Hello everyone!
Settling into our new publishing time here – I hope this new Sunday delivery time works for you. Since the last newsletter was just a few days ago, this will be shorter than usual. You’re welcome.
This week produced some fun trends to look at: the influence of association football (yes, football) on the definition of “money”; and whether or not financial privacy is a fundamental right. Feel free to wade right in.
Before I sign off, a PSA: We’ve been struggling with an intensifying battle against scammers impersonating CoinDesk journalists and asking for money in return for coverage. We would never do that. If any of you get approached by anyone, do please let us know at fraud@coindesk.com.
With that, read on…
- Noelle
(The song in this week’s subline - extra points if you know why I chose this.)
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Run toward where the ball’s going, not where it is now
You’ve probably seen plenty of articles predicting an upcoming boom in blockchain-based gaming applications, and probably even some that proclaim they will be the trigger for mass cryptocurrency adoption. But what about offline games?
In case you think they don’t have as much access to mainstream consumers as the sprawling online sector, let me remind you that association football (soccer to Americans) is the most popular sport in the world, with over 4 billion fans. Yes, billion with a b, almost half the world’s population.
It is also one of the oldest sports in the world – some reports claim its origins go back 2000 years, others say it started to take root in the Middle Ages, and the basis for the current rules appears to have been established in the mid-19th century.
Which makes it all the more surprising that football is increasingly getting involved in the crypto sector. This is significant, even for non-sports fans like me.
This week, two announcements reinforced a trend that points to a growing use case that could trigger mainstream awareness of cryptocurrencies and blockchain-based tokens.
Spain’s F.C. Barcelona, one of the largest football clubs in the world, launched a crypto token ($BAR) to encourage participation from its global fan base in elections and surveys, in exchange for points that can be swapped for merchandise and club experiences. Token holders will also have access to features such as chat, trading and games.
And London Football Exchange Group (LFE), which raised US$70 million in a 2018 token offering, has agreed to acquire a minority stake in Australian A-League football team Perth Glory. LFE aims to be a token-based fundraising platform for clubs, as well as a marketplace where fans can access merchandise and tickets.
These teams are joining good company. Last year, Bayern Munich announced the development of blockchain-based collectible tokens of its players, which could be used to compete in fantasy sports. Spain’s Atlético de Madrid launched a token platform to give fans special access to team merchandise, information and experiences. Paris Saint-Germain issued its own token as a way to incentivize participation in club decisions from fans around the world, as did Italy’s Juventus. Portugal’s S.L. Benfica became the first major European soccer team to accept cryptocurrency payments. And the list goes on…
It’s probable that not all of these tokens will do well. Most, for now, have frictions (such as the need to use native platform tokens for purchase), and while fans may be enthusiastic, token participation is not yet seen as an essential expression of devotion.
But the reach and the cachet are considerable, and even if only 1% of the expectations of current football token projects are met, it’s still a significant step towards mainstream awareness. It’s worth bearing in mind that, according to some reports, over half of the sport’s 4 billion fans are under 40, a demographic more likely to not be intimidated by new technologies. Especially if they could get you a cool shirt.
Even more compelling, these new tokens are not just about monetary value; they also confer special access and other holder privileges, highlighting the changing role of the nature of “transactions” and the innovative ways that value can be placed on community. This is a much more exciting step, even, than greater adoption of cryptocurrency for payments or speculation – a step towards redefining what we mean by “money.”
Yet perhaps even more indicative of the importance of the potential reach of these applications is the fact that I find myself writing about football. And this will probably not be the last time. I think I need to go for a walk around the block now.
Do we have a right to financial privacy?
Talk about a controversial question. On the one hand, the right to privacy is seen by many to be the basis for a free and civilized society, implying respect for individual preferences and freedom of expression. On the other hand, the state has the obligation to protect its citizens, even sometimes from other citizens, and many believe that safety has to come before all other considerations. Are the two compatible, or is it an either-or choice? If so, it’s not hard to guess which imperative will win.
Hurrying this conversation along are the blockchain intentions of China, and the progress (or its absence?) of the Libra consortium, both of which throw into stark relief the trade-offs between convenience and privacy.
With this no doubt in mind, Chairman of the Federal Reserve Jerome Powell testified before Congress this week, and was asked about China’s digital currency plans. “The idea of having a ledger where you know everybody’s payments,” he said, “that’s not something that would be particularly attractive in the United States context. It’s not a problem in China.”
Some experts took this to mean that a U.S.-backed digital currency would have privacy-preserving features, which – if true – should go a long way towards assuaging surveillance concerns. Whether or not consumers would trust those government-installed privacy features is another question. However, given our enthusiasm for social media platforms and even widely used email services that aren’t exactly private, it seems that most don’t really care. That’s what most worries those of us that do.
What does this have to do with crypto asset investment, you may ask. Earlier this week, Coinbase added support for two cryptocurrencies in New York state: stablecoin USDC and privacy coin zcash.
