Hi all!
I don’t know about you, but I’m starting to forget what “normal” feels like.
We hear a lot about how bitcoin’s narrative is changing – in THE BRIEFING this week, I talk about how that’s not the only changing narrative we should focus on.
Another big story this week was India’s Supreme Court reversal of the central bank’s ban on banking services for crypto exchanges. This is something to watch, and the battle between the two powerful institutions over the fate of crypto asset trading in the subcontinent will most likely end up being a watershed moment for the sector.
As always, there are links below that highlight progress and trends investors should be aware of, plus a new feature: Chart of the Week. With this, I hope to highlight work that other analysts are doing. And sometimes it may be something that we put together.
Read on...
- Noelle Acheson
(The song in this week’s subline, I challenge you to resist wiggling the shoulders a bit.)
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Twists and turns
Anyone seen the movie “Parasite”? You know, the one about class mobility, creative solutions and scary basements.
I thought of that after reading Jill Carlson’s op-ed a couple of days ago – she looks at our collective surprise that bitcoin is not a safe haven, and in a gentle way asks “well what did you expect?”. She highlights that bitcoin is too young to be considered a safe haven, because its narrative is not yet formed. That doesn’t mean it won’t eventually get there, though.
What does this have to do with a Korean Oscar winner? Well, in “Parasite” we spend the first hour thinking the film is about one thing. But it turns out it’s not, it’s about something totally different.
The same thing is happening in crypto land. Jill’s right, bitcoin’s narrative is the key driver of its price trends, and it will change over time. The story isn’t about what bitcoin “is” but about what it “will be.”
An even more interesting narrative shift, however, is unfolding elsewhere.
I’m talking about the rest of the market. Almost all of it, in fact. Narratives are shifting all over the place.
For instance, everyone knows that you should have bonds in your portfolio because they offer income and stability. I mean, there’s no way rates could go negative, right?
This week the yield on 30-year and 10-year U.S. government debt dropped to their lowest levels ever. The S&P 500 now yields more than treasuries, calling into question the entire concept of “risk distribution.”
Even gold is behaving strangely. We hold it up as the ultimate example of a “safe haven” investment, and yet market structure shifts are calling that into question. Last week the gold price dropped almost 5% in one day, the largest daily fall in seven years, due to deleveraging pressure from derivative positions. And we tend to forget that gold fell almost 30% at the height of the 2008 market rout.
Gold’s role as a safe haven is entirely based on narratives: that shiny and yellow are desirable qualities (surely that’s subjective?), that supply is limited (we don’t know that for sure) and that heavy is good (you’ll have heard the derogatory expression “such a lightweight!”). These days, heavy – as in very-difficult-to-pick-up-and-take-with-you – is perhaps not the indicator of utility it once was.
Even though we can all agree that gold’s metallic properties are impressive, its position as the world’s safe haven is no longer universally unassailable, and through no fault of its own. The narratives around it are changing, and the resumption of the gold price rally at the beginning of the week seems less based on conviction that the metal will hold its value in times of trouble, and more of a desperate realization that there’s nothing out there that can yet take its place.
Now, why so many narrative shifts all of a sudden? Actually, narratives are always changing – but the pace of change is usually much slower than what we are witnessing today.
What we are witnessing is a breakdown of assumptions, in a time of fear. We’re worried about the economy, the banking system, the climate, living conditions, politics, education and the automatization of jobs. Add to that a growing feeling of vulnerability and concern about health and contagion.
In times of fear, we fall back on what we know, what we can be sure of. These days, that’s not much.
In his poignant 1944 paper called “The Social Psychology of Fear,” philosopher Kurt Riezler pointed out that “If we do not know the nature of a danger, we make an assumption. Without such an assumption, we cannot act.”
But what are assumptions if not conclusions based on narratives? We assumed that interest rates would never go negative. We assumed house prices would never go down. We assumed that profits were a good thing, and that social media would liberate us.
So now, confronted by many dangers that we are still struggling to understand, we are reaching for assumptions we no longer trust.
Bitcoin’s narrative is changing, as is to be expected for such a young and complex innovation. But so are the narratives that guide just about every other aspect of investing.
A few years from now, when the new narratives have settled into some semblance of normality, we’ll look back on this time and realize that the bigger story was in front of us all along.
Disclosure: Nothing in this newsletter should be taken as investment advice. The author is a long-term holder of a small amount of bitcoin and ether. Her opinions are her own and do not necessarily reflect those of CoinDesk.
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BIG IDEAS
Nic Carter argues that exchanges that hold customer bitcoins should have to prove that they do so. TAKEAWAY: This highlights an often overlooked feature of blockchain-based assets: they are inherently auditable, more so than traditional assets. With blockchain-based assets, it is relatively trivial to prove balances without revealing sensitive information – just one way in which this asset class is less risky than its more widely accepted counterparts.
Kevin Kelly of crypto research boutique Delphi Digital points out that the coronavirus scare has come at a time when markets were already vulnerable. So, what happened should not have been a surprise. TAKEAWAY: Although, to be fair, it is increasingly apparent that no-one seems to know what's going on. So, surprise is not surprising, which is itself not surprising. Ok, I think I've expressed myself well here.
The Supreme Court of India has ruled in favor of petitions by crypto exchanges and startups that opposed the decision made by the Reserve Bank of India (RBI) in April 2018 to ban financial institutions from providing banking services to crypto exchanges. TAKEAWAY: While this is unlikely to send banks running into crypto exchanges’ arms, it does in theory allow crypto exchanges to run their businesses more efficiently, as well as to offer a more reliable and user-friendly service to customers. Crypto trading did not totally die out in India after the 2018 decision – it was just pushed to OTC desks and crypto-to-crypto platforms. There were virtually no fiat on-ramps, which is a prerequisite for broader adoption. Given the potentially huge market (India has the second highest population in the world), this is significant. And some exchanges have been fast to react: hours later, Mumbai-based CoinDCX enabled bank transfers to its exchange.
