Hi all!
Thanks to everyone who sent in feedback on the new format of this newsletter. In case you missed last week’s, we’ve changed things a bit, in order to deliver a more useful summary of what crypto investors should be keeping an eye on. Rather than a (very) long list of links, we’re sharing fewer, but with our take on what each could mean for portfolios and the sector as a whole.
We’ve also replaced the long opinion piece with our interpretation of two or three significant trends and twists. This week’s turned out to be longer than we expected, because man did options give us a lot to talk about!
We plan to keep evolving, so please keep sending in comments and suggestions to noelle@coindesk.com.
With that, read on…
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Options optional?
There was frenetic movement in the options space over the past few days, and I’m not talking about price action.
First, a bunch of new products hit the market.
OKEx bitcoin options trading went live last week, and did over $7 million of volume in each of its first two full days.
Antigua and Barbuda-based crypto exchange FTX launched bitcoin options trading over the weekend, and according to the firm’s founder Sam Bankman-Fried, did almost $15 million of volume within the first 24 hours. Compare this to Bakkt’s cumulative volume of just over $1 million since launch in early December and you can perhaps get a feel for the latent demand for this instrument.
And the CME Group launched their much-heralded bitcoin options yesterday, and apparently did over $2 million of volume in the first 24 hours. That puts it well ahead of longer-running options exchanges Bakkt and LedgerX.
While these three exchanges are still small compared to sector leader Deribit (which has done an average daily volume of over $45 million over the past week), they have dramatically increased the range of options (cough) available to investors.
There were also some notable corporate movements.
Yesterday, The Block revealed that crypto options exchange Deribit (the largest in the sector in terms of volume) has taken on external investment that puts the company at a “three-digit million” valuation. The investors are QCP Capital and Three Arrows Capital. In the article, Three Arrows’ CEO Su Zhu is quoted as saying: “"Deribit is one of the most profitable cash-generating businesses in all of crypto." Which, true or not, is quite something given BitMEX’s rumored profitability (according to reports, in mid-2018 it moved into Hong Kong’s most expensive office, paying an eye-watering $600,000/month).
You may remember that just last month, crypto derivative exchange FTX received investment from Binance in the “tens of millions”, which, according to founder Sam Bankman-Fried, valued FTX at “hundreds of millions.” In spite of the lack of specifics, one can deduce that the financial outlook for crypto derivative firms looks relatively rosy.
This news came almost a week after Deribit, currently based in the Netherlands, announced a move to Panama. This is apparently in response to a change in Dutch law which would, according to a statement put out by the firm, require an onerous amount of compliance and information sharing. That crypto exchanges can do this is in itself an added attraction for investors in both the product and the business.
Unfortunately, LedgerX – along with Deribit, one of the sector’s original crypto options exchanges – is not faring so well. A director of and investor in the firm sent a letter to the CFTC alleging bad practice and financial mismanagement following the ousting of two of the co-founders, Paul and Juthica Chou, the company’s CEO and CFO respectively. Last week another co-founder, Zach Dexter, was promoted from CTO to CEO, and the firm announced the closure of a “significant” funding round.
These moves highlight the, shall we say, “fluid” nature of market infrastructure developed by young startups, compared to that managed by heavily regulated incumbents.
While almost all young firms run into management and financial hurdles, some have overcome these to amass considerable size and market clout. The demand from early traders for crypto products triggered network effects on those fortunate (and/or smart) enough to focus on what traders want: relatively deep liquidity with low costs. Deribit is one example; BitMEX – the largest crypto derivatives platform in terms of volume – is another.
Yesterday, co-founder and CEO of BitMEX Arthur Hayes published a compelling post pointing out that crypto options were lower on leverage and liquidity than perpetual swaps, a crypto-specific derivative that BitMEX invented (the exchange offers leverage of up to 100x). Crypto investor and analyst Su Zhu (whose fund has just invested in Deribit) countered that the post was more of an excuse for BitMEX’s inability or unwillingness to issue options. If so, this is intriguing, as last April Hayes had hinted that the firm was contemplating doing just that.
To say that this is getting “interesting” doesn’t even come close. We have commented before on how tiny the crypto options market is compared to that of the underlying spot or even the futures markets.
 (from our September 2019 report "Bakkt’s Slow Start Doesn’t Mean Bitcoin Futures Have Flopped")
With four new options platforms coming on stream over the past three months (Bakkt launched its options offerings in December 2019), we could be witnessing the beginning of a catch-up. This would be a strong sign of deepening market maturity, as option markets generally develop and thrive only after other instruments such as futures are well consolidated. It could also tempt more professional investors into the market, for the non-linear hedging opportunities and the increasing sophistication of risk management.
Many associate derivatives with additional risk as traders push for greater leverage and complexity, potentially masking systemic build-up and allowing for destabilizing losses. It is true that they are much-loved by traders because of their potentially asymmetric returns. But they also mitigate risk and expand choices for crypto investors, while enhancing price discovery for the sector as a whole.
It’s tempting to throw out a glib line like “the options wars have begun,” but in wars nobody wins. In the growing complexity of crypto derivatives offerings, we all do.