Some argue that zcash is not technically a privacy coin, since the cloaking feature is optional – but the fact that it’s there and can be used, in arguably one of the most conservative states when it comes to financial innovation, is significant.
Zcash’s price recovery started well before this week’s announcement, so a broader reevaluation is the most likely cause. According to data platform Messari, the cryptocurrency is up almost 100% over the past 90 days, vs. bitcoin’s 20%. Monero, another privacy coin, is up over 50%. Dash, same, up over 90%.
As you well know, past performance is no guarantee of future performance, and there is risk on the horizon. Earlier this week, U.S. Treasury Secretary Steve Mnuchin said that the government was preparing new rules, clarifying that “we want to make sure that cryptocurrencies aren't used for the equivalent of old Swiss secret number bank accounts.” And the U.S. Department of Justice said in a statement concerning a recent arrest that “seeking to obscure virtual currency transactions in this way [using mixers] is a crime.”
On a global level, privacy coins have an uncertain future ahead of them. Reports this week that North Korea is stepping up mining of monero will not help. And some exchanges are delisting privacy coins over money laundering concerns. Yet given the nature of the public blockchains on which they run, they will not disappear, no matter how many governments decide to crack down.
Tacit support from a financial authority such as the Chairman of the U.S. Federal Reserve will highlight the divisive nature of the privacy debate, and the attention this focuses on tokens that enable financial privacy will be good for broader awareness.
It will also spur technological progress. The weekly Bitcoin Core review club has started guiding testers through the proposed the Taproot/Schnorr upgrade designed to enhance bitcoin’s privacy. Earlier this month, the Aztec privacy network launched on ethereum. These and other developments add resilience to the privacy debate, as well as hint at tools that might help both sides reach an acceptable compromise.
We don’t yet know what that would look like. What we are sure of is that the blows in this battle are just beginning, and that the end result will be deeply informative in many unexpected ways.
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BIG IDEAS
Fred Wilson of Union Square Ventures got excited about being able to buy stablecoin USDC on Coinbase in New York. TAKEAWAY: Coinbase’s addition of support for zcash (see above) and USDC is a big deal, although the impact may not be felt right away. The Circle- and Coinbase-backed U.S. dollar stablecoin has tried to position itself as the institutional alternative to tether, which easily wins in terms of volume and market impact. Yet, it is difficult to be the “institutional alternative” when Wall Street firms can’t use you. That is changing, which means that the stablecoin’s potential as an efficient settlement mechanism can really start to be tested. This, in time, will have repercussions on traditional capital markets.
The Deribit content team went deep into “quantos”: what they are, their non-linearity and the trading opportunities. TAKEAWAY: I didn’t know what they were, either – it turns out that they are derivatives where the underlying is denominated in one asset, such as ETH, but the derivative is settled in another, such as BTC. I confess I am struggling to see the point – wouldn’t this just complicate and thus amplify the risk?
Jesus Rodriguez of IntoTheBlock explained the difference between momentum investing and trend investing in crypto assets – it’s mainly about comparing assets vs groups across different time frames. TAKEAWAY: With the proliferation of trading bots in crypto markets, identifying concrete strategies is becoming increasingly important in the race to get ahead of and take advantage of market moves.
MARKETS
Binance, the largest cryptocurrency in the world in terms of volume, this week experienced platform hiccups with delays in order book displays among some trading pairs. TAKEAWAY: No doubt the result of increased volume (which is good), this highlights the relative immaturity of the technology powering some of the most influential marketplaces in the crypto sector. That has to be worrying for professional traders that rely on market information and speed of execution.
Cryptocurrency exchange Poloniex, recently acquired from Circle by an investment group including Tron founder Justin Sun, was forced to roll back 12 minutes trading activity last week after a system error caused trades to be “executed erroneously.” TAKEAWAY: This highlights the difference between an institutional-grade exchange and one that puts fast execution and user growth as a priority. Imagine having executed a trade and being pleased with the result, even telling your boss, and then being told that the trade didn’t happen and oh by the way the market has moved 5% against you since then.
The CryptoCompare monthly Exchange Review for December shows a decline in trading volumes across the board, even in derivatives. TAKEAWAY: Crypto-crypto pairs still dominate the market, with tether accounting for almost 80% of bitcoin trading. Low quality exchanges increased market share (volumes remained steady while top-tier volumes decreased) – this does not support the case for growing institutional adoption, but should support liquidity growth overall.
Wells Fargo’s venture capital arm has invested $5 million in blockchain forensics firm Elliptic, bringing its Series B up to $28 million. TAKEAWAY: The firm plans to use the funds mainly to expand a product that vets crypto exchanges for KYC checks to regulation coverage, with a view to helping them win banking support. This banking support might come from Wells Fargo. Since crypto exchanges are one of the fastest growing and most profitable segments of the sector, this sounds like a win-win for market infrastructure firms (who will have greater choice of reliable banks with which to work) and banks (who can boost their client base and revenue, while setting the stage for additional crypto-related services). And the boost to infrastructure health will also be a win for investors.
