HAPPY NEW YEAR to you all! We hope you all had some time to recharge over the festive season, and feel ready to face what will no doubt be a year full of surprises, progress and new connections.
With a new year, a new format: this newsletter is moving away from a long (too long) list of links that might be relevant to investors, and towards a more curated selection of news, developments and ideas. Rather than throw a ton of headlines at you, we’ll choose a few and briefly explain why we think they’re important.
We are also replacing the long opinion piece (they will continue to appear on coindesk.com, so if you're interested in contributing, please reach out). Instead, we’ll offer you our interpretation of three significant trends and twists.
With this, we hope to deliver a more useful newsletter that will keep you up to date with developments in crypto asset markets from an institutional perspective, help you form your own investment theses, and sound smarter in meetings and cocktail parties. At the very least, you’ll have much more interesting arguments.
We welcome your feedback, seriously – like it or hate it, please let me know at noelle@coindesk.com.
With that, read on…
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Global tensions:
Increasing tensions in the Middle East as a result of the death of Iran’s head of security forces Qassem Soleimani and other officials in a US drone attack are raising questions about bitcoin’s role as a “safe haven.”
Bitcoin has often been likened to “digital gold” in that it represents an alternative monetary system as well as a relatively safe “store of value.” Gold, long recognized as a “safe haven” for investment funds (ie. its value is expected to hold or even increase when other assets are declining in price), has gone up by almost 3% since the bombing on January 3rd. Bitcoin has increased by almost 15% at time of writing.
Does this mean that bitcoin is a better “safe haven” than gold? Much of Crypto Twitter would have you think so. But a look at the relative correlations says otherwise.
This chart from Coin Metrics shows that bitcoin’s correlation (90-day, Pearson method) with the S&P 500 (grey line) was, for much of the last quarter, lower than gold’s correlation with the same index (green line). Recently, however, the two have converged, and since the beginning of the year, gold’s correlation has dipped below that of bitcoin, signaling a stronger safe haven status.
Conclusion? That in spite of its low correlation with the S&P, we can’t count on bitcoin being seen by investors as a refuge in times of portfolio uncertainty. As my colleague Brad Keohn points out, many analysts believe that it is still a “risk on” asset, not a “safe haven” play. Ryan Selkis goes further and identifies possible systemic threats to the crypto sector in the event of heightened global conflict.
The recent jump in price may be a knee-jerk reaction to global uncertainty – or there may be other factors at work. Either way, the next few weeks should tell us much about how bitcoin traders react to shifts in risk perception.
So, bitcoin outperformed:
You might have noticed the end-of-decade celebrations of bitcoin’s staggering outperformance compared to more traditional assets. 9000000% gain! These headlines are misleading, irresponsible even, and totally overlook the bigger picture.
- Of course bitcoin had staggering growth over the past decade. Ten years ago, its value was virtually zero, and you don’t need to be a maths major to know that any movement upwards from a very low level will give you giddying figures.
- Trumpeting nonsensical figures to stimulate FOMO is irresponsible. Past performance is – obviously – no guarantee of future performance, and most experienced finance professionals will tell you that smart investors look for assets that have yet to move.
- The noteworthy aspect of the 10-year performance is not the return itself: it’s that people could invest in bitcoin for mere cents soon after it launched. Few commodities and no securities burst on the scene with “genesis” prices. New crypto assets will continue to emerge, and whether or not they produce high returns is not as fundamentally interesting as the fact that we are witnessing the evolution of a new investment paradigm: the possibility of participating, virtually at the ground floor, in tradeable assets* that represent new business models.
(*subject to regulatory restrictions, of course)
What these headlines also conveniently overlook is that high returns go hand-in-hand with high volatility, which is not for everyone. Here’s a chart that compares bitcoin’s price to its volatility over the past two years:
As prices go up, so does volatility. This will no doubt be factored in to institutional portfolio allocations.
Halvening vs halving:
You’ve probably heard me say before that this sector is notorious for its confusing vocabulary. This is the source of many a debate in the CoinDesk halls and Slack channels. The latest point of contention is whether we should use “halving” or “halvening” to refer to the upcoming 50% reduction in bitcoin miner rewards.
Many articles out there (and on CoinDesk) hedge their bets by putting both terms in the headline, or as close to it as possible. This makes for clunky journalism. And why is “halvening” even a contender, when it isn’t really a word? Because it arguably has a better rhythm, and because it further differentiates crypto assets from anything else out there. Many things can have a halving; only bitcoin and similar assets have a halvening.
Personally, I prefer shorter words. A comparison of search terms on Google trends reveals that most Google users do, also:
And while I will never suggest that we should let Google get in the way of artistic prose, the graph above shows that the curious are consolidating around the generic term – at CoinDesk, we strive to give the audience what it wants.