Bank shot
Sticking with crypto-related derivative products for a moment, has the court-side energy and string of digits after the dollar sign ever made you want to invest directly in a star athlete’s contract? If so, you might find this interesting.
Spencer Dinwiddie, forward for the Brooklyn Nets, yesterday issued blockchain-based tokens under Reg D that represent 40% of his current three-year $34 million contract. The idea is that he gets $13.5 million up front, and investors get monthly payouts of 4.95% annual interest throughout the three-year term of the token.
While this is only open to accredited investors for now, over the weekend Dinwiddie tweeted a promise to make the tokens available to all, soon.
Successful or not, this is unlikely to be a one-off. Dinwiddie is selling the ethereum-based tokens through the Dream Fan Shares platform, with Paxos providing escrow services and payout management, and Securitize acting as transfer agent and technology partner.
While the limited liquidity and upside may dampen initial demand, the move does represent an evolution in investable assets.
Income-sharing agreements (ISAs) are not new, and are relatively common now in student loan structures and some education initiatives. In their current form, however, they are non-transferrable and based on cumbersome contracts that can prove difficult to enforce.
Tokenized ISAs, on the other hand, potentially bring liquidity and programmable enforceability to the idea. They could also open up a range of intriguing configurations: imagine a fantasy league in which fans “configure” teams/portfolios of tokens representing the contracts of their favorite players. Now imagine these configurations themselves become investable products. Now imagine new types of financial playoffs (ok, I'll stop, I should never try to talk about sports).
And imagine that the benefits are not just financial. Dinwiddie has promised to take eight token holders to the All-Star game if he gets voted onto the team. What could this do to traditional asset valuation methods? Maybe we can start to see a glimpse of a new type of shareholder capitalism, in which returns are not just about profits.
– Noelle Acheson
Download our new report – “Crypto Liquidity 101”.
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BIG IDEAS
Bloomberg analysts appear to be optimistic on bitcoin’s price prospects. The firm’s latest Crypto Outlook report touches on the limited supply and growing adoption, and likens bitcoin to gold, predicting that correlations will increase, and going as far as calling it the “digital version of the metal.” TAKEAWAY: Just because the analysis comes from Bloomberg doesn’t mean it is correct, but it is interesting to see how experienced institutional analysts, who have the ear of the largest investment funds, view the crypto asset sector.
BITCOIN CORRELATION WITH GOLD  (Source: Coin Metrics)
JP Morgan analysts, on the other hand, are more pessimistic, putting bitcoin’s market value above its intrinsic value. TAKEAWAY: The analysts apparently calculate the intrinsic value by looking at the marginal cost of production. This theory has some academic support , but the supply of commodities for which this method is usually applied is not as price-insensitive as that of bitcoin, so it remains to be seen whether it holds going forward.
It’s the season for end-of-year reviews – this one from Fidelity Digital Assets sheds light on a range of bitcoin valuation fundamentals, and their limitations. TAKEAWAY: One of the many fascinating things about this sector is the entirely new set of metrics for analysts and investors to get their heads around.
Bitwise’s recent investor letter “January 2020: Crypto In A New Decade” looks at big-picture shifts in demographics and geopolitics that could spur the next wave of crypto adoption, and revealed a change in the composition of its Bitwise 10 Large Cap Crypto Index: Monero (XLM) and Cardano (ADA) leave, and Chainlink (LINK) enters. TAKEAWAY: Of the subset of high volume tokens, Chainlink was the top-performing crypto asset in 2019. This obviously does not indicate future outperformance, nor does having your founder selected for our Most Influential 2019 list. It does, however, remind us that we need to keep an eye on tech developments beyond bitcoin and ethereum, while at the same time applying a judicial filter.
Nic Carter calculates that the percentage of bitcoin held by third party custodians is growing faster than the bitcoin supply, and looks at the “depositor assurances” these emerging “crypto banks,” I mean exchanges, currently offer. TAKEAWAY: Does this mean that centralization in markets is inevitable, even in assets originally designed to be decentralized? Does this affect the assets’ value proposition, and if so, in what way? Or is is merely a question of rethinking the user experience? Does it matter? (One of the most fun parts of this job is that the questions can be even more interesting than the answers, whatever they may be.)
A round-up of famous people who support bitcoin? TAKEAWAY: God forbid you should take your cues on bitcoin from celebrities and CEOs, but this compilation makes for fun browsing.
MARKETS
Analyst and investor Su Zhu points out that bitcoin’s role in speculative trading does not mean that it can’t be a considered a currency: just look at FX markets. TAKEAWAY: True, but we are talking about different levels of volatility and liquidity, and FX has a higher percentage of actual use and hedging.
ETP manager WisdomTree has led a $17.6 million Series A funding round for Securrency, a security token platform with a focus on compliance. TAKEAWAY: WisdomTree appears to be betting on the “tokenization” of investable index products, or more specifically for blockchain technology to enhance efficiencies in distribution and value management.
