s Crypto Selloff (CoinDesk) – The report pointed out that it was likely that 20,000 BTC and 790,000 ETH were still controlled by the Ponzi scheme’s organizers, which may have prompted fears of further sell-offs.
Ride ‘Em, Cowboy: Bitmain’s Marketing Gambit Ups Its Texas-Sized Position on Bitcoin (CoinDesk) – How the bitcoin mining equipment manufacturer is using derivatives to entice clients – and in the process, incurring a whopping risk.
Bitcoin has been in a rout, but one crypto-linked stock has performed even worse (The Block) – Shares of crypto mining firm Canaan are down nearly 50% since its initial public offering.
A London Stock Exchange executive says companies are increasingly looking at token sales, and it points to the innovation sweeping the IPO market (The Block, paywall) – Costs and regulatory barriers, and a reluctance on the part of stock exchanges to embrace direct listings, are making it harder to raise public funds on traditional markets.
NEW PRODUCTS
ErisX starts trading bitcoin futures today, according to a notice posted by the company.
Fidelity to Expand Institutional Crypto Business to Europe (CoinDesk) – The digital assets platform has incorporated an office in London, with the aim of trading bitcoin for institutions throughout the region.
German Bank Launches Digital Assets Unit to Offer Custody Products (CoinDesk) – Berlin-based solarisBank, through a subsidiary called solaris Digital Assets, will offer a white-labeled custody product, and plans to apply for a license to custody crypto in 2020.
Here’s a New Banking Tool for Vetting Crypto Exchanges (CoinDesk) – Blockchain forensics startup Elliptic has launched Elliptic Discovery, which aims to give institutions up-to-date risk profiles of more than 200 of the largest exchanges globally.
France’s New ‘Napoleon Bitcoin Fund’ Is Tied to CME’s Cash-Settled Futures (CoinDesk) – French asset management firm Napoleon AM’s new fund, which offers exposure to bitcoin price movements without actually holding any, began trading on Dec. 6, with a minimum €100,000 ($110,000) buy-in for professional investors residing in France.
Equilibrium’s Stablecoin Now Has $17.5M in Insurance That Pays Out Automatically (CoinDesk) – EOSDT is now backed by smart contracts that pay out consumers if the dollar-pegged token crashes through its collateralized floor.
OKEx exchange to integrate Dai Savings Rate, allowing users to earn 4% return (The Block) – This makes the crypto exchange the first major platform to offer a return on holdings of the stablecoin.
Binance Launches Tenth Phase of Binance Lending Products (Binance) – These include 30-day fixed-term USDT loans.
CRUNCHING NUMBERS
Demystifying Digital Asset Data: A Look at Bitcoin Transaction Value (Fidelity Digital Assets) – Using data straight from the blockchain can give misleading results, due to bitcoin’s complex protocol.
Bitcoin’s Hash Rate Grew More Than 80% Since June, Mostly Within China (CoinShares) – CoinShares’ report also shows that average ROI breakeven level is $6,100.
REGULATORS AT WORK
New York Regulator Details Changes to Contentious BitLicense (CoinDesk) – The NYDFS proposes that any approved tokens be able to list on any exchange that operates in the state, and that the regulator will provide guidance for how to do this.
New York Attorney General Calls Bitfinex’s Legal Stance ‘Deeply Perverse’ in New Filing (CoinDesk) – Also, exchange token LEO, issued in the early summer, could be a security under U.S. law.
FinCEN Sees Jump in Crypto-Related Suspicious Activity Reports (CoinDesk) – Crypto companies have filed a total of 11,000 crypto-related SARs, 7,100 since May.
Basel Committee calls for 'prudential' rules for crypto as they pose risks to banks (The Block) – The discussion paper invites comment from members of the global banking community on how best to regulate banks’ exposure to crypto assets.
Larry Cermak wonders what effect the upcoming AMLD5 implementation in Europe will have on Malta-based exchanges such as Binance and OKEx.
PODCASTS
THE BREAKDOWN: Welcome to the NEW ADDITION to our podcast stable, in which Nathaniel Whittemore discusses sector evolution and events.