Speaking of the halving, this piece by Ari Paul makes the solid point that talking about the halving being “priced in” today is assuming a constant investor pool. Worth a read.
– Noelle Acheson
Download our new report – “Crypto Liquidity 101”.
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BIG IDEAS
Researcher and investor Nic Carter got busy over the holiday season, writing not one but two solid treatises on what the future of bitcoin and the broader economy could hold. TAKEAWAY: First, bitcoin is a monetary phenomenon, not a new payments mechanism – it is an idea, not a product. Second, a compelling deep dive on the efficient markets hypothesis (with a twist on the model) reminds us that the upcoming halving is almost certainly priced in.
You probably already fully understand money creation – but Andrew Wong wrote an interesting explainer nonetheless, and does a good job of showing how crypto assets could change all that. TAKEAWAY: It’s not just about a restructuring of the current financial system; it’s also a shift in what we understand to be “money.” That’s potentially a very big deal.
For more on “what is money, anyway?”, Dan Held looked at what “sound money” (such as bitcoin) could do for capitalism.
From the content team at crypto derivatives exchange Deribit, a big-picture look at the evolution of crypto exchanges and the emergence of “crypto banks.” TAKEAWAY: While the incumbents stay away, crypto exchanges are consolidating and diversifying, and could end up with much larger businesses than even significant traditional finance firms.
Brian Armstrong, co-founder and CEO of Coinbase, looked back at the previous decade, and forward at the coming one. TAKEAWAY: Early expectations were confounded, and current ones will probably be, too.
Blockchain Capital published a well-designed and thorough overview of 2019 in the crypto ecosystem. TAKEAWAY: We’re still in the “building” phase, with growing development work and mainstream interest, but so far, little impact.
A new crypto online magazine has emerged, with an impressive roster of thought pieces from Vitalik Buterin, Zooko Wilcox, Linda Xie, Balaji Srinivasan and other crypto notables. TAKEAWAY: It is exciting to see the growing amount of quality writing on deep crypto issues becoming increasingly accessible to anyone. (Our Year In Review series is another fine example.)
MARKETS
Frank Chaparro from The Block (paywall) zoomed in on the economics of the crypto exchange sector – it’s not looking good. TAKEAWAY: No schadenfreude here, a healthy infrastructure is essential for a robust market. However, consolidation and diversification, with firms offering a broader range of services on top of deeper pools of liquidity, could end up being just what the sector needs.
Max Boonen did some back-of-the-envelope calculations and came to the conclusion that crypto custodians will end up incurring significant sunk cost to compete for a slice of a relatively small pie. TAKEAWAY: Again, we can expect to see business models evolve, with consolidation, partnerships and diversification. Net result: good for clients.
Crypto custodian BitGo has asked users to withdraw any bitcoin SV tokens they may have on the platform, as an upcoming hard fork does not support wallets’ multisig technology. TAKEAWAY: BitGo is technically not removing support for the asset – it is choosing to not re-write their wallet technology to adapt to the protocol change. While this is unlikely to mean the end of bitcoin SV, BitGo’s lack of support post-fork will make it harder for institutional investors to maintain positions. TL;DR: Investment in tokens that can hard fork with significant protocol changes has risks.
Circle announced a drill-down on their stablecoin USDC (in partnership with Coinbase), signaling a strong pivot from their early strategy of being a crypto asset payments platform and trading desk. Soon after Binance announced that it was delisting Circle’s stablecoin (“no volume”). TAKEAWAY: Getting stablecoin liquidity is hard, but the winner will enjoy network effects.
Derivatives data platform Skew took a volatility-focused look at the upcoming halving, and shows that the options market is surprisingly not expecting additional volatility around the expected time of the halving. TAKEAWAY: BTC options markets are still relatively thin and therefore perhaps not efficiently reflecting available information; or, they show that the halving is already priced in. Either way, the halving will teach us much about crypto derivatives markets.
NEW PRODUCTS
Shenzhen-based asset management firm Penghua Fund has filed an application to list an ETF that will track Shenzhen-listed blockchain-related stocks. TAKEAWAY: This provides an investable product for a vast pool of investors, which – given the “blockchain not bitcoin” narrative coming out of China – should attract attention; it won’t do much for the adoption of crypto assets, however.
Liquidity provider GSR has announced a new set of derivatives contracts, expected to launch in January 2020, that in theory will help crypto miners protect themselves against losses and earn yield on inventory. TAKEAWAY: Anything that helps miner economics is good for the sector – it should encourage more miners to invest in the necessary infrastructure, which will support decentralization and network resilience.
