Hi all!
Wow, what a week.
I don’t usually discuss macro markets here, but this week I can’t not. So, see THE BRIEFING below. It’s not all doom and gloom – it’s more of a stuff-to-watch-out-for (with a little bit of generalized gloom thrown in).
The news feed gave us plenty to chew on, as well. I’m seeing a resurgence of interest in security tokens – this waxes and wanes, sure, and it’s still so early, but it feels like things are starting to happen in a not-quite-so-hype-y way.
There are also a few items that hint at progress on adoption beyond the growth of onramps. Take a look.
And read on...
- Noelle Acheson
(The song in this week’s subline.)
|
 |
Let’s hang on (to what we got)
If there ever was a week when crypto narratives got confusing, it was this one.
Those that believe in bitcoin’s safe haven narrative (fewer in number by the hour) are struggling to make sense of the correlated slump which left the bitcoin price down even more in percentage terms over the past two weeks than the S&P 500 (-17% vs -13%). Gold, bitcoin’s “analog” counterpart, was flat.
(prices as of 02/29/20 - Sources: CoinDesk, Bullion Vault, S&P)
Those that maintain it is a risk-on asset (growing in number by the hour) are transfixed by the jump in correlation between bitcoin and the S&P 500. Whatever happened to the pitch on the importance of having an uncorrelated asset in your portfolio? (True, it’s still at a low level, but it’s no longer negative.)
While analysts and fund managers produce compelling arguments for bitcoin being both risk on and risk-off at the same time, the bigger crypto story is happening beyond our markets. And it is worth paying attention to.
The stock markets’ shellacking this week seems to have been triggered by concerns about the economic impact of supply chain disruption and production slowdowns caused by coronavirus prevention measures. While these factors are unlikely to have a big impact on bitcoin fundamentals (no matter how delayed mining equipment deployment gets, the protocol will keep doing its thing), in times of fear investors exit riskier assets. They also exit liquid assets, and bitcoin is probably easier to offload than other high-risk holdings such as thinly traded stocks or private equity.
Moving beyond markets, the disruptions will have a deeper and longer-lasting impact on global supply chains. This threat, combined with building tensions elsewhere, could eventually consolidate crypto’s risk-off status, and endow it with the use case the market has been waiting for.
Unless the coronavirus spread is quickly contained, global supply chains will need to be reconfigured to more local variations. This will most likely accelerate the already-present unwinding (due to trade tensions and increased border controls) of the globalization trend in manufacturing that had led to lower costs all around.
This unwinding will most likely push up costs for consumers, as low-cost manufacturers (usually based in Asia) are replaced by less efficient or more highly taxed local suppliers. This could finally produce the inflation that central bankers have been longing for.
However, this inflation could manifest just at the time central banks are yet again lowering rates and flooding the markets with new money to combat the market slump. This week’s fall may be temporary – but Monday’s drop was the largest since the 2008 crisis, which is understandably ringing alarm bells.
Running in parallel, we have political uncertainty. The market rout, if it continues, could end up having a significant impact on the upcoming U.S. elections. A large driver of Trump support has been the strength of the S&P500. Should that evaporate, support could swing. And an increased likelihood of a victory for Bernie Sanders, for instance, could further spook the markets, perhaps making that victory even more likely.
Uncertainty in the U.S., both economic and political, is likely to spill over into other regions, perhaps pushing countries further towards populism as economies struggle and local tensions escalate.
You see where I’m heading with this? It’s not towards a fog of doom and despair. It’s toward the growing realization that there is an alternative. The mix of rising inflation, more printing of money and growing populism should heighten global interest in an alternative asset that is immune to inflation, monetary depreciation and political manipulation.
The likely eventual outcome, after tragic suffering and wealth destruction which is never a good thing, will be a new type of narrative, one with greater clarity and acceptance, not to mention urgency.