Crypto lender BlockFi has raised a $30 million Series B round, to expand its balance sheet and geographical reach. TAKEAWAY: More money pouring into a rapidly growing lending sector. For a primer on crypto lending fundamentals, see our free report.
Stablecoin issuer Tether is partnering with blockchain forensics firm Chainalysis to bolster its anti-money laundering tools. TAKEAWAY: Tether is easily the most widely used stablecoin, largely because of its network effects and because it is readily accepted by many exchanges that operate in, shall we say, less regulated jurisdictions. It also has a reputation for skirting “best practices” when it comes to verifying reserve holdings and working with reliable banking partners. Applying user surveillance tools in any form seems out of character but is a nod to the liquidity advantages of global acceptance – which, inevitably, will require avoiding regulatory censure. A smart move.
Kyle Davis posted a thread comparing traditional options markets with futures markets. TAKEAWAY: Comparing traditional markets to crypto markets is usually illuminating, and gives a hint as to what sort of growth we can expect from crypto derivatives markets. In a nutshell: lots.
NEW PRODUCTS
Crypto market aggregator SFOX will show data from OTC market maker B2C2 as the result of a partnership that aims to offer users greater insight into market depth and pricing. TAKEAWAY: OTC markets have been notoriously opaque and also misunderstood. Greater clarity into volumes and demand should both help price discovery and boost investor’s confidence in market information. It is also likely to boost volumes for both B2C2 and SFOX – a win for all.
Coinbase, the largest cryptocurrency exchange in the U.S., has reinstated margin trading, offering institutional traders in 44 U.S. states and nine countries up to 3x leverage. TAKEAWAY: This service was initially launched in 2017, but was removed later that year after a flash crash. The glee with which a good chunk of crypto twitter seems to have received the news hints at the unsatisfied demand for leverage in crypto markets in heavily regulated jurisdictions. As long as less-regulated jurisdictions offer greater leverage, volumes will concentrate there, which will continue to make the SEC uneasy.
Stablecoin tether is now available on the algorand blockchain. TAKEAWAY: This broadens the options for stablecoin users and boosts the potential use cases for tether. Tether users gain fast confirmation times (under four seconds) and low fees, which could enable micropayments. This creates headaches for us analysts, though – getting a clear view of tether issuance on various blockchains is so far cumbersome (it currently also runs on omni, ethereum, tron and liquid). But I’m not complaining, it’s exciting to see the evolving adoption.
CRUNCHING NUMBERS
The spread between ETH and BTC six-month implied volatility has trended up over the past few weeks, showing that investors are expecting bigger percentage moves (in either direction) in ether than in bitcoin over the next 180 days. TAKEAWAY: This is surprising given the approaching bitcoin halving, but supports a shift in correlations and market focus. Over the past 30 days, ethereum has significantly outperformed bitcoin, increasing 60% vs bitcoin’s 15%. This may be because volumes indicate renewed interest in cryptocurrencies overall, and investors are looking to outperform the market’s “beta” (bitcoin).
Kraken’s January bitcoin volatility report has some interesting insights: volatility for the month was 38 percentage points below the monthly average since 2011, but shifts in sentiment and open interest hint at greater volatility in the weeks and months to come. TAKEAWAY: Historical volatility trends are likely to be informative but not indicative – in other words, the past is interesting but not likely to repeat itself, especially given the profound changes in market infrastructure and investor participation. That said, increased volumes in bitcoin (likely as international tensions intensify and the halving approaches) usually do add fuel to an already smouldering volatility – will smoother price discovery and market mechanics offset that?
According to Chartstar, Lamborghini mentions on Reddit comments are a leading indicator of the bitcoin price. TAKEAWAY: I don’t really have anything to add to this, so I’ll leave you with a pretty chart taken from the article.
ADOPTION
Blockchain payments provider BitPay has partnered with open commerce platform Poynt, which operates online POS devices at over 100,000 retailers, to offer cryptocurrency payments for merchants. TAKEAWAY: The cryptocurrency payments use case dropped out of sight for a while – it seems it’s starting to make a comeback. It’s still too soon to tell whether it will become a significant driver for cryptocurrencies such as bitcoin, and merchant software to enable bitcoin payments didn’t take off in the last adoption wave in 2017. But, the technology has evolved since then, as has the UX and the general awareness of bitcoin. Worth watching.
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| Hot on the heels of our first Quarterly Review, we have just published our first Monthly Review. We want this series to be a short and sweet selection of charts to do with some of the themes we’re looking at. Our aim is to trigger conversations and push forward further enquiry – suggestions welcome! You can download the report for free here.
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Previous newsletters: 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70
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