VENTURE COINIST: Luke Martin chats to Su Zhu, CEO of Three Arrows Capital, on the halving, the outlook for DEXs, exchange tokens and much more.
VENTURE COINIST: Luke also talks to Ben Zhou, CEO of crypto derivatives exchange Bybit, about testing for fake volumes, the role of decentralized platforms and how to spin up liquidity.
ON THE BRINK: Nic Carter and Matt Walsh talk to Terrence Dempsey, Head of Product at Fidelity Digital Assets, about institutional interest, the ecosystem emerging around it and what we mean by qualified custody.
THE SCOOP: Frank Chaparro interviews Tom Jessop, Head of Fidelity Digital Assets, about why institutions invest in crypto, how Fidelity plans to improve sector liquidity and the role traditional finance can play in digital assets.
THE SCOOP: Frank also talks to Leo Zhang, principal at Iterative Capital Management, in a fascinating look at the economics of and participants in bitcoin mining.
UNCONFIRMED: Laura Shin and Larry Cermak, Head of Research at The Block, talk about crypto exchanges and their recent evolution, why volumes are low, how we can tell how much of bitcoin demand is for speculation, and more.
THE CRYPTO CONVERSATION: Andy Pickering chats to Chris Brookins, founder and CIO of Valiendero Digital Assets, about crypto metrics, what’s been capping the price of ether and what needs to change for the token to start moving.
A-HA!
Jealousy List (Bloomberg, paywall) – Always worth a look, this list of great articles from around the web that the Bloomberg team wishes it had written is made even more compelling this year by the addition of goblins.
Too much information? The new challenge for decision-makers (Financial Times) – New knowledge prompts change, which generates new knowledge and a cycle in which it is impossible to catch up.
THE PORTAL (podcast): Eric Weinstein hosts Tyler Cowen in a characteristically compelling conversation on risk, progress (or the lack of it), and much, much more.
|
|
|
|
|
|
FUNDING
Blockchain company Digital Asset has raised $35 million in Series C funding from a combination of new and existing investors led by Jefferson River Capital, the family office of former Blackstone president Tony James, and the Australian Securities Exchange.
FIRMS
State Street is partnering with cryptocurrency exchange and custodian Gemini Trust on a new trial that examines reporting scenarios for digital assets.
UK-based crypto exchange Coinfloor is delisting ETH and BCH to focus solely on bitcoin.
According to Reuters, Dutch bank ING is working on a crypto custody solution.
A recently posted job ad indicates that crypto exchange Kraken might be preparing to open a limited-purpose bank in Wyoming that would let it store customers’ fiat deposits, and possibly operate in New York without a BitLicense.
A subsidiary of token issuance platform TokenSoft has been registered as a transfer agent with the SEC.
Binance has teamed up with peer-to-peer bitcoin exchange Paxful to add new fiat on-ramps, starting with the euro, British pound, Russian ruble, Vietnamese dong, Indonesian rupiah, Nigerian naira, Colombian peso, Mexican peso, Canadian dollar and Argentine peso.
PEOPLE
Hong Kong-based crypto exchange CoinFLEX has hired Leslie Tam, formerly head of VIP coverage and OTC trading at Binance, as chief strategy officer.
Digital asset custody firm Trustology has cut seven staffers, including three executives, as the big banks and institutional players that were its target market are taking longer than expected to jump into the crypto space.
Circle, one of the earliest crypto adopters in the fintech space, has laid off about 10 employees.
Have a tip? Drop me a line at noelle@coindesk.com. |
|
|
|
|
|
| On behalf of the entire CoinDesk team, we with you a very Happy New Year!!
See you in 2020!
 |
|
|
|
|
| Were you forwarded this email? Subscribe here.
Would you like to sponsor this email? Send Jeremy a note.
And please send us feedback - we want to make this newsletter useful for you.
Previous newsletters: 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63
|
|
CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
|
| | | | |
Institutional Crypto - We Still Don't Know Bitcoin's Real Volume