Japan's Financial Services Agency (FSA) plans to reduce the risk to cryptocurrency margin traders by cutting the permitted leverage to two times the deposit. TAKEAWAY: Professional traders love leverage, and this move could push many of them on to offshore exchanges. On the other hand, relatively high leverage on volatile assets could put both traders and infrastructure business models at risk, and one of the FSA’s roles is to minimize that risk. Either way, this could lead to a contraction in Japan’s crypto exchange sector, although regulatory oversight could encourage more institutional investment and perhaps even incumbent involvement.
With virtually no indication that bitcoin usage is increasing in Iran, and skepticism that bitcoin is viewed as a safe haven, Frank Chaparro of The Block (paywall) looks at crypto ETP inflows in the wake of Qasem Soleimani’s death and other global events, and shows a mixed picture. TAKEAWAY: It’s tempting to rely on narratives we want to believe in, but we should always check (and question) the data.
NEW PRODUCTS
For a recap of the recent bitcoin options launches, see THE BRIEFING above.
The same goes for comments on NBA star Spencer Dinwiddie’s income sharing token.
Kraken announced the listing of dollar-backed stablecoin USDC, the day after rival Binance removed certain trading pairs for the same coin claiming "low liquidity." TAKEAWAY: This will add liquidity for the second largest stablecoin and give it even more of a lead over PAX, the #3. It is still quite a way behind tether, though (about a tenth of the leader’s market cap), but it has the advantage of regular attestations from a reputable accounting firm, which consistently show 100% reserves. For institutional investors, this is likely to matter.
Staying with stablecoins, tether now trades on Liquid, a sidechain with privacy features that runs parallel to bitcoin. TAKEAWAY: This will appeal to traders who wish to move large amounts of tether from exchange to exchange without tipping off other traders; however, it may make some exchanges wary of accepting tether, as privacy features tend to attract the attention of regulators.
ETP manager WisdomTree is contemplating the issuance of a US dollar-backed stablecoin. TAKEAWAY: The ETP manager is not the only asset manager looking to make payments and transfers easier for clients. For instance, Arca Funds (whose co-founder Rayne Steinberg is also co-founder of WisdomTree) last year revealed that it was seeking ESC approval for a US Treasury bond-backed stablecoin. It will be interesting to see how the SEC reacts to these new forms of “private money”. Could they be declared securities? Can securities then be used to pay for things?
Crypto lending startup BlockFi now supports LTC and dollar-backed stablecoin USDC on its platform, enabling users to earn interest on, trade and receive loans backed by the assets. TAKEAWAY: The rates offered on USDC deposits are 8.6%, a darn sight higher than investors could get on fiat dollars. This rate is unlikely to hold should inflows pick up, though, and it’s unclear to what extent the platform can scale.
And for a fishy take from CES in Las Vegas last week, my colleagues tracked down the issuers of SardineCoin, a crypto token backed 1:1 by cans of sardines. TAKEAWAY: Is this a hoax? I don’t know. Sardines are tasty, though. Best quote, from a co-founder: “the regulator was not afraid of sardines.”
CRUNCHING NUMBERS
More than 10 million bitcoins, or nearly 60% of total supply, have not moved in over 12 months, according to data from Digital Assets Data. TAKEAWAY: This implies a solid cadre of long-term holders, either because of optimism about bitcoin’s prospects, or due to reticence to sell at a loss (which implies potential selling pressure should the price go up). However, data platform IntoTheBlock estimates the number to be less, almost 8 million, and shows that the majority of current holders are in profit.
 (Source: IntoTheBlock)
ADOPTION*
(*a new section that tracks the spread of crypto asset applications and use)
Malta-based cryptocurrency exchange Binance has added new fiat funding options since the first of the year, including faster onramping for sterling. TAKEAWAY: The greater the number of fiat onramps, the greater the potential adoption, but also the greater the likelihood of restrictive regulatory oversight (which can add assurance but can also force onramps to close).
Neil Woodfine, marketing director of Blockstream, outlined recent work behind making bitcoin operable without internet. TAKEAWAY: If the financial system goes into meltdown and only your bitcoin are worth anything, chances are society’s infrastructure is also up the creek, and internet access may become a luxury. It’d be nice to know that your bitcoin will still be usable.
Bitcoin’s proposed Taproot/Schnorr protocol upgrade, expected to lower fees and enhance privacy (by disguising transaction types), will soon be pushed into the implementation phase. TAKEAWAY: Many assume that bitcoin’s technology is stagnant. Not so – developers can push through improvements if the community as a whole accepts them. Yes, this means that bitcoin’s eventual use case is continually evolving.
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CORRECTION: The y axis was mislabeled on a chart in the Dec. 17 newsletter, titled “Daily average bid-ask spread by market,” which was part of an article on exchange volume. The numbers were labeled “percent”; the correct label, “USD or equivalent,” appears on the same chart in the online version of that article (https://www.coindesk.com/we-still-dont-know-bitcoins-real-volume). |
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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: 54, 55, 56, 57, 58 , 59, 60, 61, 62, 63, 64, 65
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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 - options, more options and ISA tokens