(Cont.) The central bank wasn’t happy with the decision, however, and has decided to lodge a review petition over the ruling. TAKEAWAY: The RBI’s concern is that crypto trading could “pose a risk to the banking system.” This is actually one of the more bullish official statements I’ve seen in a while – crypto assets so far are a small blip in the sea of finance, in terms of actual volume. The RBI seems to be focusing on the potential, and they are worried. The Indian market for cryptocurrencies is not as yet of global significance, but that is likely to change, one way or another. This battle between the central bank and the Supreme Court will most likely end up becoming a watershed moment in the asset class’ legitimacy and mainstream adoption.
(Cont. again) The day before the Supreme Court ruling was released, my colleague Leigh Cuen published an article about India’s interest in crypto derivatives. TAKEAWAY: This is significant in that it delineates the potential growth in crypto trading on the subcontinent should the Supreme Court ruling hold. Even if it doesn’t, crypto trading activity is flourishing on the margins, although limited to professional traders and those familiar with derivative markets. But even that is a potentially huge market – India’s National Stock Exchange is the world’s largest derivatives exchange in terms of volume, ahead of the CME.
MARKETS
The U.K.'s Financial Conduct Authority (FCA) posted a notice this week warning that cryptocurrency derivatives exchange BitMEX has been targeting British residents without official consent or approval. TAKEAWAY: This seems like shots fired across the bow, but with intent. In previous years, the FCA has been supportive of crypto-related businesses, although its current head (and incoming governor of the Bank of England) Andrew Bailey made it clear this week in a BBC interview that he sees the asset class as extremely risky. Crypto assets themselves are not regulated by the FCA, but derivatives are. What’s more, since the FCA is restricting the sale of some derivatives to retail investors on the premise that they are too risky, it’s not a stretch to conclude that access to crypto derivative platforms will at some stage most likely be severely curtailed. Will this matter for BitMEX? Probably not very much.
Singapore-based Matrixport, founded by Bitmain CEO Jihan Wu in February 2019, is looking to raise $40 million in a new raise, according to a Bloomberg report. TAKEAWAY: It is offering at a valuation of $300 million, nearly triple the $114 million reached in a previous funding round – for a company that provides compliant crypto-related financial services to professional traders, including OTC trading and lending services. This is significant because it hints at the expected growth in crypto asset trading, in Asia and elsewhere.
NEW PRODUCTS
Palo Alto-based BitGo, one of the largest and oldest custodians for digital assets, has launched institutional digital asset lending services. TAKEAWAY: BitGo recently bought security token platform Harbor, which has a broker-dealer license. With this purchase it moves even further into prime broker territory. The lack of well-financed prime brokers that can offer lending has been often cited as a barrier to institutional investment in crypto markets – I’m not saying this development will remove that barrier, but it is chipping away at it.
Chinese cryptocurrency lending startup Babel Finance has reached a record of $380 million in outstanding loans as of February, up almost $100 million since the end of 2019. TAKEAWAY: You probably didn’t need reminding that crypto lending was growing rapidly, but here’s another reminder anyway. (For more on crypto lending, check out our recent report.)
Crypto asset exchange INX Ltd. is targeting an April launch for its $130 million IPO, and is moving from Gibraltar to New York. TAKEAWAY: This is even further confirmation that these high valuations for crypto market infrastructure businesses reveal high expectations for crypto asset trading demand. Personally I’m excited about getting a peek at the detailed statements that will reveal how these exchanges are run. (And let’s take a moment to appreciate that here we have a crypto exchange leaving a jurisdiction because it wasn’t regulated enough…)
CRUNCHING NUMBERS
Crypto analytics firm Glassnode shows that just monitoring blockchain transfers isn’t enough, you need to understand behavior. TAKEAWAY: Yes. One strong feature of crypto assets is universal access to fundamental data about their movements, something we don’t see with traditional assets. But that data needs interpreting, and interpretation is often subjective. One overlooked detail is that the data is also manipulable. If a token knows its blockchain-based volume is being watched, it’s fairly trivial to increase activity by passing coins from one pseudonymous wallet to another.
ADOPTION
Dapper Labs, the creators of the CryptoKitties phenomenon, this week launched a simulator for its upcoming Flow blockchain. TAKEAWAY: The runaway demand for CryptoKitties tokens swamped the ethereum blockchain back in 2017, causing blockchain congestion and contributing to the sharp rise in the price of ether. So it is more than intriguing that the developer is planning on migrating its applications to its own, proprietary blockchain. Many other ethereum competitors are gearing up to launch this year – it’s unlikely they’ll catch up any time soon in terms of reach and depth of development community, but the fact that they are emerging at a time when ethereum’s governance and technology road map are being questioned means that the smart contract sector is about to get even more interesting.
CHART OF THE WEEK
In one of his daily columns for Bloomberg this week, John Authers shared a fascinating chart plotting a country’s use of social media against its risk aversion. The chart was produced by CrossBorder Capital Ltd., and not only speaks to social trends in capital markets – it also hints at investor sentiment in the largest stock market in the world. In a society where fear can spread rapidly through social channels, investors are even more likely to flee to safety – it’s just not clear where that is.
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| Our next CoinDesk Monthly Review for February is in production and will be released next week. It covers the topics of cash onramps, DeFi growth and the upcoming halving, and distills them into a narrative that speaks to evolving use-cases. (You can see our previous reports here.)
Here’s a sneak peek:
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Institutional Crypto - All Shook Up