Bitcoin may be a risk-on asset now, as uncertain narratives, contained liquidity and limited awareness put it in the “optional” bucket of most portfolios. But as its use case becomes even more obvious, given macro developments that highlight the vulnerability of fiat-based finance, it could finally rise to become the “safe haven” or “necessary hedge” that we have been talking about. This is the kind of scenario that bitcoin was created for.
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.
|
SPONSOR:
Crypto.com Exchange enables users to trade digital assets on the most liquid and secure platform in the market through its web interface, robust trading API, and the Crypto.com App with competitive fees for both individuals and institutions. Learn more. |
BIG IDEAS
· Talk about a timely report: Digital Asset Research looked at the “risk-on”/“risk-off” question, and shows that bitcoin generally outperforms in drawdowns, but less so than usual, and that over past year, bitcoin has increasingly acted like a risk-off asset. TAKEAWAY: Bitcoin has only traded during a bull market, so finding “risk off” scenarios to evaluate relative performance is tough. The past week could hint at some looming real-world testing of the risk-on/risk-off theories that abound, and at the very least will contribute another important data set to add to the analysis.
· A (quasi) anthropologist’s view of crypto believers. TAKEAWAY: A delightful take on crypto culture – those of us who have been in the sector for a while will recognize the types; those new here will enjoy the characterizations.
MARKETS
· My colleague Omkar Godbole describes three possible reasons for ether’s relative outperformance so far this year (in spite of last week's sell-off): 1) correlation with bitcoin, 2) greater clarity around the upcoming upgrade (known as Eth 2.0), and 3) the growth in decentralized finance. TAKEAWAY: It may seem strange to talk about outperformance after the week we’ve just had, but professional investors (as opposed to traders) do look at longer-term returns, and the trends supporting ethereum’s performance could continue to influence sentiment as the year progresses and markets stabilize.
· On Wednesday of this week, derivatives exchange BitMEX saw the market rout trigger $190 million in liquidations of outstanding contracts. TAKEAWAY: A timely reminder that exchanges make money when markets move up or down. The worst thing for an exchange is a stable market. They should have a good year.
· Singapore's Court of Appeals has ruled against digital currency exchange Quoine in a landmark case relating to a breach of contract when the platform unlawfully reversed a series of trades executed by OTC platform B2C2 in 2017. TAKEAWAY: Quoine alleges that the trades were so obviously at an erroneous price that B2C2 should have known that they weren’t real. This has fascinating repercussions, not only for the definition of “market order” (and what “mistake” means), but also for the future regulation of DeFi trades – if a mistake happens because of a bug in the code, then sorry, you have to fill it anyway.
NEW PRODUCTS
· Industry veteran Caitlin Long is setting up a special purpose depositary institution for the custody of security tokens on behalf of institutions. TAKEAWAY: Caitlin (one of our 10 Most Influential for 2019) has spent years advocating for regulatory support for crypto assets to ensure a solid and healthy base from which to grow. She has the credentials, contacts and experience to pull this off, and if it does go through, it would represent another piece in the “institutionalization” of the crypto sector, which – when it comes to security tokens at least – is an essential step towards broader adoption of the technology.
· California-based crypto asset manager Arca Funds is planning to launch a tokenized fund backed by U.S. Treasury bonds. TAKEAWAY: This is obviously a security, and is being registered as such; but with time, could the token be used for payments? Could this be a stablecoin? Could we be witnessing the birth of a new type of investment vehicle that can also be used for payments? The potential impact of these types of assets on capital markets is huge, although the market will take time to adapt – when it does, it could shift our understanding of both securities and money in ways that should unleash even further innovation. This is a development to watch, and we should see similar projects start to trickle into the market over the next 12 months.
· Switzerland's leading stock exchange SIX Swiss Exchange has invested in institutional trading platform Omniex, with plans to use it as a "gateway" into the digital asset space. TAKEAWAY: One of the largest stock exchanges in Europe has invested in a smart order routing platform for the crypto asset market, which in theory it will use to help clients trade across various crypto exchanges. This is intriguing – but at first glance doesn’t gel with the long-talked-about plans to launch a trading platform themselves. This launch has been delayed by over a year – could it be that the strategy has shifted?