Fidelity-backed Fireblocks, which enables institutions to securely move crypto assets, has been awarded a SOC2 Type II Certification. TAKEAWAY: SOC2 certifications are granted after a thorough audit of client data handling procedures, and are for now rare in the crypto sector (BitGo, Gemini and BitPay also have one). And while client data, not crypto assets, is the focus, it’s even more rare to see “Big Four” accounting firms put their names behind crypto company audits – Deloitte performed BitGo’s and Gemini’s, Fireblocks’ was signed by EY.
Swiss crypto product manager Amun has launched euro- and Swiss franc-denominated ETPs that track bitcoin, ethereum, and a basket of cryptocurrencies. TAKEAWAY: Offering European investors crypto investment products denominated in local currencies reduces one element of uncertainty (currency risk).
Crypto banking competitors Prime Trust and Signature Bank have partnered to offer “real-time” settlements for digital asset trades. TAKEAWAY: The emergence of partnership networks designed to improve services to clients is a sign of deepening sector maturity. We should see more of this in 2020, which will boost investor confidence.
CRUNCHING NUMBERS
Galen Moore picks apart the difference in reported trading volumes on different crypto data sites. TAKEAWAY: Deciding what volumes are “reliable” is more complicated than it seems – excluding exchanges that engage in some dubious practices can also exclude a significant amount of real volume.
Jesus Rodriguez, co-founder and CTO of data platform IntoTheBlock, shares 10 intriguing crypto asset statistics that, for instance, hint at why bitcoin is struggling to break through $7450, why ether could have an even stronger resistance at $166, and what the number of large tether transactions shows. TAKEAWAY: Think “alternative data” is an edge in traditional investing? Looking at underlying blockchains reveals a wealth of information about asset health.
Rodriguez also talks us through order book analysis as a way to judge the health of an asset. TAKEAWAY: Did you know that recent metrics indicate that over 33x more volume is traded on exchanges than is reported on-chain? Just looking at blockchain information is not enough.
Marcel Burger summarises four metrics that can help with bitcoin valuation: stock to flow, market value to realized value, network value transactions and coindays destroyed. TAKEAWAY: One challenge of crypto assets is that they don’t fit into traditional valuation methods; new and unique metrics are needed.
Bitcoin's hash rate has reached all-time highs. TAKEAWAY: This is generally taken as a good sign, as it indicates more processing power (and therefore network security); but it also points to a lower likelihood of a particular miner receiving the reward, which is due to halve in Q2 anyway – this could negatively impact miner economics.
ADOPTION*
(*a new section that tracks the spread of crypto asset applications and use)
Huobi Indonesia will institute a fiat gateway in Southeast Asia’s largest economy, allowing clients to buy and sell up to 250 cryptocurrencies. TAKEAWAY: According to CryptoCompare , there is very little cryptocurrency activity in rupiahs, but early last year the country officially recognized bitcoin as a trading commodity, so we can expect more announcements like this. Indonesia has a population of 264 million, 80% that of the United States, and a significant unbanked population – so, the effects could be both noticeable in the short term, and far-reaching.
A government advisory body in South Korea has recommended that financial institutions be allowed to offer cryptocurrency products such as derivatives, and that bitcoin trade on the main stock exchange. TAKEAWAY: While this is still just a recommendation, it has been made by a Presidential Committee created to “deliberate on and coordinate” innovation initiatives. It’s more than a think tank. And South Korea is potentially a huge market.
Telegram will not integrate a crypto wallet into its messaging app, at least until it gets the green light from US regulators. TAKEAWAY: Social media and messaging applications are a potentially significant use case for crypto assets, so this ongoing battle with the SEC is worth keeping an eye on.
Chinese internet giant Baidu has launched a blockchain-based service for developers and small and medium-sized businesses to build decentralized applications (dapps). TAKEAWAY: Although apparently focusing on open-source enterprise blockchain applications (this will be part of Baidu’s enterprise blockchain network Xuperchain, which according to the company has nearly 3.5 million users), this is an astonishing step towards mainstream support for dapp development.
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We have a NEW REPORT for you!
“Crypto Liquidity 101” was conceived as an introduction to the concept of “liquidity” in crypto markets (as with most things crypto, it’s different to that of liquidity in traditional markets).
In this report we look at how crypto market structure, stablecoin growth and the emergence of credit shape the concept of “liquidity”. We also discuss some metrics that can be used to gauge its evolution.
You can download the report for FREE here.
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Previous newsletters: 53, 54, 55, 56, 57 , 58, 59, 60, 61, 62, 63, 64
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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 - new format!, correlation, halving and meaningless measurement