· An ETP that inversely tracks the price of bitcoin, managed by Swiss crypto product provider 21Shares (formerly known as Amun), is now available to European institutional and retail investors on Boerse Stuttgart. TAKEAWAY: Yes, investors can take a negative position on bitcoin by selling short or by taking a short position in the derivatives market – but for many investors, the ease of ETPs compensates the additional fees.
· Russian mining and smelting giant Nornickel will start testing the issuance of tokens backed by metals on the Atomyze platform, alongside partners such as commodity trading company Trafigura, metal refinery firm Umicore and supply chain consultancy Traxys. TAKEAWAY: An example of the new type of investable assets that are emerging on top of blockchains. Will this bring in new investors and new liquidity? Probably not to start with – but it’s a step towards a new type of capital markets.
· Commercial real estate marketplace Red Swan has tokenized $2.2 billion in real estate through security token platform Polymath. TAKEAWAY: Apparently this one “will work,” according to a Polymath executive, because the platform “understands how the private real estate market works.” That’s an advantage, sure – and it highlights the proliferation of founders thinking that an understanding of this new technology is enough to ensure success. But it still doesn’t necessarily convince investors of the inherent advantages of tokenized investments.
CRUNCHING NUMBERS
· Crypto asset manager Amun shared a chart that shows that BTC and ETH’s return distribution is broader than other asset classes. TAKEAWAY: This means that its tail risk is greater, which general portfolio managers will need to take into account. This could hint at potentially greater volatility further down the road for crypto assets when large general portfolios start including them in dynamic asset allocation strategies. It is also likely to impact mainstream portfolio protection products.
· Binance Research explains how to create synthetic trading pairs using long and short exposures. TAKEAWAY: This is technical, ok? Not for the faint of heart. But if you really want to figure out how to construct pairs that don’t exist using margin trading, dive right in.
ADOPTION
· Twitter founder Jack Dorsey’s payments company Square reported Q4 2019 results which showed that revenue from bitcoin operations reached $178 million, more than triple the figure in Q4 2018. TAKEAWAY: For those not familiar with it, Square is a point-of-sale hardware and software business that also runs a payments app for individuals. Called Cash App, it allows its almost 24 million monthly active users to easily buy and sell bitcoin. This level of growth points to not only a strong growth in interest from Cash App’s demographic: the young and the underbanked; it also points to a potential merging of bitcoin with mainstream finance, as more people transact in both fiat and bitcoin within the same app. This may be also be one of the factors that pushed Revolut, another fintech app that also offers a bitcoin onramp, to reach a $5.5 billion valuation in their latest funding round, announced this week.
· Coinbase Wallet users can now send cryptocurrencies to "short human-friendly addresses" – in other words, you can pay @bestbrowniebaker instead of 0x89136a83664fa0673930be34463e444260775dc. TAKEAWAY: Finally, it feels like real attention is being paid to the UX of crypto platforms. This should have a similar impact in the actual usage of cryptocurrencies that the focus on design had on internet adoption. User-friendly names are an overlooked part of that. As Henry Dreyfuss, one of the founders of the concept “user experience”, said in his seminal 1967 book on the subject: “Somehow, we must find again our sense of individual values, lost in this century of enormous technological advance.”
· An episode "The Simpsons" aired on Fox on February 24 talked about "the really cool subject of distributed consensus-based cryptocurrency." TAKEAWAY: Is this mainstream enough for you? There’s even a song.
|
|
|
|
|
|
| | | 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: 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72
|
|
CoinDesk is not an investment advisor. This newsletter is for informational purposes only, and any comments here do not constitute investment advice. |
Copyright © 2020 CoinDesk, All rights reserved. Our mailing address is: 250 Park Avenue South New York, NY, 10003, US Want to change how you receive these emails? You can update your preferences here. |
|
| | | | |
Institutional Crypto - Let's Hang On